<Please help> Control cost query

Discussion in 'PMP' started by Aman Mehra, Nov 21, 2020.

  1. Aman Mehra

    Aman Mehra Active Member

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    Hello,

    I have read in multiple books and forums that in order to control costs on a project (bring the CPI back on track), eliminating risks is a good option that must be explored.

    My question is, since identified risks have a contingency reserves associated with them in the cost baseline, if risks are eliminated, the reserves corresponding to those risks will not longer be available for use on the project. This will lead to reduction in cost baseline.

    How does this help in bringing the CPI back on track by eliminating risks.

    Request SME response for clarification of this concept and understanding.

    Please help!

    Thanks
     
    #1
  2. MAHESH TANAJI SANKPAL

    MAHESH TANAJI SANKPAL Well-Known Member

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    Below is my explanation.
    Same has to be verified by Simplilearn SME.
    ---------------------------------------------------------
    CPI = EV / AC
    Project Budget = Cost Baseline + Management Reserve
    Cost Baseline = All Work Package(WP) Activity Cost + All Contingency Reserves (Known Risks)

    Let us take an example:
    Cost Baseline = $1000
    WP Activity Cost = $800
    Contingency Reserve = $200

    If none of the know risks occur then entire contingency reserve of $200 is saved.

    You can use the same to offset the delays in other project activities which were not anticipated during planning.

    Does this answer your question?

    MS.
     
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  3. Aman Mehra

    Aman Mehra Active Member

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    Hi

    Thanks for your response.

    As per my understanding, the contingency reserves even though are part of the baseline can only be used for the specific risks that they are associated with. If the risks occur, you can use the contingency reserve set aside for that risk.

    However, if those risks do not occur, those reserves (both cost and time) need to be returned back to the company and cannot be used for any other purpose or risks.

    In such case, I'm unable to comprehend how eliminating risks can help with bringing CPI / SPI back on track.


    Thanks
     
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  4. MAHESH TANAJI SANKPAL

    MAHESH TANAJI SANKPAL Well-Known Member

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    I think you are getting confused between contingency and management reserves.

    Contingency reserves are within the control of a PM whereas Management reserves are not.
    A PM needs to take management approval before utilizing the Management Reserves.

    Let’s wait for the SME to confirm this.
     
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  5. Aman Mehra

    Aman Mehra Active Member

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    Page 478 of Rita Mulchay says "these reserves cannot be used by PM at will for any needs. If the identified risks do not occur, the associated cost and time reserves should be returned to the company and not used to address other issues on the project.

    Management reserves are anyway not associated with identified risks. They are for unknown unknowns.
     
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  6. Aman Mehra

    Aman Mehra Active Member

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  7. Aman Mehra

    Aman Mehra Active Member

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    @Prema.M Can we please have someone clarify this confusion. Thank you
     
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  8. Chandra M R(4723)

    Chandra M R(4723) Consultant & Coach
    Alumni Trainer

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    Your question:

    "I have read in multiple books and forums that in order to control costs on a project (bring the CPI back on track), eliminating risks is a good option that must be explored.

    My question is, since identified risks have a contingency reserves associated with them in the cost baseline, if risks are eliminated, the reserves corresponding to those risks will not longer be available for use on the project. This will lead to reduction in cost baseline.

    How does this help in bringing the CPI back on track by eliminating risks.

    Request SME response for clarification of this concept and understanding."

    My Answer:

    You are right Aman, Contingency reserves are for risks identified, which cannot be used for any other needs, by default. Secondly, regarding the reference to Rita Mulchay's book, it is also true statement, related to respective risks.

    Relating to your question (originally asked), there are possibilities of elimination of certain kind of risks. The impact of certain risks increases, where some decreases, as the project progresses. This requires continual reassessment of identified risks, through out the life cycle of the project and the identification of new risks as you progress in your project, which requires certain amount of reserves too. This includes the risks which becomes the cause for CPI going lessor than one. One needs to recognize this and address.
     
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