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MANAGING TECHNICAL RISK 203

than a managed reserve for unidentified work. A properly priced job (where the
market will allow it) will have three cost components. These are (1) the work bud-
get, (2) management reserve, and (3) margin.

The first item is the budget for the identified work. It is the sum of all task bud-
gets in your CPM (or other plan). It does not contain any contingency costs.

Management reserve is funding put aside for unidentified work. In most proj-
ects, we are not so perfect as to clearly identify every work item to be performed.
Just as we can surely expect incidents that add time to our project, we can expect
to discover cost items that did not go into the original plan. By excluding this con-
tingency from the task budget, the latter remains pure—for measurement of
progress and performance. Only when new work is defined do we move funds
from management reserve to the task budget.

A log should be maintained of scope changes, and their effect on the task bud-
get, management reserve, and margin (and schedule). If new work is defined,
which will not be paid for by the customer, then the cost of that work is moved
from management reserve to the task budget. If new work is added by request of
the customer, the tasks and their costs are added to the task budget, without
touching the management reserve (I use an Excel spreadsheet to record all
changes). Managing the contingency precludes any use of those funds unless the
new tasks are defined and added to the CPM baseline.

If we put contingency directly into the task budgets, at the start, we have no
way of managing these dollars, and they eventually are considered to be available
for spending. If we have no contingency at all, we can almost be assured of over-
running the project budget. The answer is a managed contingency—the manage-
ment reserve.

Managing Technical Risk

The avoidance and management of technical risk could warrant a whole addi-
tional chapter. Let it suffice, here, that technical risk must be addressed at least as
much as schedule and cost. Needless to say, here too, we need to take a proactive
approach. As we scope out our projects and develop our plans, we need to ask:

• What if it won’t work?
• What alternatives and options do we have?
• What is our backup strategy?

I can’t help but wonder if this approach was taken on the Denver Interna-
tional Airport project, and whether the problematic baggage handling situation
would have caused such a disaster if it had been. Are we prone to believe in our