Wednesday, March 27, 2013

Estimate Confidence Buffers, Risk Buffers and Management Reserve

"If confusion is the first step to knowledge, I must be a genius.”
                                                                                                - Larry Leissner

We’re nearing the conclusion of this series that started with the basics of scheduling.  I want to tie up a few loose ends, maybe clarify some inaccuracies and address some confusion I may have introduced.
As I developed this series on scheduling, leading up to the previous post on estimate buffers, I hopefully offered convincing arguments for including appropriate buffers.  In this post, I want to compare and contrast various types of buffers that are common.

I think the discussion I offered on risk buffers is consistent with other authors and industry practices, so I won’t belabor that discussion.  I will point out that risk buffers are included in the project (time and cost) budget and are managed by the Project Manager.
Literature and practices for improving estimate confidence are much rarer.  Therefore, there may be some stakeholder pushback for including these buffers in the schedule.  However, you can demonstrate through logic, reason, science and ethics that, in order to have a realistic schedule, these buffers, like the risk buffers, must be included in the schedule.  Like risk buffers, these confidence buffers are included in the project budget and are managed by the Project Manager.

However, you don’t want to “double count” your risks.  Let’s say you do a lot of similar projects.  For these, there will probably be a common pool of risks that are included.  However, if your estimates are based on historical results and sometimes these risks occur, then there is the potential that your Pessimistic estimates will already account for those risks.  You will need to adjust either the estimates or the risk buffers so they are in the schedule only once.
In contrast to the confidence and risk buffers, some PMs Pad their estimates.  Some project managers, after over-running the project schedule a few times, learn that their estimates are never sufficient and start adding arbitrary amounts.  “We go over by 20% every time, so I’ll just start adding 20% to the schedule.”  This may sound logical on the surface, but is actually bad for their credibility and for the PM profession.  (Look for more discussion on this topic in a future discussion of The Toyota Way.)  Stakeholders learn that the PM is padding and, in response, start cutting the budget or otherwise compensating.  Pad is Bad.

In contrast, neither confidence buffers nor risk buffers are arbitrary.  Hopefully, if you’ve followed the discussion this far, the reasonable, logical and scientific justification for including these in the project are thoroughly explained and documented.
One last buffer that is sometimes seen in large, third-party project contracts is Management Reserve.  Management Reserve is separate from and distinctly different than estimate confidence buffers, risk buffers or pad.  Management Reserve is contingency funds allocated for use by the contract owner (sponsor).  These funds are not part of the project budget and are not available to the Project Manager except after approved project change control to authorize allocation to the project.

I hope this series has been interesting and informative for you.  One last remaining post and then we can move on to new topics.
Was this discussion scheduling and estimating clear and thorough?  Is there anything I missed that you would like me to address or anything that is still not clear that I should expand on?

© 2013 Chuck Morton.  All Rights Reserved.

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