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Build Your Bankroll: Contingency Reserve

Now we need cash money. Cash money? Yes, cash money. Chances are very good that if these risk events happen, it'll cost the project something in the form of dollars. This is finding the contingency reserve.

The contingency reserve is a pool of funds that will "cover" the costs of any risk events that do happen. To complete the matrix, you enter the risks in one column, and in contiguous columns enter the financial impact if the risk happens and the probability of the risk. Then you calculate the risk event value by multiplying the probability by the impact. The sum of the risk event values is the amount that should be added to your project budget—specifically for risk events.

Here's a sample of calculating the contingency reserve:

Risk

Impact

Probability

Risk Event Value

Developer delays

$10,000

.20

$2,000

Hardware failure

$100,000

.10

$10,000

Throughput

$40,000

.30

$12,000

Regulatory sign-off

$90,000

.05

$4,500

Contingency reserve

 

 

$28,500

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