How does a reserve differ from a contingency?

A reserve and a contingency serve different purposes in project management, particularly in the context of budgeting.

The correct distinction is that a reserve is often allocated for unforeseen events that may require changes to project scope. This means that reserves are generally set aside when there is a potential for risks that could not be predicted during project planning and may lead to scope alterations, such as additional work or unexpected complexities. Reserves address the unknowns that can arise throughout the project lifecycle, requiring formal processes for approval and integration into the existing project scope.

Contingencies, on the other hand, generally account for expected costs that might arise during the project. They are typically identified during planning and are used to manage risks that are anticipated but not certain. Contingency funds allow for minor adjustments without needing significant changes to the project scope.

While other options touch on aspects of reserves and contingencies, they do not clarify the fundamental difference in their use, especially concerning unforeseen versus expected events, which is key in distinguishing these financial buffers.