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2.2.4

Domain 2 of 3 · Process · task

Budget, reserves and earned value for the PMP® exam

The finance task asks you to keep two reserves straight, know who may open each, and read earned value early enough to warn a sponsor before the money runs out. In the PMP outline the task is called plan and manage finance, and it sits in the Process domain.

Exam
PMP
Domain
Process
Domain weight
41%
Packages
15
Updated
Oct 13, 2026

01From estimates to budget

Cost planning stacks up. Activity estimates roll into work package costs, those roll into control accounts, and contingency reserve for identified risks is added to form the cost baseline. Management reserve sits on top, outside the baseline, and the two together make the project budget. Spending is time-phased, slow at the start, heaviest mid-project and tapering at the end, so the cumulative baseline plots as an S-curve.

PMI®'s outline lists the parts of the task: financial needs, risk and contingency allocations, spend tracking, financial reporting, anticipating challenges, and managing financial reserves. Planned value is spread across the schedule, so cost and time questions lean on each other. Vendor contracts are often the largest line in the baseline; their types are in resources and procurement.

02Two reserves, two owners

Contingency reserve and management reserve side by side

PointContingency reserveManagement reserve
CoversIdentified risks (known-unknowns)Unidentified risks (unknown-unknowns)
Inside the cost baselineYesNo, but inside the budget
Who releases itThe project manager, per the risk management planManagement, on request
Does using it change the baselineNo, it is already in itYes, through change control
Sized fromRisk analysis, such as expected monetary valueOrganizational policy or a share set by management

How a risk moves from the register to a reserve draw is covered in risks and issues.

03Where the budget comes from

Project budget

Budget=CB + MR

CB
cost baseline: the approved, time-phased cost of the work, contingency reserve included
MR
management reserve: money held back for unidentified risks, outside the baseline

Worked example

  • Work package estimates = $640,000
  • Contingency reserve = $48,000
  • Management reserve = $32,000
  1. Cost baseline: 640,000 + 48,000 = $688,000.
  2. Budget: 688,000 + 32,000 = $720,000.

Budget $720,000, of which the baseline is $688,000

Reading itEarned value is measured against the $688,000 baseline, the figure budget at completion (BAC) refers to. The metrics built on it, cost performance index (CPI), schedule performance index (SPI) and estimate at completion (EAC), are worked through on earned value management, and the full set sits on one page in PMP formulas.

04Check your reserve and forecast calls

Where a package hands you numbers, the wrong options tend to come from a neighboring formula; the rest ask what to do about the money.

Work packages 15

  1. WP 01CPI is 0.88 and SPI is 0.99. Choose the most effective corrective actions and compute EAC assuming cost issues persist.

    Debrief answer to open the notes

    1. ADividing by SPI forecasts cost from schedule efficiency, while the real problem here is cost.
    2. BAC + (BAC - EV) assumes the remaining work goes to plan, which contradicts the premise that cost issues persist.
    3. CCorrect: If the cost trend continues, EAC = BAC / CPI = BAC / 0.88, and corrective action targets the cost drivers, such as vendor productivity and scope control.
    4. DBAC / (CPI x SPI) suits a schedule-driven cost risk; with SPI near 1.0, compression adds cost for no reason.
  2. WP 02A critical project has a firm deadline and poor current cost performance. Given the performance data provided, both cost and schedule constraints dictate future work. What is the expected total cost of the project?

    Exhibit for WP 02

    MetricValue
    Budget at Completion (BAC)USD 2,000,000
    Planned Value (PV)USD 1,000,000
    Earned Value (EV)USD 500,000
    Actual Cost (AC)USD 1,000,000

    Debrief answer to open the notes

    1. A$2,500,000 is AC + (BAC - EV) = 1,000,000 + 1,500,000, which assumes future work runs on budget.
    2. B$4,000,000 is BAC / CPI = 2,000,000 / 0.5, which reflects cost performance only.
    3. C$3,000,000 understates the forecast; it does not apply both performance indexes to the remaining work.
    4. DCorrect: CPI = 0.5, SPI = 0.5. EAC = AC + (BAC - EV) / (CPI x SPI) = 1,000,000 + 1,500,000 / 0.25 = $7,000,000.
  3. WP 03A sponsor proposes removing the contingency reserve from the current status report to raise the project's reported percent complete. What is the most appropriate action?

    Debrief answer to open the notes

    1. AWritten approval does not make a misleading report accurate.
    2. BCorrect: Contingency is part of the cost baseline, so removing it to inflate percent complete misstates status; explain the effect and keep reporting honest.
    3. CA quiet register note hides a reporting change from the stakeholders who rely on it.
    4. DEscalation could follow, but the project manager can first explain the implications directly.
  4. WP 04After a risk materializes with $12,000 actual response cost and $25,000 schedule impact, what immediate updates are required?

    Debrief answer to open the notes

    1. AThe schedule impact is part of the realized risk; leaving it out of the forecast reports a finish the project will not meet.
    2. BCorrect: an identified risk that occurs is recorded as realized, its response is funded from the contingency set aside for it, and the forecast is updated for the cost and schedule effect.
    3. CWaiting until closure leaves the register and the reserve balance wrong for the rest of the project.
    4. DManagement reserve covers unidentified risks and needs management approval; a risk already in the register draws on contingency.
  5. WP 05EMV analysis totals 12 days of schedule risk. Monte Carlo P80 finish requires 10 days contingency. Governance policy releases reserve only after trigger events. How should contingency be allocated?

    Debrief answer to open the notes

    1. AReleasing the full reserve into the schedule at once spends it before any risk occurs.
    2. BWithout release criteria, use of the reserve cannot be governed.
    3. CReleasing everything at the start defeats a policy that moves reserve only on triggers.
    4. DCorrect: Size the reserve to the simulated P80 need and release it only when documented triggers occur, which keeps its use under governance.
  6. WP 06A project team is managing the construction of a new office building. The project is currently six months into its 12-month timeline and the work is on schedule (50% complete). The total budget (BAC) is $2,000,000, distributed evenly over the year. As of now, the team has spent $1,400,000 (AC). Calculate the cost performance index (CPI) for the project.

    Debrief answer to open the notes

    1. A1.00 would require EV to equal AC, but $1.4M was spent for $1.0M of earned work.
    2. B0.70 is a rounding slip; 1.0 / 1.4 is about 0.714.
    3. C1.40 is AC divided by EV, the inverse of CPI.
    4. DCorrect: EV = 50% x $2,000,000 = $1,000,000, and CPI = 1,000,000 / 1,400,000 = 0.71, so the project is over budget.
  7. WP 07A work package has high uncertainty and elevated risk exposure. What contingency approach is required?

    Debrief answer to open the notes

    1. ATeam size has little to do with how uncertain the work is.
    2. BA historical average ignores this work package's particular exposure.
    3. CCorrect: Contingency should follow risk exposure, so a package with higher uncertainty carries a proportionately larger reserve.
    4. DAgile work carries uncertainty too; assuming zero contingency leaves that risk unfunded.
  8. WP 08At month six, CPI = 0.92, SPI = 0.95, EAC = $2.61 M, BAC = $2.4 M. Translate these metrics into a concise sponsor briefing and recommended decision.

    Debrief answer to open the notes

    1. AA projected overrun calls for a decision now, not three months from now.
    2. B$610k misreads the figures, since EAC - BAC is about $210k, and a blanket spending freeze is out of proportion.
    3. CCorrect: VAC = BAC - EAC = $2.4M - $2.61M = about -$210k; with CPI at 0.92, cost is the main message, so ask for a scope or resource review now.
    4. DSPI 0.95 is a minor slip; cost is the bigger signal, and changing the baseline requires change control.
  9. WP 09How should contingency movements be reported when they occur weekly to maintain governance without creating noise?

    Debrief answer to open the notes

    1. AEscalating every weekly movement floods the sponsor with noise.
    2. BCorrect: Log each movement in the risk register, change the baseline only through change control, and report a monthly summary, which keeps control without noise.
    3. CRebaselining after every movement makes the baseline meaningless.
    4. DListing every movement in weekly status creates the noise the question warns against.
  10. WP 10A project is being executed using a predictive approach. The project manager notices that actual costs are exceeding planned costs. If BAC = $500,000, EV = $200,000, and AC = $250,000, what is the Estimate at Completion (EAC) if the current cost performance trend continues?

    Debrief answer to open the notes

    1. A$550,000 is AC + (BAC - EV), which assumes the cost trend will not continue.
    2. B$500,000 is the BAC, which ignores the overrun so far.
    3. CCorrect: CPI = 200,000 / 250,000 = 0.8, so EAC = BAC / CPI = 500,000 / 0.8 = $625,000.
    4. D$600,000 does not come from any standard EAC formula for these figures.
  11. WP 11A project faces a 25% probability of a $80,000 supplier delay. The risk owner must document a contingency entry that includes trigger wording, EMV calculation, and change-control-linked disbursement approval. Which entry meets all governance requirements?

    Debrief answer to open the notes

    1. ACorrect: The entry has an observable trigger, the right EMV (0.25 x $80,000 = $20,000), and release tied to change control.
    2. BReserving the full $80,000 ignores probability, and a 25% chance is not a trigger.
    3. CA missed milestone is a late trigger, and EMV must weight impact by probability.
    4. DVerbal confirmation and self-approval skip the governance the entry has to show.
  12. WP 12During a project status meeting, the team learns that a critical component will cost more than originally budgeted. The project manager needs to determine the impact on the total project cost. Which project management tool should be used?

    Debrief answer to open the notes

    1. APV shows what was planned to be spent by now, not the forecast total.
    2. BSPI measures schedule efficiency, not total cost.
    3. CCorrect: EAC forecasts total cost from performance to date and known changes, so it shows how the costlier component moves the final figure.
    4. DCost of quality analysis looks at prevention and failure costs, not the overall forecast.
  13. WP 13Given the EVM data below, what is the most appropriate EAC when variance stems from a one-time scope change?

    Exhibit for WP 13

    MetricValue
    BAC$420,000
    EV$280,000
    AC$310,000
    CPI0.90
    NotesVariance caused by approved scope addition

    Debrief answer to open the notes

    1. A$466,667 is BAC / CPI = 420,000 / 0.90, which assumes the variance keeps recurring.
    2. B$420,000 is the original BAC; it ignores the $30,000 already overspent.
    3. C$344,444 is AC / CPI, which is not an EAC formula.
    4. DCorrect: a one-time variance means remaining work runs at budget: EAC = AC + (BAC - EV) = 310,000 + 140,000 = $450,000.
  14. WP 14You are overseeing a construction project with a total budget of $280,000. The project involves several components. Evaluate the project's Earned Value (EV) given the data below, focusing on the components completed so far.

    Exhibit for WP 14

    Project ComponentPlanned CostActual CostProgress
    Foundation$80,000$75,000Complete
    Framing$120,000$110,000Complete
    Electrical Wiring$50,000N/AIn Progress
    Plumbing$30,000N/ANot Started

    Debrief answer to open the notes

    1. A$210,000 credits value beyond the finished work; EV here counts only completed components.
    2. B$185,000 is the actual cost of the finished work (75,000 + 110,000), which is AC, not EV.
    3. CCorrect: EV is the planned value of work done: Foundation 80,000 + Framing 120,000 = $200,000; in-progress and unstarted work earn nothing here.
    4. D$230,000 adds value for plumbing or wiring that is not complete, overstating progress.
  15. WP 15A hybrid project has contractual milestone payments tied to external deliverables. The latest schedule variance shows a two-week delay on milestone 3. Using the mapping table, what is the cashflow impact on the next forecast period?

    Exhibit for WP 15

    MilestonePayment AmountEV CheckpointPlanned DateForecast Date
    M1$120,000EV1Month 2Month 2
    M2$95,000EV2Month 4Month 4
    M3$150,000EV3Month 6Month 6.5
    M4$110,000EV4Month 8Month 8

    Debrief answer to open the notes

    1. AM2 and M3 are not both delayed; only M3 moves, so $245,000 overstates the impact.
    2. BM2 stays on its planned Month 4 date, so there is no shortfall there.
    3. CCorrect: only M3 slips, from Month 6 to Month 6.5, so its $150,000 payment moves later in the cash-flow forecast.
    4. DM4 is still forecast for Month 8 as planned, so its payment is not delayed.

Open a row to answer. Keys: 1–4 or A–D answer, N opens the next row.

05Questions about reserves and forecasts

Can the project manager spend management reserve?

Not alone. Management reserve is released by management, typically through change control, and the cost baseline is updated when it is. Contingency reserve is the project manager's to use for the risks it was sized for.

What should a sponsor hear when the forecast slips?

The forecast, its cause, and the options with their cost and schedule effect, early enough that choosing among them still matters. Optimism the numbers do not support is just bad news delivered later.

What is funding limit reconciliation?

Funding often arrives in steps rather than as one sum. Reconciliation compares the planned spending curve with those funding limits, and where spending would run ahead of the money in some period, work is rescheduled to stay under the line.