Risk analysis of any project cannot be completed without putting some amount as a contingency reserve. Risks will eventually result in a higher impact of individual risk, which might not be correct. Incorrect historical data will eventually impact the project.It’s a heavy reliance on historical data and expert opinions, so personal liking disliking can affect the project’s overall result.Its use is only limited to bigger projects, so it can’t be used for small projects.Similarly, there are some shortcomings in these processes, such as The basis for making decisions keeping in view the historical data.The average outcome of all identified risks.
There are many good things about this technique as this gives us
We can never win the expected Value on a single bet, but if we repeated the chance many times, we would, on average, receive $0.70 for every $1.00 wagered. This average outcome” is called the Expected Value. The average outcome for any single bet is in the above-cited example is $0.70. There are two possible prizes: $100.00 and $10. That figure of $6,000 would then be multiplied by the probability of the risk occurring using the Expected Monetary Value equation:ĮMV = 0.7 x $6,000 = $4,200 Decision TreeĮMV is often used with Decision Trees, and it requires an appreciation of the concept of expected Value or Expected Monetary Value ─ a concept similar to Exposure.įor example, imagine buying a sweepstake ticket for $1.00. To do this, the qualitative impact scales of the P-I Matrix are converted to actual costs for each risk deemed in the preceding process to be high-priority.įor example, if the 0.40 impact rating shown for the risk in the Matrix below means a “20 – 40% cost increase” and if the total costs estimated for the activities most impacted by the occurrence of this risk is $20,000, then the “impact” in monetary terms is between $4,000 and $8,000 or an Its primary purpose is to eventually allocate money in the Cost Baseline (the budget) – i.e., Contingency Reserve to cover the risk. Probability & Impact MatrixĪs explained above, it is one of the key tools of the Quantitative Risk Analysis process. This we need to have in reserve as a contingency. We got a figure of an impact of -216500, but this is not what we need to reserve as we will calculate EMV, which is -31750. Risk 2 & 3 are the opportunities that we need to exploit to happen, and the other three are threats that we need to mitigate, avoid, or transfer. Let see in the below table we have identified 5 risks. Step – 4: Calculate the Contingency reserve for all identified risks Step – 3: See the Probability of all the risks. Step – 2: Analyze all the risk factors related to the project Step – 1: Get all the activities/tasks, resources cost from the Bill of Quantity (BOQ) I will try to explain all these concepts through a fundamental example P = Probability of each outcome occurring. How is EMV Calculated?Įxpected Monetary Value for any project is calculated by multiplying the probability of each outcome occurring by the Value of each possible outcome & its Impact: EMV = P x I It can be a cost impact or the schedule impact (Time is money).
This is simply the money that you need to deal with that identified risk if it occurs.įor example, during the project’s execution, you identify that there may be a breakdown in the equipment, and you need to replace it with a new one. This makes 16.67% chances to get any number on a dice. Same way, if we roll a dice, then the likelihood for any number like to get a 3 is 1/6 as entire faces on dice are 6. This we get as the total number of events is 2, the likelihood for Head or tail is 1/2. It is the likelihood of the occurrence of any event.įor example, the Head’s outcome in a toss is 50% & so does 50% is the tail. First, we need to understand these… What is Probability?
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