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Comparing Cost of Risk
Posted: Fri Jan 19, 2018 8:46 am
I want to calculate the cost of risk impacts. I created two baselines and compared their costs. My question is should I use P10, mean or P90 for such analysis?
Re: Comparing Cost of Risk
Posted: Fri Jan 19, 2018 8:53 am
There is no set answer for this, it really depends upon what your objective is for calculating the cost of risk and how it will be used for managing your projects. In a typical scenario, the two baselines would represent pre and post mitigated baselines where the post mitigated includes the cost and time required to reduce the impact of risk events. In this case the post-mitigated baseline represent the residual cost of your project risks.
At this point, you probably want to be looking at the difference between your current baseline (Deterministic value) and the level at which you want set your cost contingency.
In the example below, we are using P80 as our certainty level for contingency. This level is widely used as it approximates around a standard deviation and represents a good threshold for setting contingency. Too little and you risk being over budget, too much and you have inefficient allocation of resources as these funds must be set aside in case the risks materialize.
In the example below we can see how to set the contingency:
Baseline = $96,777.36
P80 = $ 98, 188.00
Contigency in this case is (98, 188.00 - 96,777.36) = $1410.64