In our discussion on Perform Quantitative Risk Analysis process, we touched upon the concept of Expected Monetary Value or EMV. As mentioned then,
With the help of EMV analysis you will be able to calculate the costs of all the paths you might take during the course of your project.
Another important topic you should remember at this point is the Probability and Impact matrix. And a related question that you should be asking is how does the Probability and Impact matrix help you plan? Actually, if you have the cost of each risk being materialized, you can calculate how much the risks are going to cost to your project. This is where the calculation of EMV of each risk comes into play.
Let’s take an example,
|Server hardware failure||15%||Costs $300 for maintenance|
|A dependent coding module is completed early||8%||Saves 2 days of work and an overall $500 in cost|
|Procurement stuck at customs||10%||Can cost up to $100 for additional paperwork|
To begin with, you will calculate the Expected Monetary Value (EMV) for each risk,
Risk 1: 15% x $300 = $45 (-$45)
Risk 2: 8% x $500 = $40
Risk 3: 10% x $100 = $10 (-$10)
Note that Risk 2 is an opportunity
Now add all these values for total EMV
(-45) + 40 + (-10) = -15
This $15 is the extra money that you need to add to your budget to account for all the project risks. This is how EMV can help you with cost management as well as risk management.
Check more articles on Risk Management