Evaluating Potential Events and Costs of Assessed Risks by Dmitrij Harder

After the list of probable risks for a project has been determined, the next vitally important step is to define the potential for the occurrence of these risks as well as the cost of the event should it materialize. This process provides three benefits:

  • It enables the prioritization of risks – High priority risks can possess a high probability of occurrence and/or a high cost in terms of the required response. These are the risks which demand the most time and resources to manage due to their high potential impact to the project. Prioritization allows for advance planning which prevent an event or minimize its consequences.
  • Potentially high-cost risk events can be included in a project’s budget – Being able to budget for the potential cost of high-probability risk events in advance can allow for efficient responses which don’t result in cost overruns.
  • De-prioritization of risks – Defining low probability and low cost risks allows for a greater focus of time and resources on those risks which pose far greater threats.

Prioritizing project risks can be a relatively subjective process, especially when determining the probability of a risk materializing. Still, this determination plays a vital role in the calculation of the value (i.e. potential cost) of a risk event. If the probability is expressed as a percentage, it can then be multiplied with the estimated cost of the event to determine a risk value. High risk values would then command high priority rankings.

This calculation also works in terms of prioritizing events where one value might be considerably high and other is extremely low. One example would be a meteor strike with costs being very high while the probability is infinitesimal.

Professionals like the team led by Dmitrij Harder at Solvo Group collect as much data as possible to properly estimate the probability of an event occurrence as well as its potential costs. This analysis enables the allocation of risk management resources to be focused where they should be; on the risks which pose the greatest threats to the project.

 

 

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