Search Help:

﻿

## About Cost of Risk Calculations

Risk cost is a calculates the total cost of a risk that takes into account the risk mitigation plans linked to the risk. The Risk cost calculation is performed in the Properties tab of the Risk Information dialog box.

### Risk cost calculation

1. Enter Potential Loss: the loss in monetary terms if the risk occurs.

• For example: For the risk "low quality component" the potential loss is \$50,000. It is the cost that you would incur if a low quality component was supplied.

2. Probability Before Mitigation comes from the Probabilities and Outcome tab of Risk Information dialog box. See "Risk Probabilities and Impacts" for more information.

3. Expected Loss takes into account that the risk may not occur. It is an indicator that helps you to compare the costs of different risks. Expected loss can be calculated manually or automatically depending of selection “Auto calculation of expected loss from Monte Carlo”.

• Manual calculation of Expected Loss: You can manually calculate the expected loss for individual risks by running two simulations: one with the risk open and the other with the risk closed. The difference in the total project costs is the expected cost of the risk.

Expected loss = Potential Loss * Probability (pre-mitigation)

For example, probability of risk “low quality component” equals 50%. Potential loss equals \$50,000. Expected loss will be \$25,000 = \$50,000 * 50%.

• Automatic calculation of Expected Loss is done based on results of Monte Carlo simulations of project schedule:

Expected loss = (Project Cost with Risks – Project Cost Original) * Correlation Coefficient

The correlation coefficient is calculated using project cost and cost increases due to a specific risk occurring. For example, the project cost with risks and uncertainties is \$100,000. Project cost without risks and uncertainties is \$90,000. In addition, the correlation coefficient for the specific risk is 0.8. Expected loss will be (\$100,000 - \$90,000 )*0.8 = \$8,000. In RiskyProject Enterprise, the automatic calculation cannot be performed at the enterprise level or on summary projects, as they do not include project activities.

4. Total Expected Loss (for RiskyProject Enterprise only):

Total Expected loss = Expected Loss on Current Level of Project Hierarchy + Expected Loss of Sub Projects

Total expected loss is calculated at the enterprise or on for summary project level. For example, a summary project has two sub projects with expected loss \$8,000 and \$7,000, which can be calculated manually or automatically. The summary project itself has expected losses of \$5,000 from risk managed at that level. Total expected loss will be \$20,000.

5. Cost of Mitigation is taken from Waterfall tab of Risk Information dialog box. It is the cost associated with efforts to reduce the probability and impact of the risk.

• For example: Mitigation plans will include "Additional QA procedure" and "QA audit of supplier's operation", which would cost \$10,000 in total.

6. Even if mitigation plan is executed as planned, there will still be a cost associated with a risk as it is possible to reduce risk, but not to eliminate it (an exception is when you are able to Avoid the risk through early planning). The response plan may be executed if the risk occurs and will be calculated using the cost entered for the response plan associated with this risk. This cost is entered Mitigation and Response view.

• For example: If the risk "low quality component" occurs, this component needs to be replaced with a new one, which would cost \$20,000.

7. Residual risk may still occur after the risk response and is cost is calculated as the Cost of Residual Risk.

• For example: New component installed as a risk response can still can be defective. The residual cost of the risk will be \$10,000.

8. Probability after Mitigation comes from Waterfall tab of Risk Information dialog box.

• For example: Risk Probability after mitigation equals 25% as a result of the execution of the mitigation plan "additional QA procedure" probability of risk "low quality component" is reduced two times.

9. Expected loss after mitigation takes in to an account the fact that risk may not occur. Expected loss after mitigation = (Cost of Response Plan + Cost of Residual Risk ) * Probability after information

• For example: Probability of risk "low quality component" after mitigation equals 25%. Expected loss after mitigation will be \$7,500 = (\$20,000 + \$10,000) * 25%

10. Total Risk Cost after Mitigation = Expected loss after mitigation + Cost of Mitigation

• For example: Total cost after mitigation of risk "low quality component" will be \$17,500 = \$7,500 + \$10,000

11. Saving from Mitigation is a difference between costs with and without mitigation. If this number is negative mitigation efforts will not lead to cost saving.

Saving from Mitigation = Expected Loss - Total Risk Cost after Mitigation

• For example: Total cost after mitigation of risk "low quality component" will be \$17,500. Expected lost \$25,000. Saving from Mitigation is \$7.500. Because this number is positive it makes sense to perform mitigation efforts.