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Risk–Response Budgeting: A Financial Optimization Approach to Project Risk Management

Author

Listed:
  • Yossi Hadad

    (Industrial Engineering and Management Department, Shamoon College of Engineering (SCE), Beer Sheva 8410001, Israel)

  • Baruch Keren

    (Industrial Engineering and Management Department, Shamoon College of Engineering (SCE), Beer Sheva 8410001, Israel)

Abstract

Projects are exposed to risks that may hinder their success regarding cost, schedule, and quality/content. After identifying these risks, the project manager must select a subset for mitigation, constrained by a limited risk response budget. The problem lies in the uncertainties surrounding risk realization, their impact on the project’s parameters, and the outcomes of the risk response plan. This paper proposes a method for allocating the risk–response budget to mitigate project risks. The method begins with a Monte Carlo simulation to assess each risk’s impact and residual impact post-mitigation. These simulation results are the input for mathematical programming calculations, determining the optimal budget allocation among the risks based on various objective functions (e.g., maximizing expected net savings or minimizing variance). Each objective function can yield a different optimal budget allocation, so the final step involves weighing all results to make a conclusive decision. A case study illustrates the proposed method.

Suggested Citation

  • Yossi Hadad & Baruch Keren, 2025. "Risk–Response Budgeting: A Financial Optimization Approach to Project Risk Management," JRFM, MDPI, vol. 18(3), pages 1-16, March.
    • Handle: RePEc:gam:jjrfmx:v:18:y:2025:i:3:p:160-:d:1614630
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    References listed on IDEAS

    as
    1. Komarek, Adam M. & De Pinto, Alessandro & Smith, Vincent H., 2020. "A review of types of risks in agriculture: What we know and what we need to know," Agricultural Systems, Elsevier, vol. 178(C).
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