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A practical method of determining project risk contingency budgets

Author

Listed:
  • D F Cioffi

    (The George Washington University)

  • H Khamooshi

    (The George Washington University)

Abstract

Given a collection of accepted risks with corresponding impacts and probabilities over the life of a project (or a relevant portion), a method to estimate the total potential impact at a given certainty is presented. Project sponsors and managers can decide their risk tolerance and set aside corresponding contingency funds. This analytic method uses a binomial distribution with a probability equal to the risks’ average probability. At a desired statistical confidence level, the number of risks to consider is determined, and risks are ranked in descending order of either impact or expected value of impact. The ranked risks’ impacts are then summed over the specified number of risks, leading to an appropriate contingency budget. The budget found with this method compares extremely well with the one ascertained from numerical simulations of the risk occurrences.

Suggested Citation

  • D F Cioffi & H Khamooshi, 2009. "A practical method of determining project risk contingency budgets," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 60(4), pages 565-571, April.
    • Handle: RePEc:pal:jorsoc:v:60:y:2009:i:4:d:10.1057_palgrave.jors.2602586
    DOI: 10.1057/palgrave.jors.2602586
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    References listed on IDEAS

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    1. T S Glickman & H Khamooshi, 2005. "Using hazard networks to determine risk reduction strategies," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 56(11), pages 1265-1272, November.
    2. C Eden & T Williams & F Ackermann & S Howick, 2000. "The role of feedback dynamics in disruption and delay on the nature of disruption and delay (D&D) in major projects," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 51(3), pages 291-300, March.
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    Cited by:

    1. Rao Rao & Xingping Zhang & Zhiping Shi & Kaiyan Luo & Zhongfu Tan & Yifan Feng, 2014. "A Systematical Framework of Schedule Risk Management for Power Grid Engineering Projects’ Sustainable Development," Sustainability, MDPI, vol. 6(10), pages 1-30, October.
    2. Petr Řehoř & Jaroslav Vrchota, 2017. "Influence of Project Approach Implementation on the Occurrence and Perception of Crises in Agricultural Enterprises in the Czech Republic," Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, Mendel University Press, vol. 65(3), pages 1039-1044.
    3. Ji-Myong Kim & Taehui Kim & Kiyoung Son & Sang-Guk Yum & Sungjin Ahn, 2019. "Measuring Vulnerability of Typhoon in Residential Facilities: Focusing on Typhoon Maemi in South Korea," Sustainability, MDPI, vol. 11(10), pages 1-11, May.

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