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Risk management - Cost model part 2

Cost model part 2

As we mentioned earlier [see Simple estimating of risk] the chances of the MINIMA and MAXIMA happening are a lot lower.


Let us assume that we estimate that the chances of either a MINIMA or MAXIMA happening for each task is 2% (0.02). For all the MINIMA and MAXIMA to occur at the same time the probability of this occurring for the 8 tasks would be:

2% x 2% x 2% x 2% x 2% x 2% x 2% x 2% or:

0.02 x 0.02 x 0.02 x 0.02 x 0.02 x 0.02 x 0.02 x 0.02 or

0.02 to the power 8 = 0.0000000000000256 = 2.56 x 10 (to the power -14)

Now this is a very, very small probability. The chances of each task going wrong to the same extent is almost impossible.

We need to get a more realistic range of costs. At the moment we don’t know the possible combinations of the risks.
For example, one scenario could be:

Arisk: HIGH
Brisk: HIGH
Crisk: AVERAGE
Drisk: LOW etc

Clearly, if there was a strong likelihood of all MINIMA or MAXIMA then the project would be impossible to handle.
Next we can examine Monte Carlo simulation [see Monte Carlo simulation].