Categories: cost management
Expected Monetary Value is abbreviated to EMV, so you may also see it called that.
It’s a concept that took me a while to get my head around, but it’s a useful measure to know when thinking about project cost management and project selection.
The challenge I had with understanding EMV is that it’s a calculation about a probability. I prefer to deal in ‘real’ numbers, like payback period or ROI. Having said that, EMV is a tool out there and in use, so it’s worth knowing more about.
How do you calculate EMV?
One of the disadvantages of EMV is that so much of the calculation relies on professional judgement and expert input. In other words, guessing.
EMV is calculated like this:
Probability x (financial) Impact
Let’s take an example.
You have identified a risk with a 20% chance of occurring.
If the risk occurs, it could cost you £500 to deal with it.
The EMV for this risk event is:
Probability = 20%
Impact = -500
0.2 * -500 = -100
You should make sure there is a risk budget allocated of £100 to help offset this risk.
The challenge I have is that if the risk occurs, it is going to cost you £500, not £100, so you won’t have enough. If the risk doesn’t occur, you don’t need any money.
That’s what makes EMV feel very abstract to me, but I understand that it works better across a wider pool of risks. They won’t all happen, so the money you’ve put aside will hopefully be enough to act as contingency for the risks that do occur.
What do you use EMV for?
EMV is a useful measure to help you work out the contingency funds you might need. As we’re talking about probability and the chance of things maybe happening, you can see that there is a strong link to risk management.
You can also use EMV calculations to help determine the best course of action for risk management. If you have two possible ways to mitigate a risk, which one would give you the best EMV result? Do the maths and that helps you with a recommendation for next steps.
You wouldn’t need to use EMV calculations on small projects. It’s really a technique for larger initiatives where you have a lot of risks requiring financial amounts to manage them. It can help you spread the risk budget between risks.
Do you use EMV on your projects? Is there a better way to explain the probability and why it’s OK to not have the full amount of risk budget in your reserve? Or is it just me who finds this concept not very practical?!
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