What is Expected Monetary Value?
From the The Money Files Blog
by Elizabeth Harrin
A blog that looks at all aspects of project and program finances from budgets, estimating and accounting to getting a pay rise and managing contracts.
Written by Elizabeth Harrin from RebelsGuideToPM.com.
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Date
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
So:
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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Posted on: April 27, 2020 09:00 AM |
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Comments (9)
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Aaron Porter
Community Champion
IT Director| Blade HQ
Payson, UT, United States
I can see using this for projecting opportunity/benefit, as well. I've seen ROIs not met, fully - knowing to expect that might have led to different decisions. Factoring in probability could help with better decision making.
Khai Ng.
IT PMO | IT Project Manager| TTGROUP
Hanoi, Viet Nam
I think for risks with probability of occurring higher than 50% or the impact is huge then we should not use the formula to calculate reserved money. We should use all of money without multiplying by probability.
Phyo Papa
Experienced Project Management| MBA (project management)| Myanmar Koei International Ltd
Kawasaki, Japan
Thanks for your knowledge sharing.
Very helpful. I like the breakdown.
Rodrigo Gregorio
Engineering Manager| Advanced Energy
Singapore, Not Specified, Singapore
Thanks for sharing. Very informative and helpful.
Well written and explained. Its a creative way to categorize risk contingency amounts and make provisions.
RAJESH K L
Project Manager, PMP| Bharat Electronics, Bengaluru, India
Bengaluru, Karnataka, India
Very clear way of explaining this concept, thank you!
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