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I took an enterprise risk management course last fall. In it, they point out that we need to think of the total cost of risk (TCR?): costs of mitigating, palliating and managing risks. Many of them can be determined or estimated ahead and, therefore, be included in the overall project budget, rather than simply left to the contingency reserves.
That is correct but let us be clear; any funds you need to manage (meaning people, etc.) and to mitigate, etc ... these are known costs and will be included in the estimate. However, the EMV are left for contingency because they are still uncertain.
In other words, you have a high priority risk it cost you X to mitigate --- X goes into the project known costs. However, that risk is only mitigated - so there is still a residual risk, which has a P and I --> EMV. That is what goes into contingency.
The above is one approach. There could be others.
Let's work through a simple hazard risk: the project office could be burned down. I will probably have some risk transfer that will cost me the insurance premium (risk financing). As well, I will probably have some risk mitigation activities to reduce the likelihood and impact of the risk. These activities can be clearly defined and accounted for within the schedule and the budget.
Are we done? Not quite. At this point, your planning should focus on what happens if the risk is triggered even after these preemptive activities have been completed. I might want to plan for evacuation, alternate office arrangement, and restoration.
While the bulk of the costs associated with risk palliation is not incurred if the risk is not triggered, I will still probably have project activities such as drills, negotiations and agreements, that should be set up ahead of time.
In other words, all of my mitigation and some of my contingency should be planned, scoped, scheduled and budgeted for.
Yes it is often the case where a special risk is manage separately due to corporate culture.
Thanks I'll look at it
I agree Risk reserve should be for all risk, corporate culture often make it a bit different.
Yes Enterprise risk management and project management are almost identical.
The hazard of the project office to burn, should be mitigated first with some insurance, a cost to be include in the project.
Some other mitigations could be done to minimize cost of the events, first come to mind a out of site back-up of computer document, also to include in project cost. Your right some preselection of alternate office option should be in the mitigations.
Residual risk should be mainly the deductible of the insurance, since most of the cost would be cover by the insurance company. It would be prudent to have some reserve for lost time and cost that are not cover.
Some company would have project evaluate some risk probability in terms of occurrence during the project life cycle. In a case of fire, it will probably be put at less then one.
Would you distinguish contingency reserve from the risk reserve?
Thanks for the precision
Just I’d like to add;
1- For contingency reserve; it has to be calculated; it is the sum of the EMV for all related activities. (including the residual risks & actively accepted risk during Plan Risk Response); in fact the individual contingency reserve or response will be add to the Risk Register as it is updated thru all Risk Management Process; it may be useful to the risk owner to watch the trigger & apply the contingency reserve / response as mentioned in the risk register.
2- For management reserve; it usually a percentage ranged from 5 to 9 % as average.
Rest were explained in gentlemen points before.
On another point, contingency reserve is usually part of the project budget while the management reserve is not. Usually when I project do estimates, I do contingency reserve for soft and hard cost and they will be part of the budget.
Quality contributions. i would keep them separate and note what i have provided for in each. should there be additional risks i should be able to tell if my provision is not adequately covering and now have to look at other items to cover for these risks.
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