risk calculation

Information Technology Risk Management

Shailesh Wagh Fairfax, Va, United States

Suppose the contract contains a penalty clause of $40,000 per month for a late delivery of THE SYSTEM. There is general agreement among the technical team that they have a 50% probability of being late by one month, a 10% probability of being late by two months and a 5% probability of being late by three months. What is your risk exposure?

scheduled delivery is after 24 month and 3 month for beta testing ..(info if needed)

Posted: Jun 15, 2016 3:14 PM

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Anonymous

Risk Scenario 1 (50%) Late by 1 Month = 0.5*40000
Risk Scenario 2 (10%) Late by 2 Months = 0.1*40000*2
Risk Scenario 3 (5%) Late by 3 Months = 0.05*40000*3
I believe you already did this. Check if it is useful.

Posted: Jun 16, 2016 5:23 AM (Updated by author: )

Rami Kaibni

Community Champion

Senior Projects Manager | Field & Marten Associates New Westminster, British Columbia, Canada

You can eliminate any risk exposure by having a COC & Wrap-Up liability which will cover you from delayed opening up to 6 months and up to a certain amount of money. Risk Exposure is usually Value x Probability of Occurrence

...

1 reply by Chris Franzoso

Jun 21, 2016 1:41 PM

Chris Franzoso

...

Don't think this insurance applies to this situation. Seems the contract is already written...doubt the vendor purchased any insurance for late delivery, or there would be no risk exposure.

Posted: Jun 16, 2016 11:43 AM

Eric Harter Estimating & Risk Management Team Manager| Siemens Energy - Field Service North America Oviedo, Fl, United States

So 2 in 3 chance of being late? Expected value sounds like $34k of exposure, which is awfully close to the $40k penalty....makes one think if its not just best to 'buy' the delay and put it to good use to make sure everything else is in order.....

...if its approximately twice as likely to be late as on time AND the expected impact is about equal to the penalty ($34k vs $40k), might be best to acknowledge probability, buck up, and begin adjusting plans for being a month late.

Re-baselining the risk by accepting the $40k penalty and +1 month delay leaves a 15% threat of being 1-2 months late (expected value of $8k) and a 35% opportunity of still finishing on time (ev $14k). Bleak, but sort of a controlled fail rather than a crash.

Posted: Jun 20, 2016 1:16 PM

Chris Franzoso Mansfield, Tx, United States

Jun 16, 2016 11:43 AM

Replying to Rami Kaibni

...

Don't think this insurance applies to this situation. Seems the contract is already written...doubt the vendor purchased any insurance for late delivery, or there would be no risk exposure.

Posted: Jun 21, 2016 1:41 PM

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risk calculation

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