Schedule Risk Management - Construction Project Scheduling and Control - page 388

Assuming the person's capital is $100,000, the expected value is

, . , . , . , .

E =−100 000 + 0 20 ⋅ 200 000 + 0 30 ⋅ 150 000 + 0 30 ⋅ 100 000 + 0 20 ⋅ 0

=+15 , 000.

or 6

E = 0 . 20 100 , 000 + 0 . 30 50 , 000 + 0 . 30 0 + 0 . 20 (−100 , 000)=+15 , 000

⋅ ⋅ ⋅ ⋅

Even though the investment has a positive (attractive) value overall, the investor
must bear in mind that there is a 20% chance that her entire savings will be lost. In
such case, the investor may not be willing to take such risk.
The contractor, on the other side, should not overreact, perhaps by taking into
consideration the event outcome or consequence only without considering the like-
lihood. This may lead to a situation in which the risk mitigation costs more than the
expected value of the event itself.
Companies or investors who diversify their investments or projects generally have
a lower risk of suffering a catastrophic loss at the level of the corporation or organi-
zation. If the probability of a catastrophic loss (or adverse condition) for each project
is low (e.g., 20%), the probability of catastrophic loss at n projects simultaneously is
n 20% (2% if 10 projects). This is true only if the events in the different projects are

independent of each other.

⋅

APPLICATION IN SCHEDULING
Historically, schedule risk management has been reserved mostly for large complex
international projects with severe risk events, such as long-lead shipping components,
but the scheduling industry has started to recognize that the use of strictly deter-
ministic schedule development has some drawbacks. As noted earlier, risk has been
considered for years in the cost-estimating side of project controls, through processes
ranging fromMonte Carlo analysis to going with a “gut feeling” estimation of contin-
gencies. Few estimators would provide a project cost estimate that did not account for
escalation and uncertainties in the estimate; however, schedulers are just now starting
to take the same approach with time risk.
Much of the benefit of a schedule risk management program is a result of the
risk workshop. Once the project management team has participated in a formal risk
workshop, has discussed the project's problems, has thought through the likelihood
of encountering those same problems, and has worked out risk allocations, the team

6 The two equations are equivalent: the first one considers all payments, including the initial investment,
which comes in as a negative value. All other payments (profit/loss) are adjusted by the probability. The
second equation considers only profit/loss after the initial investment.