Expected Monetary Value Calculation for Project Risk Management
In this Expected Monetary Value example, we have two negative project risks (Weather and Labor Turmoil) and a positive project risks (Cost of Construction Material). The Expected Monetary Value for the project risks:
Weather: 25/100 * (-$80,000) = - $ 20,000
Cost of Construction Material: 10/100 * ($100,000) = $ 10,000
Labor Turmoil: 5/100 * (-$150,000) = - $7,500
Note: Though the highest impact is caused by the Labor Turmoil project risk, the Expected Monetary Value is the lowest. This is because the probability of it occurring is very low.
This means that if the:
Weather negative project risks occurs, the project loses $20,000,
Cost of Construction Material positive project risks occurs, the project gains $10,000, and
Labor Turmoil negative project risks occurs the project loses $ 7,500
The project’s Expected Monetary Value based on these project risks is:
-($20,000) + ($10,000) – ($7,500) = - $17,500
Therefore, if all risks occur in the construction project, the project would lose $17,500. In this scenario, the project manager can add $17,500 to the budget to compensate for this. This is a simplistic Expected Monetary Value calculation example. Another technique used to calculate complex Expected Monetary Value calculations is by conducting Decision Tree Analysis. This analysis helps while making complex project risk management decisions. For more details, read this article on Using a Decision Trees Example in Project Risk Management to Calculate Expected Monetary Value.
As a project manager, you may apply different production techniques to minimize risk. For example, if this example was based on software development or manufacturing, the project manager could use Lean thinking to reduce waste and minimize risk. However, the method for computing Expected Monetary Value during project risk management would not change.