Addressing Cost Risk Exposure and Mitigation

Posted by Megan Cacioppo on November 8, 2017

Addressing Cost Risk Exposure and Mitigation Header Image

I often find that project teams talk a lot about schedule risk mitigation. But what about the other very important element of a project – you know, cost?

There are actually quite a lot of similarities between the schedule risk analysis process and what you go through to identify, analyze, and consider mitigating cost risks and uncertainties. It’s all about anticipating cost issues that otherwise might be surprises and deciding what to do about them (if anything). In fact, cost risk analysis works the same way, mechanically speaking, as schedule risk analysis does. The main difference is that a total cost is calculated, rather than a delivery date.

There are five high-level steps involved in a cost risk analysis:

Step 1: Get ready to analyze. To do so, you’ll need to sample the cost lines of your project, and then add up the total cost value using the sampled costs. If a risk event has a 50 percent probability of occurring, then it would be present in roughly 50 percent of the iterations.

Step 2: Run your iterations. Then, just like in schedule risk analysis, take all of those iterations and chart them into a histogram, like the example below. From that analysis you can then determine the probability of delivering the project at cost, as well as the confidence level.

Cost Risk Analysis Histogram Example

Step 3: Compare cost risk exposure. Like with the results of a schedule risk analysis, the cost risk analysis results can also be evaluated using a side‐by‐side comparison of the cumulative probability curves, or S curves. For cost, a common comparison is to show base uncertainty, time overlay, and the risk events as additive curves.

Step 4. Understand the cost contribution. Once the risk exposure is created and the contingency calculated, the next step is to examine which cost lines are the most impacted and which risk events are the biggest drivers. A tornado (or Pareto) diagram is handy for this. At the top would be the cost lines and risk events that are of the biggest concern, which will help you determine where to direct resources. Check out the example below. This analysis sets the priorities for consideration of mitigation. It ensures that you’re spending time and money on mitigation that matters the most, and that you’re not missing mitigation that could provide a substantial benefit to the project.

Cost Risk Exposure Comparison Chart 

Step 5. Analyze and handle the cost risk. The mitigation process for cost risk events is the same as for schedule risk events (do you see a recurring theme here?). Once you’ve identified the top cost risk drivers, you can evaluate options for mitigation. The analysis will indicate the benefit of a proposed mitigation, and you can then compare that benefit with the time and money it will take to implement the mitigation. Your next and final step is to propose mitigation, based on your evaluation of the top cost risk events and taking into account the cost and time to implement the mitigation.

Do you see the similarities between cost and schedule risk analysis? In our new eBook, Project Risk Management for Dummies, we go into much greater detail about addressing risk exposure for both. You can download your complimentary copy here: http://more.deltek.com/Project-Risk-Management-for-Dummies.