What is the EMV?
A budget for risk contingency planning must be created so that organizations are prepared in the event that a risk may not be managed in the proper manner. Risk management can be thought of as the process which can be used to successfully indentify and deal with project risks.
In most cases, the goal of an organization should be to either get rid of risks, or reduce the impact of a risk should it actually occur. At the same time, there is always the possibility that you may simply not be able to prevent certain risks. In a situation like this, the risk may actually occur, and if it does, it can cause major problems for your product, perhaps destroying it altogether.
When the risk occurs, one risk that your project may face is one which is monetary. Having said that, it may be a wise idea to create a budget for risk contingency, so that you can be prepared for the unexpected. The risk contingency budget must be comprised of capital which can be tapped into in case your project is in danger of going over budget.
The big question that you must ask yourself now is how you can figure out the amount of money that will need to be placed inside the budget for risk contingency? The answer to this question is called the EMV, or Expected Monetary Value. This is a technique which can greatly assist you in quantifying the risk your project faces, and this can be done for the budget.
To create the EMV, there are two things you will need, and this is the impact that the risk will have if it manifests itself, and the chances that the risk will manifest itself. For the risk impact, you can simply break it down into the cost for the total impact, as well as the effect it will have on the schedule.
However, at the same time, you will want to take the time to think about the budget for risk contingency. If you use this technique for every risk you face, then it is possible for you to request a risk contingency planning budget which will cover any damage which is done to the project should a risk become a reality.
How to Measure Risk Via the EMV
Once you are able to properly identify the risks that your project faces, you will next want to take the time to consider the total amount that these risks will cost if they are manifested. Once you know this amount, you can request it for your budget. The good thing about this budget is that the money is only necessary should the risk actually manifest itself.
Remember, the goal of risk management is to be sure that the risks that you face do not have a major impact on the project. What this means is that you must expect that you will be capable of properly handling the costs, and perhaps all the risks. The risk contingency plan must reflect the expected impact that your project faces, as well as the probability of the risk happening.
It is absolutely critical that you have enough money in the risk contingency budget to deal with any potential events that may occur. If you do not have enough money in the budget to handle all the risks, then you may go over the budget, and if you go over your budget, then there is a good chance that the project will become a complete failure.
One thing you should also note is that some risks will have a greater chance of occurring than others. For example, if one risk only has a 10% chance of actually manifesting itself, then this means the team should analyze it to make sure it does not occur. While you may not be able to totally manage it, paying attention to it is important.
When the EMV Works Well
When you are dealing with more than one risk, the power of the EMV can really manifest itself. The more risks that the team will face, the more the total budget can be spread among the risks. It is also important to keep in mind that the EMV methods offer a way of figuring out the proper amount of the budget to provide based on any risk contingency plan that you have set for yourself.