To assess the potential impacts of risk to a project, it is important to understand the 3 basic elements used in risk calculations: Impact, Probability and Expected Value.
Impact
Impact is the expected cost of the risk event in dollars. The impact is simply an estimate of what the risk event would cost if it occurred. Not all risk events negatively impact a project. In fact, some risk events could actually reduce costs to a project.
Probability
Probability is the likelihood of a risk event occurring. The project manager estimates the probability of occurrence. For example, the project manager may estimate that there is a 40% chance that a specific risk event could occur.
Expected Value
The expected value is the product of impact and probability and is expressed as:
Expected Value = Impact x Probability
Worked Example
A project manager is evaluating the expected value of a risk event that would add $10,000 in cost to the project if it were to occur. The project manager estimates that there is a 40% chance that the risk event may occur. In this example, the expected value is calculated by multiplying the $10,000 cost by the 40% chance of occurrence.
Expected Value = $10,000 x 40% = $4,000