Another approach to calculating the project risk is to estimate the probability of its occurrence with the knowledge of the possible impact of such an event on the project as a whole. This contingency makes it possible and necessary to put a monetary value on the aforesaid risk, and define the degree of the event’s impact on the project accordingly.
Some modern views are inevitable to take into account the ability to manage the event and to understand that there are some events that can be managed easily where other event that is more complicated to manage. This approach is vital special in calculating the risk in project execution phase, undoubtedly contributing to the rapidity with which it has entrenched itself as one of the most widely-recognized and applied methods for estimating and managing project risks during execution. There is a second additional subtlety that emerges from the fact that, as knowledge and technology both advance, many specific risks come to be managed and handled more pro-actively. Not surprisingly, therefore, one of the columns of this particular tabulation approach indicates the "manageability" of an identified risk. The subtle point here is that the manageability of many kinds of risk may be improved as part of sorting out inter-departmental discrepancies addressed during interdepartmental meetings that take place from time to time in any event, i. e., without necessarily having to prepare any particularly exceptional budgetary or scheduling contingency solely for the purpose of addressing the risk in question. Accordingly, following this risk-tabulation method, such an item, because of this acknowledged higher manageability, would and should be given a lower score, decreasing the overall risk score. If the source of the risk is related to contact involving some outside organization, such as licensing or other special permissions from a government department, the fact that neither the contractor nor the owner has it in their power to manage this eventuality means its degree of risk lies beyond the project’s control and must therefore be assigned a higher, if not the highest, score.
This tabulation method is arranged to be applied in a face-to – face meeting of all those with project responsibilities. The ranking of probability and impact (consequence), is relatively simplified, using the numbers 3, 2, 1 to rank what is high, medium and low, respectively. Manageability is ranked 1, 2,3 for high, medium, and low respectively.
In defining impact, the pessimistically-minded manager will tend to rank everything as highly probable, while the carelessly – minded one can be expected to rank everything as less probable. The project manager or his designate in charge of this meeting, therefore, should proactively define the probability as follows:
• High probability – if the probability of occurrence is higher than 50%
• Medium probability – if the probability of occurrence is 10-50%
• Low probability – if the probability of occurrence is less than or equal to 10%
The same criteria should be defined by the facilitator and team leader before assessing the risks. This criterion is different from one project to another based on size and budget. The assumed criteria for the example in Chapter 4, as will be discussed in Section 9.8, is as follows:
• High consequence – when the risk becomes reality and the impact on the project will cost higher than or equal to $500,000
• Medium consequence – when the risk becomes reality and the impact on the project will cost between $50K and $500K
• Lower consequence – when the risk becomes reality and the impact on the project will cost less than $50K