Bounding the Risk

It is not uncommon in risk analysis to identify a situation that has more uncertainty than definition.  In such cases, when trying to define the risk in words and the impact, there may be a number of possible risk event definitions and impacts from what is essentially one risk.  Often, such complexity discourages the project manager from continuing the risk management process.

The complexity can be addressed by using a tool such as “Bounding” the risk.   Not all possibilities need be recorded; only a range.  When bounding a risk, the PM identifies the worst case scenario and its impact, the best case scenario and its impact, as well as the most likely.   The discussion then considers strategies to address each of these three particular risk scenarios.  Consideration is given to whether the worst case scenario is survivable or “worth the risk”.  Mitigation plans are developed.  The optimists will anticipate the best possible outcome, but  it may not be the most likely.   An analysis of the probabilities will identify a realistic value for exposure levels.

Example:

We have some work that’s being done in the spring and are concerned about water damage.

We know there may be some rework required if the work is damaged by water, which causes delays to the schedule, additional costs, and extra labour to perform the water removal. We also have some more uncertainty than one issue should mount, so let us bound the risk.

Picture111

We start by identifying the best outcome: water damage is significant but is recognized as an additional scope, so we have full compensation for the extra work required. The only disadvantage is that the client may be unhappy paying the extra cost.

Worst outcome: water damage is more significant than our budget expected (and not recognized as outside the normal scope of events), so rework is required at our own cost. The advantage is that the client is very happy, but our disadvantage is that the job is less profitable or even not profitable at all.

The most likely outcome is easier to formulate after formulating the best and worst outcomes. The most likely outcome is that there is water damage, some rework and water removal is required, but not significant enough to claim as extras. We are still operating within our contingencies/normal course of events. Margins are reduced but we are still profitable.

We can continue our risk analysis by identifying likelihoods; in this example 15% for the worst case, 15% for the best case and 30% for the most likely.

Picture1

We can then complete the risk analysis by identifying impacts and relative impacts of all outcomes (based on the probability of occurrence).

This will impact the calculation of our contingencies and will give us a much more realistic number to work within developing those reserves.

The software shown above, RiskMP, leads us through the process of bounding the risk including:

  • Calculating the relative and cumulative probabilities, and
  • Expected impacts .

RiskMP is a specialized software application that will guide you through the creation of a full risk management plan.

 

In conclusion, when looking at risks that are really poorly defined, where any one of a number of possibilities may occur, we can “Bound “ the risk to make it manageable.   Bounding the risk is a simple and structured methodology to develop a realistic analysis of a particularly complex risk.

 


Risk Management Training

We offer accredited webinars and on-site training in Risk Management and Construction Management. For more information: https://escomputertraining.com/courses/list/industry/9

———-

More blogs from Construction Talks: constructiontalks.com

Videos on these topics: Construction & Risk Management Series

 

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s