Risk quantification is a key component of the analysis of procurement options. An important concept related to risk quantification is that, for most risk events, the result is not a single value but, rather, a distribution of many possible values.
While a definite process is followed to obtain inputs to calculate the distribution of values for a risk event, the result involves both art and science, and will be influenced by the unique experience of the project team, advisors and the facilitator.
The objective of the risk quantification stage is to value the project risks in order to develop two fully-costed (i.e., risk-adjusted) delivery models. These models include a public sector delivery model, or public sector comparator (PSC), and a private sector delivery model, also known as a Shadow Bid.
The PSC and Shadow Bid will take into account the value of risks that are transferred from the public sector to the private sector, as well as the value of risks that are retained by the public sector under both delivery models. The outcome of this process allows for the comparison of the cost of the two approaches on a risk adjusted basis.
When comparing the cost, a thorough understanding of the contingencies in the project's base cost estimate is necessary to ensure there is no double counting of risk. Such double counting can occur if the contingencies include any amounts for project risk that are also being quantified in the risk analysis. To fully understand the contingencies, the quantity surveyor responsible for developing the cost estimate should be included as a member of the risk quantification team.