The base cost estimate for a particular cost item is adjusted for the risk of the forecast cost not being achieved. For example, the financial impact of an expected overrun in a particular cost is summarised in Table 1 below on the basis of its probability of occurrence:
Table 1
| Probability of outcome | Cost overrun $000 | Weighted cost overrun $000 |
| (a) | (b) | (a) x (b) |
| 5% | 60.0 | 3.0 |
| 20% | 80.0 | 16.0 |
| 40% | 120.0 | 48.0 |
| 20% | 170.0 | 34.0 |
| 15% | 190.0 | 28.5 |
| 100% | 129.5 |
Although the most likely cost overrun is $120,000, the expected overrun is $129,500. The expected overrun of $129,500 must be recorded in the PSC and is potentially a transferable risk. While a simple probability analysis may suffice for some risks, comprehensive risk analysis requires a somewhat more sophisticated approach than this simplified example, and the risk adjustment will depend primarily on the probability distribution of the costs. Risk analysis is discussed in further detail in the following section.