The formula for the calculation of risk requires the discretion of the planners and auditors to factor in the details but can follow a basic formula or matrix. For each potential situation, there will be a list of possible scenarios that reflect potential monetary or cost outcomes. These outcomes will be assigned a probability factor. The costs for each scenario multiplied by their probability will be the cost of the risk to be included in the project cash flow.38
Scenario | Probability (p) | Cost (c) | Value of Risk (p*C) | ||
Scenario A | 0.5 | $50,000 | $25,000 | ||
Scenario B | 0.25 | $100,000 | $25,000 | ||
Scenario C | 0.25 | $75,000 | $18,750 | ||
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38 Robinson, H., Carillo, P., Anumba, C.H., & Patel, M..(2010) Governance and Knowledge Management for Public-Private Partnerships. Malaysia: Vivar Printing Sdn Bhd