11.1.3  The importance of valuing risk

Risk and uncertainty are inherent in all projects no matter what the size of the project. Serious consequences of risk for projects can be broadly summarised as:

•  failure to keep within the cost estimate;

•  failure to achieve completion date; and

•  failure to achieve the required quality and operational requirements.

All too often risk is either ignored, or dealt with in an arbitrary way. For example, simply adding 10 per cent contingency onto the estimated cost of a project is typical. As this approach makes little attempt to identify and assess the risks in a project, this contingency may be inadequate and there may be a resultant cost blow-out and delay. It is, therefore, essential that risks are identified and valued where possible in order to gain a full appreciation of the likely outturn cost to government of pursuing this project.

The identification and costing of risks is particularly important in PPP projects, as risk allocation and its financial consequences play a key role in assessing value for money and in contract negotiation.