Step 3: Calculate the cost of each risk

The Probability of Occurrence and the impact of the risk can then be combined into a matrix in order to provide a measure of the combined significance of the risk, and can then be ranked from the highest significance of risk to the lowest, thus providing a measure of which risks need to be prioritised for the particular project, based on extensive consultations with relevant Stakeholders. The PPP Project Team can then prepare a risk management strategy for those risks retained by the Government Entity, with the aim of optimising Risk Allocation.

In order to calculate the project risk value, a five step calculation methodology should be followed:

  Establish the base case - the best estimate for each risk option that necessitates assessment of how much it will cost in economic terms;

  Calculate the impact severity - assign "best" case, "most likely" case, and "worst" case scenario percentages, building up on the potential impact determined in Step-2 ;

  Calculate the potential value - multiply the base case by each percentage to estimate the potential value of each scenario;

  Assign the probability of the risk - estimate the probability of each scenario occurring (sum = 1); and,

  Calculate the expected value of the risk - multiply the potential value by the respective probability.

For example, to calculate the "most likely case" risk of capital cost overruns of a project which has an estimated capital cost of 20M AED (Base case cost): if the risk of a capital cost overrun is calculated as 40% (Impact severity - "most likely" case) and by taking into account the historical trends in similarly procured projects, the average overrun is determined as 20% (Probability of Occurrence of "most likely case" ), the expected value of the risk will be calculated as; AED 20M* 40 % *20 % = AED 1.6M).