Contingency Determination Using Expected Value

What the expected value method is

This is the EMV concept from Foundations (Lesson 71R-12), scaled up from one decision to a whole register of risks. Each line in the register already has the two numbers you need — a probability and an impact (you assigned them in the risk assessment, Lesson 62R-11). The expected value method simply says: the contingency you need is the sum of what each risk is "worth" on average.

The formula

Contingency = Σ ( P_i × Impact_i )

over every risk i in the register · P = probability, Impact = cost if it occurs

That's the whole method. For three risks — a 30% chance of a $200k impact, a 60% chance of $100k, and a 20% chance of $500k — the contingency is:

(0.30 × $200k) + (0.60 × $100k) + (0.20 × $500k)

= $60k + $60k + $100k = $220k

Expected-value contingency calculator

Three risks from a register. Adjust each one's probability and impact — the expected value of each, and the contingency total, update live:

Using the expected value method well

Start from a complete, deduplicated risk register (the QA/QC of Lesson 77R-15 matters here — missing risks understate contingency, double-counted ones overstate it). Use credible probabilities and impacts, not optimistic ones. Present the result as a mean-level contingency, and be clear that it doesn't carry a stated confidence level. For larger projects, treat it as the transparent baseline that a Monte Carlo model (Module 5C) can then refine.

Nine things to remember

1. Expected value contingency = Σ (probability × impact) over all risks.
2. It's the EMV idea from Foundations applied across a whole register.
3. Each risk's EV is the right amount to reserve — even though you'll spend $X or $0.
4. Worked example: $60k + $60k + $100k = $220k contingency.
5. It gives the mean (~50%) — not a stated confidence level.
6. It ignores correlation and impact shape — Monte Carlo handles those.
7. A few big-but-unlikely risks can dominate the contingency.
8. Garbage in, garbage out — needs a complete register and credible inputs.
9. It's the transparent gateway from qualitative to quantitative risk.