1) Calculating Contingency Reserves Using Expected Value Method - Guidance Note Step 1 List each contingency that could increase your expenses. For example, suppose that these contingencies include having to i) add extra personnel to the project, ii) outsourcing to outside contractors, ii) failing to meet your soft deadline iv) experiencing equipment malfunction. Step 2 Estimate each of these contingency's costs. (If they were to occur). For example, suppose that the four contingencies would cost you, respectively, i) $32,000, ii) $48,000, iii) $20,000 and iv) $12,000. Step 3 Estimate the probabilities of each of the contingencies actually occurring. For example, suppose that the contingencies have, respectively, a 1) 5 percent, ii) 5 percent, iii) 10 percent and iv) 2 percent chance of occurring. Step 4 Multiply each contingency's cost by its probability. Continuing the example, i) 5 percent of $32,000 is $1,600, ii) 5 percent of $48,000 is $2,400, iii) 10 percent of $20,000 is $2,000 and iv) 2 percent of $12,000 is $240. Step 5 Add these values together. The sum of the values in this example is $6,240. You would need $6,240 in contingency reserves. EXERCISE 1) Calculate contingency reserves using expected value method. PROJECT DATA Project One %Probability Cost of of Contingencies Contingency List of contingencies Reserve Extra personnel to project 23570 0.04 Outsourcing to outside contractors 16900 0.06 Failing to meet deadline 46000 0.08 Equipment breakdown 2300 0.03 TOTAL RESERVE Project Two %Probability Cost of of Contingencies Contingency List of contingencies Reserve extra personnel to project 64780 0.06 outsourcing to outside contractors 42000 0.05 Failing to meet deadline 19700 0.09 equipment breakdown 4200 0.02 TOTAL RESERVE Project Three %Probability Cost of of Contingencies Contingency List of contingencies Reserve extra personnel to project 35600 0.07 outsourcing to outside contractors 22000 0.07 Failing to meet deadline 52000 0.12 equipment breakdown 6700 0.03 TOTAL RESERVE Project Four %Probability Cost of of Contingencies Contingency List of contingencies Reserve extra personnel to project 34600 0.03 outsourcing to outside contractors 19300 0.03 Failing to meet deadline 24700 0.08 equipment breakdown 4500 0.02 TOTAL RESERVE 1) Calculating Contingency Reserves Using Expected Value Method - Guidance Note Step 1 List each contingency that could increase your expenses. For example, suppose that these contingencies include having to i) add extra personnel to the project, ii) outsourcing to outside contractors, ii) failing to meet your soft deadline iv) experiencing equipment malfunction. Step 2 Estimate each of these contingency's costs. (If they were to occur). For example, suppose that the four contingencies would cost you, respectively, i) $32,000, ii) $48,000, iii) $20,000 and iv) $12,000. Step 3 Estimate the probabilities of each of the contingencies actually occurring. For example, suppose that the contingencies have, respectively, a 1) 5 percent, ii) 5 percent, iii) 10 percent and iv) 2 percent chance of occurring. Step 4 Multiply each contingency's cost by its probability. Continuing the example, i) 5 percent of $32,000 is $1,600, ii) 5 percent of $48,000 is $2,400, iii) 10 percent of $20,000 is $2,000 and iv) 2 percent of $12,000 is $240. Step 5 Add these values together. The sum of the values in this example is $6,240. You would need $6,240 in contingency reserves. EXERCISE 1) Calculate contingency reserves using expected value method. PROJECT DATA Project One %Probability Cost of of Contingencies Contingency List of contingencies Reserve Extra personnel to project 23570 0.04 Outsourcing to outside contractors 16900 0.06 Failing to meet deadline 46000 0.08 Equipment breakdown 2300 0.03 TOTAL RESERVE Project Two %Probability Cost of of Contingencies Contingency List of contingencies Reserve extra personnel to project 64780 0.06 outsourcing to outside contractors 42000 0.05 Failing to meet deadline 19700 0.09 equipment breakdown 4200 0.02 TOTAL RESERVE Project Three %Probability Cost of of Contingencies Contingency List of contingencies Reserve extra personnel to project 35600 0.07 outsourcing to outside contractors 22000 0.07 Failing to meet deadline 52000 0.12 equipment breakdown 6700 0.03 TOTAL RESERVE Project Four %Probability Cost of of Contingencies Contingency List of contingencies Reserve extra personnel to project 34600 0.03 outsourcing to outside contractors 19300 0.03 Failing to meet deadline 24700 0.08 equipment breakdown 4500 0.02 TOTAL RESERVE