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PMP Practice: Communicate risk status to stakeholders

Question 4 of 5 in Assess and Manage Risks

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Kavya Subramaniam is managing a municipal water treatment facility upgrade for Kaito Fujimoto Partners. During risk assessment workshops, the team identifies a significant risk: potential discovery of contaminated soil during excavation, which would trigger mandatory environmental remediation. The team estimates three scenarios: best case remediation cost of $45,000 (20% probability), most likely cost of $85,000 (50% probability), and worst case cost of $140,000 (30% probability). Kavya needs to calculate the expected monetary value of this risk to determine the appropriate contingency reserve allocation. What is the EMV for this risk?
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Correct answer: $88,500

Explanation

Expected Monetary Value is calculated by multiplying each possible outcome by its probability and summing the results. For this contaminated soil risk: ($45,000 × 0.20) + ($85,000 × 0.50) + ($140,000 × 0.30) = $9,000 + $42,500 + $42,000 = $88,500. This EMV represents the statistically weighted average cost if this risk occurs, and should inform how much contingency reserve Kavya allocates. EMV calculations help project managers make informed decisions about risk response investments by quantifying uncertain events into single values for comparison and budgeting purposes.

**Why not A:** This represents simply averaging the three cost estimates ($45,000 + $85,000 + $140,000) ÷ 3 = $90,000, which ignores the different probabilities of each scenario occurring. Equal weighting is incorrect when probabilities differ.

**Why not B:** This is the most likely cost estimate alone ($85,000), but EMV requires considering all scenarios weighted by their probabilities, not just selecting the single most probable outcome. Using only the most likely value underestimates the risk impact from the high-cost scenario.

**Why not D:** This results from incorrectly calculating the average of the best and worst case scenarios (($45,000 + $140,000) ÷ 2 = $92,500) and then applying only the most likely probability (50%), yielding $46,250, or from other probability calculation errors. EMV requires weighting each individual scenario, not creating composite scenarios.

Key Concept

This question covers Communicate risk status to stakeholders under Assess and Manage Risks (Process).

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