Prince2 header
products page

PRINCE2 2009 - Risk part 16

The PRINCE2® approach

Risk budget

A risk budget, if used, is a sum of money included within the project budget and set aside to fund specific management responses to the project’s threats and opportunities (for example, to cover the costs of any fallback plans should they need to be implemented).

In order to arrive at a risk budget for the project, a financial approach to risk management is needed.
Each risk must be fully analysed for the impact costs, response costs and likelihood.
The aggregation of the costs (for responses and impact) weighted by each risk’s probability generates the expected monetary value for the set of risks.
The expected monetary value can be used to determine a risk budget.
The assumption is that the risk budget is expected to be used over the course of the project.
Care needs to be taken that the aggregation of the factored costs is not skewed by a small number of large risks.
This is where analytical techniques, such as Monte Carlo analysis and associated software tools, can help.

As the risk budget is part of the project budget, there may be a tendency to treat it as just another sum of money that the Project Manager can spend.
This culture should be discouraged in favour of the Risk Management Strategy defining the mechanisms for control of, and access to, this budget.
As the project progresses, some of the risks previously identified will occur and others will not.
New risks may be identified during the life of the project whose response costs will not have been included within the risk budget.
It is always prudent to set the risk budget to cover the known risks (as identified) and to make a provision for unknown risks (yet to be identified).

Risk management is a large area and is covered in depth in ‘The Complete Risk Management package’.

PRINCE2® is a Registered Trade Mark of the Office of Government Commerce in the United Kingdom and other countries.

Non - PRINCE2 information

This product contains EVERYTHING in the publications:

Managing Successful Projects with PRINCE2 - 2005 edition
Managing successful Projects with PRINCE2 – 2009 edition
Directing Projects with PRINCE2.
The Complete Project Management package.

And much more besides - at a fantastic price.