As per the risk analysis process carried out for a project, two risks are registered. The probability risk A will occur is 40% and its monetary impact to the project is US$100,000. The probability risk B will occur is 60% and its monetary impact to the project is US$20,000. What is the total contingency budget that should be created?

The total contingency budget is calculated using the Expected Monetary Value (EMV) method. EMV quantifies the potential financial impact of risks by multiplying the probability of each risk's occurrence by its monetary impact. The total contingency reserve is the sum of the EMVs for all identified risks. For Risk A: EMV = 0.40 (Probability) × US$100,000 (Impact) = US$40,000. For Risk B: EMV = 0.60 (Probability) × US$20,000 (Impact) = US$12,000. Total Contingency Budget = EMV (Risk A) + EMV (Risk B) = US$40,000 + US$12,000 = US$52,000.

A. US$68,000: This value results from incorrectly assigning the probability of Risk A to the impact of Risk B, and vice versa.
C. US$120,000: This is the sum of the full impacts of both risks (US$100,000 + US$20,000), which ignores their respective probabilities of occurrence.
D. US$80,000: This figure is an arbitrary value and does not align with any standard risk quantification or contingency calculation method. ---

1. Project Management Institute. (2017). A Guide to the Project Management Body of Knowledge (PMBOK® Guide) (6th ed.). Project Management Institute. Section 11.4.2.3, Expected Monetary Value Analysis, p. 434. This section explains that EMV is calculated by multiplying the probability of a risk by its impact, and the sum of these values can be used to determine contingency reserves.

2. Project Management Institute. (2009). Practice Standard for Project Risk Management. Project Management Institute. Section 5.4.2.2, Expected Monetary Value Analysis, p. 52. This standard explicitly states, "The total EMV for a project is the sum of the EMVs of all the individual risks that have been identified and quantified. This total EMV may be used to determine the size of the contingency reserve for the project budget and schedule."

3. Hulett, D. T. (2011). Integrated Cost-Schedule Risk Analysis. Gower Publishing, Ltd. Chapter 4, "Risk Analysis Methods," discusses the use of Expected Monetary Value (EMV) as a fundamental technique for quantifying individual risks and aggregating them to understand overall project exposure, which informs contingency funding.