On a design-bid-build project, a new risk has monetary value of $800,000 with a 15% chance of occurring. An option to transfer this risk exists for $300,000. As the construction manager, what is your recommended action to the owner?

On a design-bid-build project, a new risk has monetary value of $800,000 with a 15% chance of occurring. An option to transfer this risk exists for $300,000. As the construction manager, what is your recommended action to the owner?

• A. Transfer the risk
• B. Accept the risk
• C. Perform a Monte Carlo simulation
• D. Assign the risk to the lead designer

Answer: (B)

In risk management, you decide whether to transfer a risk by weighing the transfer cost against the risk’s expected monetary value. The risk carries a potential impact of $800,000 with a 15% probability, so the expected loss if you keep it is 0.15 × 800,000 = $120,000. The transfer option costs $300,000. Since $300,000 is higher than the $120,000 expected loss, transferring the risk isn’t economical. The sensible move is to accept the risk and allocate a contingency (or implement mitigation to reduce either probability or impact) so you’re prepared if it occurs. Monte Carlo analysis could be used to explore the full risk distribution, but the straightforward calculation already shows that accepting the risk is the better financial choice. Assigning the risk to the lead designer isn’t appropriate here since the cost-benefit favors acceptance and transfer would not align with typical contract risk allocation.

In risk management, you decide whether to transfer a risk by weighing the transfer cost against the risk’s expected monetary value. The risk carries a potential impact of $800,000 with a 15% probability, so the expected loss if you keep it is 0.15 × 800,000 = $120,000. The transfer option costs $300,000. Since $300,000 is higher than the $120,000 expected loss, transferring the risk isn’t economical. The sensible move is to accept the risk and allocate a contingency (or implement mitigation to reduce either probability or impact) so you’re prepared if it occurs. Monte Carlo analysis could be used to explore the full risk distribution, but the straightforward calculation already shows that accepting the risk is the better financial choice. Assigning the risk to the lead designer isn’t appropriate here since the cost-benefit favors acceptance and transfer would not align with typical contract risk allocation.