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A pragmatic procedure is suggested to determine the size of a projectpsilas, a programpsilas, or a system's risk contingency budget at any specified level of certainty, e.g., 99% confidence. The size of the budget is a function of the number of risks expected at the specified confidence level. The number of risks used for developing the contingency budget depends on the total number of risks to be considered and the estimated probabilities of occurrence of the risks. The exact number, derived from the binomial distribution, is given in a table or, when the number of risks to be considered is greater than about 20, by a simple formula. The findings suggest that a specific contingency budget amount can be set aside for the small fraction of risks that typically materialize. The specific numbers would depend on the risk tolerance of the organization.
Date of Publication: Feb. 2009