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An analytical model for budget allocation in risk prevention and risk protection
Guan, Xin Servranckx, Tom Vanhoucke, Mario
Guan, Xin
Servranckx, Tom
Vanhoucke, Mario
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Publication Type
Journal article with impact factor
Editor
Supervisor
Publication Year
2021
Journal
Computers & Industrial Engineering
Book
Publication Volume
161
Publication Issue
November
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Publication End page
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Abstract
Risk is inherent and inevitable during project execution. Its occurrence often has an adverse impact on the project or even leads to project failure. In order to ensure the successful project completion, risk prevention used for reducing the risk probability and risk protection used for reducing the risk loss should be considered. Given the different effects and costs of these two strategies and the limited project budget, project managers should be able to reasonably divide the budget among these two strategies. This study proposes a budget allocation method consisting of three modules for mitigating the project risks. First, we model the relation between the effect and cost of each strategy as linear and non-linear relations. Second, two mathematical models are built and the corresponding analytical solutions are obtained. Afterwards, a three-step procedure for budget allocation is proposed. To validate the analytical results and investigate the impacts of the characteristics of the project risk and response on the optimal budget allocation, numerical experiments are conducted and managerial insights are drawn. Finally, the budget allocation model is extended with multiple risks, secondary risk and risk transfer, and validated using an empirical analysis.
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Keywords
Budget Allocation, Risk Prevention, Risk Protection, Analytical Solution, Project Risk Management