Budget allocation decisions for project risk response

Abstract

Purpose The purpose of this paper is to propose a method integrating fault tree analysis and optimization model to allocate response budget from the preventive and protective perspectives. Design/methodology/approach The proposed method consists of two main steps. The first step is to analyze and calculate the probability and the loss of the risk. The second step is to build an optimization model for allocating response budget. Findings First, there exists an optimal response budget. Second, risk protection is preferred to risk prevention when the total budget is limited. Third, the protective budget should be first invested for the consequence event with greatest expected loss. Fourth, the preventive budget should be first allocated to the risk cause with highest occurrence probability that belongs to the OR set in the fault tree. Practical implications Managerially, our results indicate that project managers (PMs) should make a tradeoff between the budget invested for risk response and reduced expected loss of the risk. Then, in the case of inadequate response budget, PMs should pay more attention to risk protection and cope with the event that can cause severe loss. In addition, under this circumstance, PMs had to better allocate the risk preventive budget in proper order. Originality/value Project risk response is a critical issue in project risk management as PMs can take actions actively to cope with project risks in this phase. Effective risk response, in general, requires financial support in practice, and reasonable allocation of the total budget among risk response strategies can produce better response effects.

Risk response budget allocation based on fault tree analysis and optimization

“…Zhang and Guan (2018) apply the bowtie analysis (BTA) to describe the relationships among risk causes, risk consequences and risks, and then build an optimization model to select risk response strategies from a preventive and protective perspective. Zhang and Guan (2021) integrate the fault tree analysis (FTA) in an optimization model in order to allocate the response budget among risk prevention and risk protection.…”

“…To investigate the trade-off between risk prevention and risk protection that are two essential requisites for effective risk response, Guan et al (2021) propose an analytical model to reduce the project risk to a certain level by balancing the budget allocated to risk prevention and risk protection, where the costs of prevention and protection strategies depend on their contribution on risk reduction. Zhang and Guan (2021) use FTA to describe the relations among risk causes, and then construct an optimization model to allocate a risk response budget among risk prevention and risk protection strategies with the aim of minimizing the total risk cost.…”

“…Although risk prevention is often considered in combination with risk protection for project risk response (Guan et al, 2021) and multiple causes and consequences are common phenomena in projects, only one study (Zhang & Guan, 2021) has considered these causes and consequences simultaneously as shown in the two columns ('RCs' and 'CEs') of Table 1. However, only one type of relation (AND-OR) among the risk causes is investigated (see column 'Type of Gates') and the effects of probabilities, losses and preventive/protective effectiveness are not explored in their study.…”

“…However, only one type of relation (AND-OR) among the risk causes is investigated (see column 'Type of Gates') and the effects of probabilities, losses and preventive/protective effectiveness are not explored in their study. Compared to the paper of Zhang and Guan (2021), the contributions of our paper are as follows.…”

Impact of Project Initiation on Performance of Output-Based Funded Sabasaba Urban Water Supply Project

“…Diverse project budgets aspects have been noted to impact positively on the project performance including budget management (Nsengiyumva & Gitahi, 2021), budget monitoring and control (Liang, 2019) and budget allocation (Y. Zhang & Guan, 2021).…”