The easiest way to do this is to multiply the probability percentage by the estimated cost impact, providing a risk contingency for each line item. For contingency calculation, use a multiplication formula. Sometimes contractors are asked for a quick estimate or a budget price. They could take the price of a building or similar structure and then add a contingency to this price; this is a very rough estimate.
If they have more time they can calculate the size of the building, then knowing that square footage applies a per-square foot fee. They have done a little more research, so their price is a little more accurate than the first estimate, so they don't need to add such a large contingency to their estimate. Next, we will see an excerpt from an example of calculating the expected monetary value. In this example, there is a 50% chance that the budget for each category is correct.
In addition, for each category, there is an assigned probability that there is a favorable or unfavorable variance. By multiplying the probability of each variation by the budget for each category, an expected variance is calculated. The total of the expected variances for each category will be the expected variance for the entire project.
