Budget allocation decisions for project risk response
ISSN: 0368-492X
Article publication date: 8 February 2021
Issue publication date: 15 November 2021
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.
Keywords
Acknowledgements
This work was supported by the National Natural Science Foundation of China (71871050); and the Liao Ning Revitalization Talents Program (XLYC1805012).
Citation
Zhang, Y. and Guan, X. (2021), "Budget allocation decisions for project risk response", Kybernetes, Vol. 50 No. 12, pp. 3201-3221. https://doi.org/10.1108/K-03-2020-0188
Publisher
:Emerald Publishing Limited
Copyright © 2021, Emerald Publishing Limited