On a design-bid-build project, a new construction risk is valued at $500,000 with a 20% probability of occurrence. Transferring the risk would cost $125,000. As construction manager, what is your recommended course of action to the owner?

• A. Transfer the risk
• B. Accept the risk
• C. Mitigate the risk
• D. Do nothing and monitor

Answer: (B)

The main idea is to compare the cost of transferring a risk with the risk’s expected cost to the project. The expected cost of the risk is probability times impact: 0.2 × $500,000 = $100,000. Paying $125,000 to transfer the risk would cost more than the expected loss you’d incur if the risk occurs. Because transferring is not cost-effective on a expected-value basis, the prudent choice is to accept the risk and allocate a contingency to cover the potential loss, rather than paying to transfer it. If you could mitigate the risk for less than the difference (here, less than $25,000 in expected value terms), that could be considered, but with the given numbers, acceptance and monitoring/contingency is the best approach.