6.5.3  Determining the most appropriate valuation technique

This technical note explains and provides examples of the use of a simple and advanced probability valuation technique. The technique that is adopted for a particular project, or a particular risk depends on the significance of the project and the complexity of the risks within it.

When selecting a risk valuation technique, other factors to be considered besides the significance of the particular risk within the project are:

•  size of the project - the greater the size the greater the likelihood of using an advanced probability technique;

•  complexity of project - the more complex, the greater the likelihood of using an advanced probability technique;

•  cost benefit analysis - the cost of using the technique (time taken plus cost of external consultants) should be evaluated against the potential value of the risk; and

•  bids close to the PSC - where the NPC of a bid is close to the PSC, more complex valuation techniques such as Monte Carlo simulations may assist in ranking the bids by increasing the accuracy of the bid evaluation process.