Switchgear Delay: Secondary Risk and Schedule-Critical Response Selection
A data-center construction project has a 45% probability of a four-week delay in switchgear delivery, costing $1.2M in liquidated damages. The project manager proposes air-freighting the switchgear at a cost of $380,000, which would reduce the delay probability to 15% but would add a 10% chance of a $600,000 customs hold. A second option is to pre-order a temporary rental switchgear for $520,000, which eliminates the delay risk but introduces a 20% chance of a $250,000 integration failure. A third option is to accept the risk. The project has a $1.0M management reserve, and the client has stated that schedule is the top priority, with liquidated damages strictly enforced.
1. Calculate the expected cost of each of the three options. Which has the lowest expected cost, and does that make it the preferred option?
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Accept: 0.45 × $1.2M = $0.540M expected liquidated damages. Air freight: $0.380M + 0.15 × $1.2M + 0.10 × $0.600M = $0.380M + $0.180M + $0.060M = $0.620M. Rental: $0.520M + 0.20 × $0.250M = $0.520M + $0.050M = $0.570M.
Accept has the lowest expected cost at $540,000, followed by rental at $570,000 and air freight at $620,000. But expected cost does not make acceptance the preferred option here. Acceptance leaves a 45% chance of a four-week delay, and the client has said schedule is the top priority with liquidated damages strictly enforced. The expected-cost ranking treats a 45% chance of $1.2M as equivalent to a certain $540,000, which is not how a schedule-critical client is likely to view it. The $1.0M management reserve can cover the liquidated damages in a single delay, but it would be largely consumed, leaving little for other risks.
2. Identify the secondary risks in the air-freight and rental options and explain how they should be assessed before selecting a response.
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The air-freight option creates a secondary risk: a customs hold with 10% probability and $600,000 cost. That risk is caused by the response itself and is not in the original delay register. The rental option creates a different secondary risk: a 20% chance of a $250,000 integration failure. Both should be entered in the risk register with an owner, trigger, and response.
Assessment points: (1) Are the secondary risks independent of the original risk? If the customs hold is more likely when the shipment is expedited, the 10% may be understated. (2) Does the integration failure affect schedule as well as cost? If it causes a delay, the rental option does not truly eliminate the schedule risk. (3) Are the probabilities based on historical data or judgment? A 10% customs rate may be a planning assumption. (4) What is the residual risk after the response? Air freight still leaves a 15% delay probability; rental leaves an integration risk. (5) Who owns and can manage each secondary risk? The customs broker and the integration contractor should be named.
The comparison should use total expected cost including secondary risks, and should also show the probability of exceeding the $1.0M reserve.
3. Recommend an option. Address the client's schedule priority, the $1.0M reserve, and any condition that would change your recommendation.
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Recommend the rental option if the integration failure does not itself cause a schedule delay. It eliminates the delivery-delay risk that the client cares most about, and its expected cost of $570,000 is only $30,000 above acceptance but with no 45% chance of a four-week breach. The $1.0M reserve can cover the rental cost plus the $250,000 integration exposure without being exhausted. Air freight is less attractive: it still leaves a 15% delay probability and adds a customs risk, for the highest expected cost.
Acceptance would be defensible only if the schedule float is at least four weeks, the liquidated damages are not truly enforced, or the reserve is needed for higher-priority risks. If the integration failure could delay the opening, the rental option loses its main advantage and the decision shifts toward air freight or a combined response (expedite plus integration testing). Before committing, confirm the rental unit's compatibility and the client's acceptance of a temporary facility; those are schedule and quality conditions, not just cost inputs.