Assume that Bob is planning to pour a sidewalk tomorrow. If more than ¼” rain falls, the concrete will be destroyed and will need to be repaired at a cost of $3,000. Bob can spend $400 to set up a tent to protect the concrete, thus eliminating the chance of the concrete being destroyed. There is a $500 liquidated damage (LD) that will be charged if it is not poured tomorrow. The forecast calls for 10% chance of ¼”+ rain tomorrow and no chance of rain the following day. What should Bob do?

Three options are to:

1. Pour and pray for good weather. (ME₁)
2. Wait a day for better weather. (ME₂)
3. Tent the concrete. (ME₃)

• There is no mitigation cost for ME₁ except for the prayer Bob offers.
• There is no mitigation cost for ME₂ because Bob pays the $500 penalty. [You could consider the LD expense as a mitigation plan and come up with the same number in the end, but mitigation implies that you are actively doing something to reduce risk exposure.]
• There is a $400 mitigation cost for ME₃. By spending this money, Bob is buying away the potential damage to the concrete which could be caused by the rain. The likelihood of rain is not changed, but the likelihood of it falling on your concrete has changed from 10% to 0%.

With each mitigation scenario, the expected cost is different:

The first has an EC of 10% [chance of rain]*$3,000 [repair if it rains] = $300.

The second has an EC of 100% [chance of paying LD]*$500 [LD cost].

The third has an EC of 0% [chance of raining on concrete if tented]*$3,000 = $0.

EC₁|ME₁ = $0 + $300 = $300.

EC₂|ME₂ = $0 + $500 = $500.

EC₃|ME₃ = $400 + $0 = $400.

It is clear that the prayer is the best solution here. Bob would waste $100 based on the values derived here. Of course, Bob would never pay $300. The cost for repair would either be nothing 90% of the time or $3,000 10% of the time. Stated in another way, if Bob poured 10 times with this scenario it would be expected that there would be no problems on 9 of the pours but that Bob would spend $3,000 on one of them. This factor can be added to bids in lieu of protection or can be used just to determine your course of action.

Realistically, the tent will not eliminate the chance of the concrete being destroyed if there was rain. There is still a chance that wind could blow if over, too much rain could break it or a stray dog could damage it. To account for this, the “chance of rain” description would change to “water damage from rain”. This is an example of why separating risk factors from the risk is important. The possibility goes from 10% rain to 1%. [Assume there is a 10% chance of water damage due to tent failure if it rains.] The calculation only changes for MC₃ to: $400 + ($3,000*1%) = $430. It is still better to pray and pour and it is still better to tent than to pay LDs, but the analysis is more accurate because the EC|ME is portrayed.

It would be easy to re-evaluate the above scenarios altering the variables. What if the weather report just changed to 20% chance of rain of ¼” or more? The new figures are:

EC₁|ME₁ = $0 + $3,000*0.2 = $600.

EC₂|ME₂ = $0 + $500*1 = $500.

CE₃|ME₃ = $400 + $3,000*0.01 = $430.

Thus we see that by increasing the chance of rain from 10% to 20%, the preferred order of mitigation attempts changes to tenting as the best choice.