Reward-Risk Ratio

by Marvin Gates, Pres.; Construction Estimating, Inc., West Hartford, CT; and Vice Pres., Gates-Scarpa and Assocs., Inc., Elmwood, CT,
Amerigo Scarpa, (F.ASCE), Pres.; Gates-Scarpa and Assocs., Inc., Elmwood, CT; and Vice Pres., Construction Estimating, Inc., West Hartford, CT,

Serial Information: Journal of the Construction Division, 1974, Vol. 100, Issue 4, Pg. 521-532

Document Type: Journal Paper


Reward-Risk Ration (RRR) is a probabilistic measure of the investment quality of a venture. It is especially applicable whenever it is necessary to assume some degree of risk of loss to maintain a competitive pricing policy. This is frequently encountered when bidding for construction contracts. The RRR is the ratio of the expectation values of profit and loss expressed as averages over the percentages of the unit times that the project does or does not break even. The analysis adds a probability scale based on the triangular distribution of production rates to the familiar break even chart. Consequently, the related expected monetary values are charted and the factors in the preceding equation are formulated. Generally, the relationships investigated include: fixed and variable costs, total expenses, unit bid price, total income, range and variance of production rates, break-even production rate, profit, loss, expectation values, and probability of production based on a triangular distribution.

Subject Headings: Probability | Pricing | Bids | Profits | Probability distribution | Investments | Risk management

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