This paper presents a two-stage structural health monitoring methodology and applies it to the Phase I benchmark study sponsored by the IASC-ASCE Task Group on Structural Health Monitoring. In the first stage, modal parameters are identified using measured structural response from the undamaged system and then from the (possibly) damaged system. In the second stage, these data are used to update a parametrized structural model of the system using Bayesian system identification. The approach allows one to obtain not only estimates of the stiffness parameters but also the probability that damage in any substructure exceeds any specified threshold expressed in terms of a fractional stiffness loss. It successfully identifies the location and severity of damage in all cases of the benchmark problem.