Quantitative Risk

Analysis
 Quantitative Risk Analysis
• Quantitative Risk Analysis is the process of numerically analyzing the
effect of identified risks on overall project objectives.
• Quantitative risk analysis is performed on risks that have been
prioritized by the qualitative risk analysis process as potentially and
substantially impacting the project’s competing demands. The
quantitative risk analysis process analyzes the effect of those risk
events.
• It may be used to assign a numerical rating to those risks individually
or to evaluate the aggregate effect of all risks affecting the project. It
also presents a quantitative approach to making decisions in the
presence of uncertainty.
• Quantitative risk analysis generally follows the qualitative risk analysis
process. In some cases, quantitative risk analysis may not be required
to develop effective risk responses. Availability of time and budget,
and the need for qualitative or quantitative statements about risk and
impacts, will determine which method(s) to use on any particular
project.
 Quantitative Risk Analysis
• Quantitative risk analysis should be repeated after Plan Risk
Responses, as well as part of Monitor and Control Risks, to
determine if the overall project risk has been satisfactorily
decreased. Trends can indicate the need for more or less risk
management action.
• Results of the quantitative risk analysis compared to the
project plan gives the overall estimate of the project risk and
answers the following questions:
• What is the probability of meeting the project’s objectives?
• How much contingency reserve is needed to provide the organization
with the level certainty it requires based upon its risk tolerance?
• What are those parts of project which contribute most risk when all
risks are considered simultaneously?
• Which individual risk contributes the most to overall project risk?
Quantitative Risk Analysis
 Quantitative Risk Analysis: Inputs
• Risk Register
• A risk register is a risk management tool used to collect potential risk events,
organize them by risk categories, and assign team members who will address them.
It also serves as a place to include additional information about each risk, like the
nature of the risk and how it will be handled, this is especially useful for when you
want to perform risk analysis throughout the project or even after an event
occurred. You might also hear it referred to as risk matrix project management.
• Risk Management Plan
• A risk management plan is a document prepared by a project manager to help
foresee any risks, estimate their impact and to plan responses to issues that could
occur. Also contained in the document is a risk assessment plan. A risk is inherent
with any project and should be assessed and planned for continually.
• Key elements of the risk management plan for quantitative risk analysis include
roles and responsibilities for conducting risk management, budgets, schedule
activities for risk management, risk categories, definitions of probability and impact,
the probability and impact matrix, and revised stakeholders’ risk tolerances.
• These inputs are usually tailored to the project during the plan risk management
process. If they are not available they can be developed during the perform
quantitative risk analysis process.
 Quantitative Risk Analysis: Inputs
• Cost Management Plan
• The project cost management plan sets the format and establishes criteria
for planning, structuring, estimating, budgeting, and controlling project
costs. Those controls may help determine the structure and/or application
approach for quantitative analysis of the budget or cost plan.
• Schedule Management Plan
• The project schedule management plan sets the format and establishes
criteria for developing and controlling the project schedule. Those controls
and the nature of the schedule itself may help determine the structure
and/or application approach for quantitative analysis of the schedule.
• Organizational Process Assets
• The organizational process assets that can influence the quantitative risk
analysis process include, but are not limited to: Information on prior,
similar completed projects, studies of similar projects by risk specialists,
and risk databases that may be available from industry or proprietary
sources.
Quantitative Risk Analysis: Tools and
Techniques
• Data gathering and Representation Techniques
• Interviewing.
• Interviewing techniques draw on experience and historical data to
quantify the probability and impact of risks on project objectives. The
information needed depends upon the type of probability distributions
that will be used.
• For instance, information would be gathered on the optimistic (low),
pessimistic (high), and most likely scenarios for some commonly used
distributions. Examples of three-point estimates for cost are shown in
the figure in next slide.
• Documenting the rationale of the risk ranges and the assumptions
behind them are important components of the risk interview because
they can provide insight on the reliability and credibility of the analysis
Quantitative Risk Analysis: Tools and Techniques
Range of Project Cost Estimates Collected During the Risk
Interview
Quantitative Risk Analysis: Tools and
Techniques
• Probability distributions.
• Continuous probability distributions, used extensively in modeling
and simulation represent the uncertainty in values such as durations
of schedule activities and costs of project components. Discrete
distributions can be used to represent uncertain events such as the
outcome of a test or a possible scenario in a decision tree.
• Two examples of widely used continuous distributions are shown in
next slide figure. These distributions depict shapes that are
compatible with the data typically developed during the quantitative
risk analysis.
• Uniform distributions can be used only if there is no obvious value
that is more likely than any other between specified high and low
bounds, such as in the early concept stage of design.
Quantitative Risk Analysis: Tools and
Techniques
 Quantitative Risk Analysis: Tools and Techniques
• Quantitative Risk Analysis and Modeling Techniques
• Commonly used techniques include both event-oriented and project-oriented
analysis approaches including:
• Sensitivity analysis.
• Sensitivity analysis helps to determine which risks have the most potential
impact on the project. It examines the extent to which the uncertainty of each
project element affects the objective being examined when all other uncertain
elements are held at their baseline values. One typical display of sensitivity
analysis is the tornado diagram, which is useful for comparing relative
importance and impact of variables that have a high degree of uncertainty to
those that are more stable.
• A Tornado diagram is a useful tool for project managers to assess risks
associated with a project. A Tornado diagram is a bar chart that visually
displays the magnitude of each risk in a descending order. This gives it the
shape of a funnel that looks like a tornado. These are useful project
management tools when making decisions and assessing risks at various
stages of the project.
• The biggest risk is shown at the top of the chart, and it will have the biggest
Quantitative Risk Analysis: Tools and Techniques
Project Tornado Chart
Quantitative Risk Analysis: Tools and
Techniques
• Expected monetary value analysis.
• Expected monetary value (EMV) analysis is a statistical concept
that calculates the average outcome when the future includes
scenarios that may or may not happen (i.e. analysis under
uncertainty). The EMV of opportunities will generally be
expressed as positive values, while those of threats will be
negative. EMV requires a risk neutral assumption, neither risk
averse, nor risk seeking.
• EMV for a project is calculated by multiplying the value of each
possible outcome by its probability of occurrence and adding
the products together. A common use of this type of analysis is
in decision tree analysis.
Quantitative Risk Analysis: Tools and Techniques
Expected Monetary Value
 Quantitative Risk Analysis: Tools and Techniques

• A decision tree is a type of diagram that clearly defines potential outcomes for
a collection of related choices. In project management, a decision tree analysis
exercise will allow project leaders to easily compare different courses of action
against each other and evaluate the risks, probabilities of success, and potential
benefits associated with each.
• It’s important to note that a proper decision tree has four main elements:
decision nodes, chance nodes, end nodes, and branches.
• Let’s briefly explore each of these individually.
• Decision Nodes: A decision node, represented on our decision tree diagram as
a square, indicates a choice that needs to be made.
• Chance Nodes: A circle represents a chance node and is used to signify
uncertain outcomes. These nodes are used when future results are not
guaranteed.
• End Nodes: End nodes, like the name suggests, represent the end of a diagram
and illustrates a final outcome.
• Branches: Branches are what connect the nodes together. Each branch
represents a potential choice and should be clearly labeled.
Quantitative Risk Analysis: Tools and
Techniques
• Modeling and simulation.
• A project simulation uses a model that translates the specified
detailed uncertainties of the project into their potential impact on
project objectives. Iterative simulations are typically performed using
the Monte Carlo technique. In a simulation, the project model is
computed many times (iterated), with the input values (e.g., cost
estimates or activity durations) chosen at random for each iteration
from the probability distributions of these variables. A probability
distribution (e.g., total cost or completion date) is calculated from the
iterations. For a cost risk analysis, a simulation uses cost estimates.
For a schedule risk analysis, the schedule network diagram and
duration estimates are used.
• The output from a cost risk simulation is shown in next slide’s figure.
It illustrates the respective likelihood of achieving specific cost
targets. Similar curves can be developed for schedule outcomes.
Quantitative Risk Analysis: Tools and Techniques
Cost Risk simulation Results
Quantitative Risk Analysis: Tools and
Techniques
• Expert judgment
• Expert judgment (ideally using experts with relevant,
recent experience) is required to identify potential cost
and schedule impacts, to evaluate probability, and to
define inputs (such as probability distributions) into the
tools. Expert judgment also comes into play in the
interpretation of the data. Experts should be able to
identify the weaknesses of the tools as well as their
relative strengths. Experts may determine when a
specific tool may or may not be more appropriate given
the organization’s capabilities and culture.
Quantitative Risk Analysis: Outputs
• Risk Register Updates
• The risk register is further updated to include a quantitative risk
report detailing quantitative approaches, outputs, and
recommendations.
• Updates include the following main components:
• Probabilistic analysis of the project.
• Estimates are made of potential project schedule and cost outcomes
listing the possible completion dates and costs with their associated
confidence levels. This output, often expressed as a cumulative
distribution, can be used with stakeholder risk tolerances to permit
quantification of the cost and time contingency reserves. Such
contingency reserves are needed to bring the risk of overrunning
stated project objectives to a level acceptable to the organization.
• For instance, in the previous slide figure the cost contingency to the
75th percentile is $9 million US, or about 22% when compared to the
$41 million US sum of the most likely estimates.
Quantitative Risk Analysis: Outputs
• Probability of achieving cost and time objectives.
• With the risks facing the project, the probability of achieving project
objectives under the current plan can be estimated using quantitative risk
analysis results. For instance, from the figure, the likelihood of achieving the
cost estimate of $41 million US is about 12%.
• Prioritized list of quantified risks.
• This list of risks includes those that pose the greatest threat or present the
greatest opportunity to the project. These include the risks that may have the
greatest effect on cost contingency and those that are most likely to
influence the critical path. These risks may be identified, in some cases,
through a tornado diagram generated as a result of the simulation analyses.
• Trends in quantitative risk analysis results.
• As the analysis is repeated, a trend may become apparent that leads to
conclusions affecting risk responses. Organizational historical information on
project schedule, cost, quality, and performance should reflect new insights
gained through the performed quantitative risk analysis process. Such history
may take the form of a quantitative risk analysis report. This report may be
separate from, or linked to, the risk register.
 Class Activity
• Mary owns a fabric manufacturing plant in Arusha. Though they’ve only been
in business for a few years, they’re growing rapidly and Mary needs to find a
larger vendor to source materials from. She identifies two legitimate options: a
Tanzania based company that sits just a few hours away from Mary’s plant,
and a vendor that operates overseas. Mary needs to decide whether to partner
with a Tanzania based vendor or the one situated overseas. Both options
present their fair share of risks and rewards. So, in order to make the right
choice, Mary think of crafting a decision tree that will help her accurately
predict which materials vendor will best suit her growing company’s needs
and budget.
• On the one hand, the Tanzania based vendor will allow her to visit more often
in person and check up on operations. But it’s also the more expensive option.
On the other hand, the overseas vendor is much cheaper and Mary could use
the money saved to improve other areas of her business. But there are
downsides too. Mary won’t be able to make as many trips to see this vendor,
there will be a language barrier, and shipping times will be longer. Mary decide
to come to you for help.
• As a project and risk analysis expert draw a decision tree predicting which
vendor will be suitable for Mary’s company.
Mary’s case