Chapter Three

Risk analysis

Approaches , Models, and

Techniques

1
 Contents

 This section sheds a light on:

1. Perform qualitative risk analysis

2. Perform quantitative risk analysis

– Monte Carlo risk analysis

– Decision Tree analysis

– Expected Monetary Value analysis

2
 Overview

 Project Risk Management includes the processes of conducting

risk management planning, identification, analysis, response
planning, response implementation, and monitoring risk on a
project.
 The objectives of project risk management
are
– to increase the probability and/or impact of positive risks and
– to decrease the probability and/or impact of negative risks, in order to
optimize the chances of project success.

3
 Overview…
 The Project Risk Management processes are:
– Plan Risk Management—The process of defining how to
conduct risk management activities for a project.
– Identify Risks—The process of identifying individual project
risks as well as sources of overall project risk,
and documenting their characteristics.
– Perform Qualitative Risk Analysis—The process of prioritizing
individual project risks for further analysis
or action by assessing their probability of occurrence and
impact as well as other characteristics.
–

4
 Overview…
 The Project Risk Management processes are:
– Perform Quantitative Risk Analysis—The process of numerically
analysing the combined effect of identified
individual project risks and other sources of uncertainty on overall
project objectives.
– Plan Risk Responses—The process of developing options, selecting
strategies, and agreeing on actions to
address overall project risk exposure, as well as to treat individual
project risks.
– Implement Risk Responses—The process of implementing agreed-
upon risk response plans.

5
 Overview…
 The Project Risk Management processes are:
– Monitor Risks—The process of monitoring the
implementation of agreed-upon risk response plans, tracking
identified risks, identifying and analysing new risks, and
evaluating risk process effectiveness throughout
the project.

6
7
 Plan Risk Management…

8
 Identify Risks

 Identify Risks is the process of identifying individual project

risks as well as sources of overall project risk, and
documenting their characteristics.
 The key benefit of this process is the documentation of existing
individual project risks and the sources of overall project risk.
 It also brings together information so the project team can
respond appropriately to identified risks.
 This process is performed throughout the project. The inputs,
tools and techniques, and outputs of the process are depicted
in in the following figures.

9
 Identify Risks: Inputs, Tools and Techniques, and
Outputs

10
 Identify Risks: Data Flow Diagram

11
 (1) Perform qualitative risk analysis

 Qualitative Risk Analysis – is the process of assessing and

evaluating the characteristics of individually identified project risk
and prioritizes risks based on pre-defined scale.

 The process of prioritizing risks for further analysis or action

by assessing and combining their probability of occurrence and
impact.

 Qualitative risk analysis should be reviewed during the project’s

life cycle to stay current with changes in project risks.
12
Qualitative Risk Analysis…

Purpose and Objective

– Evaluates probability and impact of individual risk on the project

objectives.

– Risks are categorized according to their sources or causes.

– Identifies areas of greater risk exposure (e.g., project completion

date, budget, deliverable’s scope) and facilitates risk responses.

– Methods of qualitative risk analysis are applied to the list of positive

and negative risks created or updated by the Identify Risks Process.

Qualitative Risk Analysis…

Critical Success Factors for Perform Qualitative Risk Analysis

Process
– Use Agreed-Upon Approach
– Use Agreed-Upon Definitions of Risk Terms
– Collect High-Quality Information about Risks, and
– Perform Iterative Risk Analysis (Periodical analysis of
individual risks of project enhances the success of
qualitative risk analysis)
Qualitative Risk Analysis…

Inputs to Qualitative Risk Analysis

1. Organizational Process Assets: Information from past projects

(Project files, lessons learned)

2. Project Scope Statement: Projects of a common or recurrent

type tend to have less risk. Projects using first-of-a-kind
technology or highly complex projects tend to have more risk.
Qualitative Risk Analysis…

Inputs to Qualitative Risk Analysis…

3. Risk Management Plan: Major items for qualitative risk analysis

include roles and responsibilities, budgets and schedule for risk
management activities, risk categories, definitions of probability
and impact, and the stakeholders’ tolerance.

4. Risk Register: List of the identified risks.

Qualitative Risk Analysis: Tools and Techniques

 Expert Judgment
– Expertise should be considered from individuals or groups
with specialized knowledge or training in: Previous similar
projects, and Qualitative risk analysis.
– Expert judgment is often obtained through facilitated risk
workshops or interviews. The possibility of expert views
being biased should be taken into account in this process.
 Data Gathering: Data-gathering techniques that can be used for
this process include but are not limited to interviews. Structured
or
semi-structured interviews can be used to assess the probability
and impacts of individual project risks, as well as other factors.
Qualitative Risk Analysis…

Activities of perform qualitative risk analysis

They are as follows:

1. Select risk characteristics that define risks’ importance

2. Collect and analyse data

3. Prioritize risks by probability and impact on specific

objectives

4. Prioritize risks by probability and impact on overall project

5. Categorize risk causes

Qualitative Risk Analysis…

Select Risk Characteristics

– Helps to distinguish high level risk response from low level
risk response.
– The criteria that make a risk important to management are
agreed upon in advance and implemented in the tools used.
– Output includes a listing of risks in priority order or in
priority groups such as high, moderate, and low.
Qualitative Risk Analysis…

Collect Data
– Assessment of individual risks is based on information
collected about risks.
– Data collection, evaluation tools, including interviews,
workshops, and references to databases of prior projects
require management support and attention.
– Intention bias should be avoided while relying in expert
judgment for the information.
Qualitative Risk Analysis…

Analyze Data
Data analysis techniques that can be used during this process
include but are not limited to:
– Risk data quality assessment. Risk data quality assessment evaluates the degree
to which the data about individual project risks is accurate and reliable as a basis
for qualitative risk analysis. A weighted average of selected data quality
characteristics can then be generated to give an overall quality score.
– Risk probability and impact assessment. Risk probability assessment considers
the likelihood that a specific risk will occur.
– Assessment of other risk parameters. The project team may consider other
characteristics of risk (in addition to probability and impact) when prioritizing
individual project risks for further analysis and action.
Qualitative Risk Analysis…

Prioritize risks by probability and impact assessment

– Helps to distinguish a risk’s priority in terms of probability and
impact on project objectives.
– Risk probability is the likelihood that a risk will occur.
– Risk impact is the effect on project objectives if the risk occurs,
which may be a negative effect (threat) or a positive effect
(opportunity).
Qualitative Risk Analysis…

Prioritize risks by probability and impact

 Qualitative Risk Analysis…

Probability and Impact Matrix

A condition based on the combined probability and impact scales
 Risk probability scale:

– General scale : 0.0 (no probability) up to 1.0 (certainly)

– Ordinal scale : very unlikely to almost certain

 Risk impact scale:
– Ordinal scale : very low, low, moderate, high, very high
– Cardinal : linear or non linear

24
 Qualitative Risk Analysis…

Level of Occurrence
High Risk: Substantial impact on cost, technical performance, or schedule.

Substantial action required to alleviate issue. High-priority management attention is

required.
Medium Risk: Some impact on cost, technical performance, or schedule. Special
action may be required to alleviate issue. Additional management attention may be
needed.
Low Risk: Minimal impact on cost, technical performance, or schedule. Normal
management oversight is sufficient.

25
 Qualitative Risk Analysis…

Impact/Probability Matrix
A common method/tool to determine whether a risk is considered

low, moderate, or high by combining the two dimensions of a risk:

– its probability of occurrence, and
– its impact on objectives if it occurs.

26
 Qualitative Risk Analysis…

2x2 Impact/Probability Matrix

 Green: Low Risk (Passive Acceptance – workarounds)
 Yellow: Moderate Risk (Active Acceptance –
contingency)
 Red: High Risk (Risk Response Planning)

27
 Qualitative Risk Analysis…

2x2 Impact/Probability Matrix

28
 Qualitative Risk Analysis…

2x2 Impact/Probability Matrix

29
 Qualitative Risk Analysis…

2x2 Impact/Probability Matrix

30
Qualitative Risk Analysis…

Categorize Risk Causes

 Brings improvement in analysis of the probability and magnitude of project
risk and effective responses.
 Identifying common root causes of a group of risks reveal both the
magnitude of the risk event and effective strategies that might address
several risks simultaneously.
 Better understanding of the chain of risks lead to the implementation of risk
for the project.
 It provides a realistic picture of problems of risk mitigation using scarce
resources.
Qualitative Risk Analysis…

Documentation of Results
 It adds structure to the list of undifferentiated risks into categories of
priority.
 Priorities are based on probability of risk occurrence and impact on project
objectives.
 The information is stored in risk registry and is easy to use and update.
 List of prioritized risks is posted to the project participants for improving
the plan and risks having high priority are segregated for further analysis.
 Low priority risks are placed on a watch list and are less often reviewed for
changes.
Reading papers:
1. Qualitative and quantitative risk assessment

2. Qualitative risk analysis: problems and remedies

 (2) Perform quantitative risk analysis

 Quantitative Risk Analysis refers to the thorough and

complete numeric analysis of the overall effect of the total
quantifiable amount of risks involved in the project objective.
 Quantitative risk analysis examines numerically the effect a
project risk has on a project objective.
 Results of the quantitative risk analysis compared to the
project plan gives the overall estimate of the project risk
management.
35
Quantitative Risk Analysis…

 The quantitative risk analysis process generally follows qualitative

analysis and utilizes techniques such as Monte Carlo simulation,
decision analysis or Expected Monetary Value to:
 Determine the probability of achieving a specific project objective
 Identify risks requiring the most attention by quantifying their
relative contribution to project risk.
 Identify realistic and achievable cost, schedule or scope targets.
 Quantify project outcomes and their probabilities.
 Guides project management decision.
Quantitative Risk Analysis…

Purpose and Objective

– Numeric estimation of overall impact of risks on project objectives.

– Results evaluate the likelihood of success and estimate contingency

reserves for time and cost that are appropriate to both project risks

and stakeholders.

– An overall risk analysis, such as one that uses quantitative

technique, estimates the implication of all quantified risks on

project objectives.
 Quantitative Risk Analysis…
The implementation of risk analysis using quantitative methods requires:

- Complete and accurate representation of the project objectives built up from

individual project elements. e.g. project schedule or cost estimate.

- Identifying risks on individual project elements such as schedule, and costs at a

level of detail that lends itself to a specific assessment of individual risks.

- Including generic risks that have a broader effect than individual project

elements

- Applying a quantitative method that incorporates multiple risks simultaneously in

determining overall impact on the overall project objectives.

Quantitative Risk Analysis…

Results of the quantitative risk analysis gives the overall estimate of

the project risk and answers:
- 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…

Critical Success Factors for the Perform Quantitative Risk Analysis

Process are:
– Prior risk identifications
– Appropriate project model
– Commitment to collecting high-quality risk data
– Unbiased data
– Overall project risk derived from individual risks
– Interrelationships between the risks in quantitative risk analysis
Quantitative Risk Analysis…

Inputs to Quantitative Risk Analysis

1. Organizational & Environmental Process Assets: Information from past

projects, studies of similar projects, risk databases.

2. Project Scope Statement

3. Risk Management Plan: Major elements from the plan needed include
roles & responsibilities, budgets and schedule for risk management
activities, risk categories, the stakeholders’ tolerances.

4. Risk Register: List of risks, ranking of risks, and risks grouped by category.

5. Project Management Plan: Project Schedule Plan and Project Cost Plan
Quantitative Risk Analysis…

Data Gathering Tools and Techniques

 Interviewing: Interviewing techniques are used to quantify

the probability and impact of risks on project objectives.

 Assessment of historical data and workshops

 Expert Judgment: subject matter experts are useful to

validate data.
Quantitative Risk Analysis…

Quantitative Risk Analysis and Modeling Techniques

I. Expected Monetary Value analysis

II. Decision Tree analysis

III. Monte Carlo Simulation technique

Quantitative Risk Analysis…

I. Expected monetary value analysis

– The method considers the probability of each possible outcome
and determines the average value of all future events that may
or may not happen.
– Allows the user to calculate the weighted average (expected)
value of an event that includes uncertain outcomes.
– Incorporates both the probability and impact of a risk (EMV =
probability * impact). It is well-suited to Decision Tree Analysis.
Quantitative Risk Analysis…

II. Expected monetary value analysis…

– You might think that EMV is a technique in risk management
used to quantify risks and calculate the contingency reserve.
– Once you calculate the EMV of the project outcome, you will
add it to your work package costs estimates and this amount is
called ‘contingency reserve’.
– you may need the ‘reserve fund’ to manage a risk (if it occurs).
The EMV calculation for an event by weighting the individual possible
outcomes by their probabilities of occurring.
Quantitative Risk Analysis…

III. Decision tree analysis

– A decision analysis can be structured as a decision tree.
– The decision tree is a diagram that describes a decision under
consideration and the implications of choosing one or
another of the available alternatives.

– Causes the organization to structure the costs and benefits of

decisions when the results are determined in part by

uncertainty and risk.

Quantitative Risk Analysis…

Decision tree analysis…

– Solution of the decision tree helps select the decision that provides the
highest Expected Monetary Value or expected utility to the project.
– It incorporates probabilities of risks and the costs or rewards of each
logical path of events and future decisions.
– Solving the decision tree gives the expected value of each decision. The
decision-maker can select the decision yielding the highest expected
value when all the uncertain implications, costs, rewards and
subsequent decisions are quantified.
Quantitative Risk Analysis…
IV. Monte Carlo Simulation

– Is a technique used to understand the impact of risk and uncertainty in

financial, project management, cost, and other forecasting models.
– It computes the project cost or schedule several times using input values,
selected randomly, to calculate a distribution of possible total project cost
or completion of project dates.
– Uses a model that translates the uncertainties specified at a detailed level
into their potential impact on objectives at the level of the total project.
Quantitative Risk Analysis…

IV. Monte Carlo Simulation…

– Monte Carlo simulation performs risk analysis by building models of

possible results by substituting a range of values—a probability
distribution—for any factor that has inherent uncertainty.
– It then calculates results over and over, each time using a different
set of random values from the probability functions.
– The key feature of a Monte Carlo simulation is that it can tell you –
based on how you create the ranges of estimates – how likely the
resulting outcomes are.
Quantitative Risk Analysis…
IV. Monte Carlo Simulation…
– In some cases, it's possible to estimate a range of values. In a construction
project, you might estimate the time to complete a job; based on expert
knowledge, you can also estimate the maximum time it might take, in the
worst possible case, and the absolute minimum time, in the best possible case.
– The same could be done for project costs. In a financial market, you might
know the distribution of possible values through the mean and standard
deviation of returns.
– By using a range of possible values, instead of a single guess, you can create a
more realistic picture of what might happen in the future. When a model is
based on ranges of estimates, the output of the model will also be a range.
Quantitative Risk Analysis…

IV. Monte Carlo Simulation… How It Works?

– In a Monte Carlo simulation, a random value is selected for each of the tasks, based on
the range of estimates.
– The model is calculated based on this random value. The result of the model is recorded,
and the process is repeated.
– A typical Monte Carlo simulation calculates the model hundreds or
thousands of times, each time using different randomly-selected values.
– When the simulation is complete, we have a large number of results from the model,
each based on random input values.
– These results are used to describe the likelihood, or probability, of reaching
various results in the model.
Quantitative Risk Analysis…

IV. Monte Carlo Simulation…. provides answers to questions such as:

– How likely the base plan to be successful?

– How much contingency in time and cost do we need to achieve

our desired level of confidence?

– Which activities are important in determining the overall project

risk?
Quantitative Risk Analysis…

“Monte Carlo simulation is a great tool for engaging with the best brains in
the business and for providing insights well beyond mere averages”.
Quantitative Risk Analysis…

Probability
of
Completion
Within
Specified
Time
(Months)
Quantitative Risk Analysis…

Outputs from Quantitative Risk Analysis

 Probability of achieving the project cost and time objectives. The probability
of achieving the project objectives under the current plan can be estimated
using quantitative risk analysis results.
Prioritized list of quantified risks. This list of risks includes those posing the
greatest threat or presenting the greatest opportunity to the project together
with a measure of their impacts.
 Trends in quantitative risk analysis results. As the analysis is repeated, a
trend of results may become apparent. Trends may be useful for developing risk
responses.
Reading papers:

1. The use of Monte Carlo simulation techniques for risk analysis

2. Monte Carlo techniques for quantitative uncertainty

analysis in public health risk assessments

3. Decision analysis: A method for taking uncertainties

into account in risk-based decision making
 The End!

59