Evaluating Risks Using Quantitative Risk Analysis

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Project managers should be prepared to perform different types of risk analysis. For many projects, the quicker qualitative risk analysis is all you need. But there are occasions when you will benefit from a quantitative risk analysis.

Let’s take a look at this type of analysis: What is it? Why should we perform it? And when should it be performed?

Evaluating Risks

What is Quantitative Risk Analysis?

Quantitative Risk Analysis is a method of quantifying your highest priority risks in order to determine the probability of achieving your overall cost and schedule objectives.  For example, rather than ranking the probability of a risk as a three on a scale of one to five qualitatively, we would estimate the probability to be 50%. Rather than ranking the impact as a four, we would say that the impact is three weeks or $60,000.

Why Perform Quantitative Risk Analysis

Better Overall Project Risk Analysis

Individual risks are evaluated in the qualitative risk analysis. But the quantitative analysis allows us to evaluate the overall project risk from the individual risks.

Better Business Decisions

Business decisions are rarely made with all the information or data we desire. For more critical decisions, quantitative risk analysis provides more objective information and data than the qualitative analysis. Keep in mind: While the quantitative analysis is more objective, it is still an estimate. Wise project managers consider other factors in the decision-making process.

Better Estimates

A project manager estimated a project’s duration at eight months with a cost of $300,000. The project actually took twelve months and cost $380,000. What happened?

The project manager did a Work Breakdown Structure (WBS) and estimated the work. However, the project manager failed to consider the potential impact of the risks (good and bad) on the schedule and budget.

When to Perform Quantitative Risk Analysis

Consider using Quantitative Risk Analysis for:

  • Projects that require a Contingency Reserve for the schedule and budget.
  • Large, complex projects that require Go/No Go decisions (the Go/No Go decision may occur multiple times in a project).
  • Projects where upper management wants more detail about the probability of completing the project on schedule and within budget.

Quantitative Risk Analysis Tools & Techniques

Quantitative Risk Analysis tools and techniques include but are not limited to:

  • Three Point Estimate – a technique that uses the optimistic, most likely, and pessimistic values to determine the best estimate.
  • Decision Tree Analysis – a diagram that shows the implications of choosing one or other alternatives. Click here to see an example.
  • Expected Monetary Value (EMV) – a method used to establish the contingency reserves for a project budget and schedule.
  • Monte Carlo Analysis – a technique that uses optimistic, most likely, and pessimistic estimates to determine the total project cost and project completion dates. For example, we could estimate the probability of completing a project at a cost of $20M. Or what is a company wanted to have an 80% probability of achieving its cost objectives. What is the cost to achieve 80%?
  • Sensitivity Analysis – a technique used to determine which risks have the greatest impact on a project.
  • Fault Tree Analysis (FMEA) – the analysis of a structured diagram which identifies elements that can cause system failure.

How to Perform Quantitative Risk Analysis

Let’s look at a simple Expected Monetary Value (EMV) example:

Keep in mind that risks include both threats and opportunities. Threats have adverse impacts on cost. Opportunities are benefits that reduce cost. Expected Monetary Value = Probability x Impact.

RiskProbabilityCost ImpactEMV
A (Threat)20%$100,000$20,000
B (Opportunity)40%($10,000)($4,000)
C (Threat)30%$50,000$15,000
Total EMV$31,000

Notice we subtracted the benefit of the Opportunity from the EMV. The Total EVM represents the project risk exposure and the amount of our Contingency Reserve.

Once you’ve performed the Quantitative Risk Analysis, be sure to update your Risk Register with the additional risk information.

Question: What Quantitative Risk Analysis tools and techniques do you most use? What are the benefits?

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2 thoughts on “Evaluating Risks Using Quantitative Risk Analysis

  1. In my experience, FMEA meant Failure Modes and Effects Analysis. Fault trees were only one technique used within it, and FMEAs were produced by specialized Reliability Engineers. It seemed rather useless because the results seemed to aim at confirming compliance with reliability requirements rather than with causing design improvements. FMEAs seem to be down in the weeds of project execution. How would they be used at the PM Risk Management level?

    • Hi Richard. I’m sure that you have had more experience with FMEA than I have. I used it in some Six-Sigma projects at GE. As you know, FMEA is used for the analysis of failure modes (e.g., errors or defects) within systems. One use is to analyze new technology and the potential of failure of the system components. This analysis can begin early in projects during the requirements and design processes before the new technology is developed and tested.