Doctors use different methods to analyze our health. Some are quick and easy.
Some require more time and cost. A doctor may quickly check your temperature, weight, throat (say “ahh”), and your heart beat.
But for a more thorough analysis, a doctor will order an MRI or Heart Catheterization.
Project managers should also be prepared to perform different levels of analysis. The Qualitative Risk Analysis, which should always be performed, allows you to quickly determine the highest risks. For many projects, this type of analysis will be all you need.
However, there are times when we need additional information and data. We need to probe a bit deeper.
Let’s take a look at this type of analysis: What is it? Why should we perform it? When should it be performed?
What is Quantitative Risk Analysis?
Quantitative Risk Analysis is a method of quantifying risks in order to determine the probability of achieving cost and schedule objectives. You may also use methods like the Decision Tree to help make better business decisions.
Why Perform Quantitative Risk Analysis
Better Business Decisions
Business decisions are rarely made with all the information or data we desire. For more critical decisions, Quantitative Risk Analysis provides objective information and data. (Qualitative Risk Analysis provides the quick subjective information.)
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
- Decision Tree Analysis
- Expected Monetary Value (EMV)
- Monte Carlo Analysis
- Sensitivity Analysis
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.
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.
For a more in depth example of Quantitative Risk Analysis, see this Decision Tree article.
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?