Project managers should be prepared to perform different types of risk analysis. For many projects, the quicker qualitative risk assessment 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? When should it be performed? And how do we quantify risks?
What is Quantitative Risk Analysis?
Quantitative risk analysis is a numeric estimate of the overall effect of risk on the project objectives such as cost and schedule objectives. The results provide insight into the likelihood of project success and is used to develop contingency reserves.
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 plus other sources of 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.
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
First, we identify risks. Then we can evaluate the risks qualitatively and quantitatively.
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.
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What is the Difference Between Qualitative and Quantitative Risk Analysis?
Quantitative Risk Assessment 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.
Quantitative Risk Analysis Example
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.
Once you've performed the Quantitative Risk Analysis, be sure to update your risk register with the additional risk information.