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?
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.
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.
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.
Consider using Quantitative Risk Analysis for:
Quantitative Risk Analysis tools and techniques include but are not limited to:
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.
Question: What Quantitative Risk Analysis tools and techniques do you most use? What are the benefits?
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