Chap 11.4 Perform Quantitative Risk Analysis

Chapter 11 –
Project Risk Management
PMP
Trainer: Anand BobadePMBOK 6th Edition, 2019, All rights reserved.
Perform Quantitative
Risk Analysis
SIXTH EDITION

PMBOK 6 - All rights reserved; By: Anand Bobade (nmbobade@gmail.com)
Perform Quantitative Risk Analysis - Definition
Why Quantitative Risk Analysis?
Perform Quantitative Risk Analysis: ITTO
What is probability?
What is Decision tree analysis & EMV.
What is tornado diagram?
Review
11.4 Perform Quantitative Risk Analysis

Project Risk Management Processes
Plan Risk management Identify Risk
Perform Qualitative
Risk Analysis
Perform Quantitative
Risk Analysis
Plan Risk Response Implement Risk Monitor Risk
P
MC
P P P
P E

Numerically analyzing the effect of identified risks on
overall project objectives.
It produces quantitative risk information to support
decisions.
Perform Quantitative Risk Analysis
Prioritized Risk
(Qualitative Analysis)
Quantitative Analysis
Impact on project
objectives

Purpose of this process:
Determine which risk events warrant a response.
Determine overall project risk (risk exposure).
Determine quantified probability of meeting proj. objectives.
Determine cost and schedule reserves.
Identify risks requiring the most attention.
Create realistic & achievable cost, schedule, or scope targets.
Perform Quantitative Risk Analysis -> Why?

This process can be skipped, if Risks doesn’t require
this approach.
PM may not consider this process due to insufficient
data to develop analysis models.
There is no need to perform in depth Risk analysis for
every project.
PM should exercise expert judgment to decide on the
need.
Availability of Time & budget should be consider to
decide.
Perform Quantitative Risk Analysis -> Not mandatory

Perform Quantitative Risk analysis-> ITTO
Expert Judgment
Data Gathering
Interpersonal and team skills
Representation of uncertainty
Data analysis
Project Management
Plan
Project documents
Enterprise
environmental factors
Organizational process
assets
Project document
updates
Inputs Tools & Techniques Outputs

Project Management
Plan
Project documents
Enterprise
environmental factors
Organizational process
assets
Perform Quantitative Risk Analysis->Inputs

Project
Management Plan
Risk Management
plan
Schedule baseline Scope Baseline Cost Baseline

Risk Management plan
• Provides guidance, methods & tools to be used in quantitative risk analysis.
• Resource, Schedule & Budget requirements.
• Stakeholder - Roles & Responsibilities
Perform Quantitative RA->Inputs->RMP
Project
Management Plan

Project documents
Assumption log Basis of estimates Cost estimates Cost Forecasts
Duration Estimates Milestone list
Resource
requirements
Risk Register
Risk Report Schedule forecasts

Risk Register
• List of prioritized Risks (from Qualitative analysis).
• Root Cause.
• Potential Response
Perform Quantitative RA->Inputs->Risk Register
Project documents

EEF
Provide insight & context to the Risk analysis:
Industry studies of similar projects Risk Databases from industries
Perform Quantitative RA->Inputs->EEF

OPA
Influence quantitative Risk analysis.
Information from previous projects: Similar completed Projects.
Perform Quantitative RA->Inputs->OPA

Expert Judgment Data Gathering
Interpersonal and team
skills
Perform Quantitative Risk Analysis->T&T
Representation of
uncertainty
Data analysis

Expert Judgment
Expertize should be considered from groups or individuals with specialized
knowledge in quantitative risk analysis.
Translating the information
on individual project risks in
terms of probability and
impact into numeric inputs
Selecting the most
appropriate representation
of uncertainty to model
particular risks.
Section of modeling
techniques (simulation,
sensitivity analysis, decision
tree analysis, influence
diagrams).
Interpreting the outputs
of quantitative risk
analysis and preparing
risk report.
Perform Quantitative Risk Analysis->T&T->Expert Judgement

Data Gathering
Interviews
• Experience & Historical data.
• Quantify probability & impact of Risk.
• Document rational of risk ranges & assumptions.
Perform Quantitative Risk Analysis->T&T->Data Gathering
Data based
on Expert
Opinion
Likelihood of completing the project

Interpersonal and
team skills
Facilitation
Perform Quantitative RA->T&T->Interpersonal and team skills
• Establish a clear understanding of the
purpose of the Risk related workshop
• Build consensus among participants
• Ensure continued focus on the task
Facilitator
responsibilities:

Representation
of uncertainty
Where the duration, cost, or resource requirement for a planned activity is
uncertain, the range of possible values can be represented as probability
distribution
Most commonly used distributions are
Triangular Normal Lognormal Beta
Uniform or
discrete
Perform Quantitative RA->T&T->Representation of uncertainty

Representation
of uncertainty
What is Probability?
• Probability is measurement of likelihood of occurrence of any event.
Example:
• Toss a coin, it will show heads or tails.
• 50% -50% chance of showing heads or tails.
• Probability of showing heads or tails is 50% (or
1/2).

Representation
of uncertainty
Probability Formula & Example:
• = “Number of favourable” / “Total number of events”
Probability of an event
happening
• = (Number of favourable events)/(Total number of
events)
Probability of showing
heads
Total number of events = 2
[Coin can show heads or tail ]
Total number of favourable events = 1
= ½ = 50%

Representation
of uncertainty
Probability Example3:
For given project, Probability of completing one Task on time is 90%. What is
probability of completing all scheduled task on time?
Task 1 Task 2 Task 3 Task 4
=100*0.90
= 90%
=90*0.90
=81%
=81*0.90
=72%
=72*0.90
=65%
Probability of
Individual Tasks
90% 90% 90% 90%
Probability of
combined tasks
One Task
(90%)
Two Tasks
(90% of prev.)
Three tasks
(90% of prev.)
All tasks
(90% of prev.)

Data analysis Sensitivity analysis
Decision Tree
analysis
Simulation Influence diagrams
Perform Quantitative Risk Analysis->T&T->Data analysis

Sensitivity Analysis:
• Also called as Tornado Diagram.
• These are special type of bar charts.
• Determine which Risk have most potential impact on the Project.
Positive ImpactNegative Impact
Useful for comparing relative importance of variables.
The longer the bar the greater the sensitivity of project objective to the factor.
The factor that have greatest impact is located at the top.
Risks/Category
are listed
Vertically
Assists PM in focusing on
most critical risks of project.
Sort & prioritize risks
according to their impact.
Data analysis

Data analysis
Expected Monetary Value (EMV) Analysis:
• It calculates average outcomes, when the future includes
scenarios that may or may not happen.
• It is used in decision tree analysis.
It is used to convert the risk into a number.
Assists PM to calculate the contingency reserve.
Helps compare a risk with other risks.
Perform Quantitative Risk Analysis->T&T-> Data analysis
It helps in selecting choice which involves less money to manage
risks.
In general, it can be used to select profitable business solution.

Data analysis
Expected Monetary Value:
= Probability X Impact
Perform Quantitative Risk Analysis->T&T-> Data analysis
Reserve analysis
Below are 3 risks with Probabilities & Impact.
What is the total cost of managing these risks?
Risk Probability (P) Impact (I) EMV (P * I)
Hardware may cost more 10 % - 10,000 - 1,000
Licenses cost may increase 20 % - 6,000 - 1,200
Resource cost may reduce 90 % + 2,000 + 1,800
Total Cost of all Risks: = (-1000)+(-1200)+(1800) - 400

Decision Tree & EMV Example 2:
Decide weather to build new CAR manufacturing plant or
upgrade existing based on demand.
Note: In first example Project costs are not given.
1 Cost of Building a new plant 120 M
2 Cost of Upgrading plant 50 M
Chance of Strong Demand: 60%
# Demand scenario Possible
revenue
A New plant - Strong Demand 200 M
B New plant - Week Demand 90 M
C Upgrade – Strong Demand 120 M
D Upgrade – Week Demand 60 M
Perform Quantitative Risk Analysis->T&T->QRA&MT
Data analysis

Build / Upgrade
New Plant
Investment= 120M
Strong Demand (60%)
Revenue=200M
Week Demand (40%)
Revenue=90M
Upgrade plant
Investment= 50M
Strong Demand (60%)
Revenue=120M
Week Demand (40%)
Revenue=60M
Net path value=200-120
= 80M
= (- 30M)
= 70M
= 10M

Build / Upgrade
New Plant
Investment= 120M
Strong Demand (60%)
Revenue=200M
Week Demand (40%)
Revenue=90M
Upgrade plant
Investment= 50M
Strong Demand (60%)
Revenue=120M
Week Demand (40%)
Revenue=60M
= 80M
= (- 30M)
= 70M
= 10M
Upgrade
EMV=0.60 ($80M)
+0.40(-$30) = $36M
EMV =0.60 ($70M)
+0.40($10) =$46M

EMV Calculation using table.
Demand scenario:
Chance of Strong Demand: 60%
Build New Plant: $120M
Upgrade plant: $50M
Node Demand Given
Revenue
Node value based
on Demand
A New plant - Strong
Demand (60%)
200 M 200M-120M=80M New Plant:
EMV=0.60 ($80M)
+0.40(-$30) =
$36M
B New plant - Week
Demand(40%)
90 M 90M-120M=-30M
C Upgrade – Strong
Demand (60%)
120 M 120M-50M=70M Upgrade plant:
EMV =0.60 ($70M)
+0.40($10) =$46MD Upgrade – Week
Demand (40%)
60 M 60M-50M=10M

Modeling & simulation:
• Uses model that translates specified detailed uncertainties into their
potential impact on project objectives.
• Performed using Monte Carlo technique.
A project model is computed many times with input values chosen at random for each iteration.
12% chance - project will complete in 41 million 75% chance - project will complete in 50 million
Data analysis

Data analysis
Influence diagrams:
• A graphical representation of situations showing causal influences, time
ordering of events and other relationship among variables and outcome
Identify factors that
influence individual
project risks?
Then, perform analysis
of the probability
distributions effecting
these influences
Determine combined
total of these influences
on the probability and
impact of the individual
project risk

Project Document
Update
Perform Quantitative RA->Outputs

Project Document
Update
Risk Report
Assessment of overall project risk exposure – Reflected in two key measures:
•Chances of project success, given the identified individual project risks and other uncertainties
•Variability remaining within the project, indicated by the range of possible project outcomes
Detailed Probabilistic analysis of the project– S-curves, tornado diagrams, and critical
analysis may include:
•Amount of contingency reserve needed
•Identification of individual project risks, other uncertainty that has the greatest effect on the critical path
•Major drivers of overall project risk
Perform Quantitative RA->Output->Project Doc. updates
Prioritized list of individual
project risks
Trends in quantitative risk
analysis results
Recommended risk responses

Why Quantitative Risk Analysis?
Perform Quantitative Risk Analysis: ITTO
What is Decision tree analysis & EMV.
What is tornado diagram?
Modeling & simulation
Risk Report
Perform Quantitative RA -> Review

Chap 11.4 Perform Quantitative Risk Analysis

Chap 11.4 Perform Quantitative Risk Analysis

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Chap 11.4 Perform Quantitative Risk Analysis