Risk Event Modeling
Risk event modeling in part of Intaver
Institute’s presentations on project risk
management and risk analysis
Intaver Institute Inc.
303, 6707, Elbow Drive S.W, Calgary, AB, Canada
Tel: +1(403)692-2252
Fax: +1(403)459-4533
www.intaver.com
The Project Management Problem
Many projects are unsuccessful!
Projects
consistently
fail to meet:
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• Budget
• Schedule
• Quality
• Other measures
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The Project Management Problem
Key Project Management Issues
• How to estimate project duration or cost?
• What are the most critical risks and how to handle
them?
• How to measure project performance?
• How to make an informed decision about the
future course of the project?
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The Project Management Problem
Reasons
• Human psychological limits
• Inadequate training
• Poor processes
• other
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The Project Management Problem
Risk management key to project success
• Risks are events that can occur during a project
that changes to course of a project
• Risk is key source of project uncertainty and major
root cause of project failure
• Limited ability to forecast and manage project
uncertainty due to risk
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The Project Management Problem
Chains of unfortunate events
• Risks can form event chains
• A risk occurs and causes another risk to occur,
which causes yet another
• Unexpected result of a series of events derail
projects
• Statistical sampling or Monte Carlo simulations
the best solution for modeling the effect of
related and unrelated project risks
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Benefits
Understand impact of risk on projects
• Understand project risk and uncertainty in Cost
and Duration
• Identify critical risks and activities
• Model risk handling efforts
• Improved contingency and buffer plans
• Monitoring with risks and uncertainties provides
strong, early signals of impending issues
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Risk Event Modeling Workflow
Uses common PM artifacts
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WBS
Resources
Costs
Risk Register or Risk Lists developed for
qualitative risk management
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Risk Definition
• Risks
– Risks are “events” that have a probability of occurring during a project
– Risks are identified and assigned to tasks or resources
– Define impact of risks by assigning:
• Chance of occurrence
• Outcome (e.g. delay, increase in cost)
• Result (percentage or fixed value of outcome)
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What is Monte Carlo
Monte Carlo simulation is a mathematical method used in risk
analysis. Monte Carlo simulations are used to approximate the
distribution of potential results based on probabilistic inputs.
Monte Carlo Simulations
Input Parameters
Output Parameters
Calculation
Engine
( Critical Path
Scheduling
Engine )
Task duration
cost, finish time,
etc.
Project duration
cost, finish time,
etc.
Monte Carlo Schedule Analysis
1 2 3 4 5 6 7
2 3 4 5 6 7 8
1 2 3 4 5 6 7
Task 1
Task 2
7
6
5
4
3
2
1
8 9 10 11 12 13 14 15 16
Task 3
Two Approaches to Estimating Probabilities
• The relative frequency approach, where probability equals
the number of occurrences of specific outcome (or event)
divided by the total number of possible outcomes.
• The subjective approach represents an expert’s degree of
belief that a particular outcome will occur.
Two Approaches for Defining Uncertainties
• Distribution-based approach
• Event-based approach
Which Distribution Should Be Used?
Normal
Also useful:
• Lognornal
• Beta
Triangual
Uniform
Distribution Fitting
Before Eliciting Judgment You Need to Have:
• A clearly defined problem
• An identified list of risks, or a risk
breakdown structure, for the project
• A project schedule
• A clearly defined set of questions you will
ask experts
In addition, your team of experts should be aware
of any personal interest that expert may have
regarding particular issues. It helps to mitigate
motivational biases.
Psychological Factors
• Availability heuristic: people judge the probability of the
occurrence of events by how easily these events are brought to
mind.
• Anchoring heuristic: refers to the human tendency to remain close
to the initial estimate.
• Wishful thinking: when we overestimate the probabilities of
opportunities and underestimate the probabilities of risks.
Overestimating the Probability of Compound
Events
If the probability of a defect in a component is 20% and the
device uses three redundant components, the probability of the
defective device will be (0.2 * 0.2 * 0.2) = 0.008%.
People tend to think this number is much higher.
Ignoring Base-Rate Frequencies
• Historically, the probability that a particular
component will be defective is 1%.
• The component is tested before installation.
• The test showed that the component is defective.
• The test usually successfully identifies defective
components 80% of the time.
• What is the probability that a component is
defective?
The correct answer is close to 4%, however, most
people would think that answer is a little bit lower
than 80%.
Eliciting Judgment About Probabilities of
Single Events
• Pose a direct question: “What is the probability that the project
will be canceled due to budgetary problems?”
• Ask the experts two opposing questions: (1) “What is the
probability that the project will be canceled?” and (2) “What is
the probability the project will be completed?” The sum of
these two assessments should be 100%.
• Break compound events into simple events and review them
separately.
Probability Wheel
25% No delay of activity
35% 3 day delay of activity
40% 5 day delay of activity
20
100%
16
80%
12
60%
8
40%
4
20%
2
3
4
5
6
Probability
Frequency
Eliciting Judgment: Probability Method
Question: What is the chance that duration
is less than 3 days?
Task Duration
(days)
10
50%
8
40%
6
30%
4
20%
2
10%
2
Question: How many times the duration
will be between 2 and 3 days?
3
4
5
6
Task Duration
(days)
Probability
Frequency
Eliciting Judgment: Method of Relative Heights
How Many Trials Are Required?
Huge number of trials (> 1000) usually does not increase
accuracy of analysis
• Incorporate rare events
• Use convergence monitoring
What Is The Chance That a Project Will Be on Time And Within
Budget?
Analysis of Monte Carlo Results
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•
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Sensitivity and Correlations
Critical Indices
Crucial tasks
Critical Risks
Probabilistic Calendars
Deadlines
Conditional Branching
Probabilistic Branching
Chance of Task Existence
Analyze Results
View results
Identify critical
risks and tasks
Risk Matrix
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• Risk Scores
• Overview with and without risks
• Detailed results of analysis
• Sensitivity
• Crucial Tasks
• Success Rate
• Risk Chart
• Risk Scores
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Result Gant
When you have project
schedule and risk
breakdown structure ready
click here to perform Monte
Carlo simulations
RiskyProject employs
convergence monitoring
to ensure fast calculation
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Risk Register
Pre-mitigation Probability, Impact,
And Score
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Result Gantt Chart
White bars represent
original project
schedule (no risks)
Blue bars represent
project schedule with
risks
Because of risks, project duration
significantly increased
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Results of Risk Analysis
Project Summary:
project duration,
cost, and finish time
with and without
risks
Results of analysis
for project cost,
finish time, and
duration
Double click on any chart to view detailed information
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Detailed Results of Analysis
Detailed results can be shown for each tasks
or whole project for cost, duration, start
time, finish time, and income.
Move the slider to determine the
chance that project will be within
budget
Get detailed
statistical data
Data can be exported
as an image or text
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Sensitivity
Top critical risks need to
be mitigated first
Tornado chart shows risks or
other parameters have the most
affect on the project schedule
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Crucial Tasks
Crucial tasks for project cost and
duration can be different
Crucial tasks have the
most affect on the
project schedule
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Success Rate
A task can be canceled if it reaches a task or a project deadline or if it is affected
by risk with a “Cancel task” outcome.
Success rate is calculated
based on number of
times the task is not
canceled
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Risk Chart
Risk chart show risks, associated with task versus duration or cost
This task has low
duration but high
risk
These tasks have
balanced risk versus
duration ratio.
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Risk Matrix
Risk matrix shows probability/impact on 5x5 matrix
Double-click on a
risk to view risk
assignments
Risk Probability,
Impact and Score for
the current schedule
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Risk Planning
Modeling risk mitigation efforts
•Risk handling strategies
•Transfer
•Mitigate
•Eliminate
•Ignore
•Risk mitigation efforts represent their own costs etc.
which must be accounted for
•Create multiple baselines that model pre and post
mitigation risk handling efforts
•View results of risk handling efforts
•Select project alternative based on criteria (cost,
duration, start and finish time, success rate)
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Future Reading
Lev Virine and Michael Trumper
Project Decisions:
The Art and Science
Management Concepts, Vienna, VA, 2007
Lev Virine and Michael Trumper
Project Think:
Why Good Managers Make Poor Project Choices
Gower, 2013