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OPMT2510 – Project Quality and Risk Management
Module 3 – Risk Analysis
M03-01
M03-02
M03-03
M03-04
M03-05
Introduction
Learning Objectives
Assessing Risk
Qualitative Assessment
Quantitative Assessment
M03-05-01
Probability
M03-05-02
Sensitivity Analysis
M03-05-03
Expected Monetary Value
M03-05-04
Simulations
M03-06
Prioritizing Risk
M03-07
Discussion – Qualitative vs Quantitative
Exercise
Article review: Structuring Qualitative Analysis
M03-08
Summary
Supplemental Reading
Note: Make all links open in a new tab
Introduction
Welcome to our second module dedicated entirely to Project Risk Management: Risk Analysis.
What We Covered in the Previous Module
Last module we covered the basics concepts of Risk, the tools to help in Risk Identification for a Project,
and how to organize and present the Risks identified.
If any of the above sounds unfamiliar to you or you feel uncertain of your grasp of the concepts, return
to the previous module to review the material and discussions. You can also use one of the Discussion
Boards to ask questions.
What We Will See in This Module
In this module we will learn techniques to help us analyze and prioritize the risks previously identified.
All Risks are not equally important!
Performing Risk Assessment is the basis for creating an effective and efficient Risk Response Plan
(Module 4).
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Learning Objectives
#outcome
Upon completion of Module 3, you will be able to:
1. Assess Risk.
2. Use Qualitative risk assessment techniques.
3. Use Quantitative risk assessment techniques.
4. Describe and use risk prioritizing tools.
/outcome
Introduction
If we have already spent time and effort of several project resources to create as complete a list of Risks
as we could, why spend even more time assessing those Risks? Why not simply move into addressing
those risks?
Last module you may have noticed how in just a few minutes you were able to come up with a list of
several risks for the Rockworkz case. Imagine how long that list would have been if you dedicated a
couple of days to making it more complete, met with specialists and project stakeholders and
researched documentation for previous projects similar to yours!
To deal with such a long list of Risks you will need to prioritize them so you can dedicate the limited
project resources to addressing the most important Risks.
Assessment of Risks also provides:
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Preliminary understanding of cause of the risk
Control costs associated with addressing risks—proportional investment to risk importance
Accurately consider against risk appetite
Elements of Risk Assessment
When formally assessing Risks, the goal is to identify:
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Risk Probability = Likelihood of Occurrence = What chance does it have to happen?
Risk Severity = Size of Impact or Consequence = How bad (or good) would it be if it happened?
The two elements above are the most commonly assessed in a project but depending on context, other
measures may also be assessed, such as:
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Risk Detectability = if it were to occur, how likely would it be for it to get noticed?
Risk Correctability = how easy would it be to mitigate the risk?
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Risk Urgency
Qualitative Assessment
Qualitative Assessment is an opinion based method of scoring a Risk’s Probability and Severity on predefined scales.
Each Risk is then evaluated individually and given a Probability Score and a Severity Score based on
where they place on the scale according to the opinion of the people assessing the risk.
Considerations for performing Qualitative Risk Assessment:
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Expertise on the risk
Quality of the data available
Root cause analysis can be helpful (multiple causes of the same risk)
More data allows you to organize better and make the pieces more bite-sized. Consider
classifying risks by:
o Source (Risk Breakdown Structure)
o Task Area (Work Breakdown Structure)
o Project Phase
o Root Cause
You will see a more detailed discussion of Qualitative analysis in the texts you will read for this week’s
discussion.
Quantitative Assessment
Quantitative Assessment is a data driven way of assessing risks. It is not based on opinion. It can be
expensive to perform and requires availability of data to be performed.
Because it is more expensive it is common for a risk to be assessed qualitatively first before the project
invests in a quantitative analysis.
There are several tools/methods that can be used for Quantitative Risk Assessment. In this course we
will introduce:
 For assessing Probability:
o Probability distributions (3-point estimate)
o Experimentation
o Historical data
 For assessing Impact:
o Sensitivity analysis
 For assessing both Impact and Probability:
o Expected Monetary Value
o Modeling and Simulation
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Some of the tools require a level of knowledge in statistics and mathematical methods which are not
part of the scope of this course. Should you want to apply any of these tools you are encouraged to
further research educational resources or obtain specialized support to utilize them.
Quantitative Assessment of Probability
Example
Project with Probabilistic Time Estimates
You are already familiar with the use of the 3-point estimate method for activity duration estimation. It
considers a beta-distribution and uses as inputs an optimistic, most likely, and pessimistic estimate for
duration, to obtain the expected duration and associated variance for a task.
A network diagram of the activities using PERT methodology can be used to determine the project’s
Critical Path and expected total project duration and associated variance. The expected duration (or
mean) and variance can be represented in a normal probability distribution as:
#image
/image
Where μ = project mean time, σ = standard deviation (square root of variance), x = proposed time, Z =
number of standard deviations that x is from the mean.
From statistics we know the relationship: 𝑍 =
𝑥−𝜇
𝜎
Knowing the above we can calculate the probability that a project is completed by a certain date. For
example, for a project with an expected duration of 25 weeks and variance of 6.89 weeks:
#image
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/image
Sensitivity Analysis
In Sensitivity Analysis the goal is to show the impact on the project if the Risk item varied: for example,
interest rates, cost of capital, or a performance number.
Consider the example of a Sports event. The number of tickets sold and the cost to run the event are still
unknown and the ticket price can still be adjusted. What is the influence of each of these factors on the
profitability of the event?
Let’s assume the following ranges for each of the variables:
#image
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/image
Calculating profit for each variable while holding the other variables at the Base value, we obtain:
#image
/image
This is commonly represented by a Tornado diagram:
#image
/image
Expected Monetary Value
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Expected Monetary Value is a methodology for calculating the expected outcome when dealing with a
series of alternatives for the possible outcomes of a scenario. It is normally represented by a Decision
Tree, showing for each branch the alternative scenarios possible at each node of that branch.
For example:
When deciding whether to expand a business on existing land or purchase land:
The end of each path shows the monetary outcome if that path was to be realized. At the last node
before the end of a path you can see the probability each of the paths will occur.
#image
/image
The Expected Monetary Value of each path is calculated by multiplying the probability of the path times
its value.
See page 339 of the PMBoK 5th edition for another example of Expected Monetary Value.
Simulations
The risk scenario can be modelled mathematically and by the use of random or pseudo-random input
variables, the outcome can be simulated many times (hundreds or thousands of times). The aggregated
results of the several simulations allows for an understanding of the ranges of values that can be
expected as well cumulative distributions.
#image
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#image
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Prioritizing Risk
After completing Qualitative and/or Quantitative analysis of your risks, your Risk Register will contain
values for Probability and Impact.
A common method for determining Risk Priority is to multiply the Probability and Impact Scores, ranking
the Risks from higher to lower priority. Other formulas can be used to calculate Priority. For example,
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Risk severity may be considered in a project to be twice as important as Probability and in this case a
better formula for probability could be: Probability + (2 x Severity)
Risk Priority can also be represented in graphical form by use of a Probability and Impact Matrix. They
can be organized in several different ways visually but the common factor is that one axis represents
Probability while the other represents Impact.
The Probability and Impact Matrix (PIM) can be used to easily show Risk thresholds and some projects
even place Risk directly on the Matrix to monitor their progress along a project’s life.
This is one example:
#image
/image
Discussion: Qualitative versus Quantitative
Analysis
Now that you have been exposed to the basics of each of the two general methods of Risk Assessment,
what factors would make you choose one method over another?
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#discussion
Qualitative and Quantitative
Read the articles:
Qualitative Analysis.pdf
Linking Qualitative and Quantitive.pdf
What are your thoughts on qualitative and quantitative analysis? With reference to the two articles and
these questions, right a discussion post.
1. What are the Strengths and Weaknesses of Qualitative Analysis?
2. What are the Strengths and Weaknesses of Quantitative Analysis?
3. What are the factors that help us choose between them?
4. What are some mitigating strategies for qualitative analysis presented in the articles?
/discussion
Summary
In this module we covered how to assess and prioritize Risks using Qualitative and Quantitative
methods. We also discussed the advantages and disadvantages of each. Finally, we presented how to
prioritize risks based on the results of the assessment.
#reading
The following texts provide discussions that will enrich your learning of this week’s topic, help you
review the concepts and see more examples of the tools in use.
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Assessing Risk Probability.pdf
Barriers in Assessing Risk Probability.pdf
Facing Threats in your Oil Well Drilling.pdf
Read them before moving on to the next module; use the Course Q&A discussion to ask any questions.
/reading