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4 PERFORM QUANTITATIVE RISK ANALYSIS - WHALE

Perform Quantitative Risk Analysis is the process of Evaluating Magnitudes of the effects of identified risks on overall project objectives (Figures 11-11 and 11-12). The Analysis is performed on risks that have been prioritized by the Perform Qualitative Risk Analysis process as potentially and substantially impacting the projects competing demands. The Perform Quantitative Risk Analysis process analyzes the effect of those risk events. It may be used to assign a numerical rating to those risks individually or to evaluate the aggregate effect of all risks affecting the project. It also presents a quantitative approach to making decisions in the presence of uncertainty.
1 Inputs 1 Risk Register 2 Risk Management Plan 3 Cost Management Plan 4 Schedule Management Plan 5 Organizational Process Assets
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2 Tools & Techniques 1 Data Gathering and Representation Techniques 2 Quantitative Risk analysis and Modeling Techniques 3 Expert Judgment
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3 Outputs 1 Risk Register Updates

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11.4.1 PERFORM QUANTITATIVE RISK ANALYSIS: INPUTS

11.4.1.1 Risk Register The primary outputs from Identify Risks are the initial entries into the risk register. The risk register ultimately contains the outcomes of the other risk management processes as they are conducted, resulting in an increase in the level and type of information contained in the risk register during Perform Qualitative Analysis Process. However the magnitude or quantum of Risk is evaluated during Perform Quantitative Risk Process. Thus the quantitative values are filled in and the prioritization may be reshuffled according to these values. This information then becomes available to subsequent Risk Management processes as well as project management processes and other Projects in future. 11.4.1.2 Risk Management Plan The risk management plan describes how risk management will be structured and performed on the project which is a part of PM Plan. The details viz. Methods to be followed, budget, time table, design of protocols or formats of paperwork/records are available in this plan. 11.4.1.3 Cost Management Plan

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The project cost management plan sets the format and establishes criteria for planning, structuring, estimating, budgeting, and controlling project costs (Section 7.0). Those controls may help determine the structure and/or application approach for quantitative analysis of the budget or cost plan. 11.4.1.4 Schedule Management Plan The project schedule management plan sets the format and establishes criteria for developing and controlling the project schedule (Section 6.0). Those controls and the nature of the schedule itself may help determine the structure and/or application approach for quantitative analysis of the schedule. 11.4.1.5 Organizational Process Assets The organizational process assets useful to Perform Quantitative Risk Analysis process are Information on prior, similar completed projects, Studies of similar projects or technology or process by risk specialists, and Risk databases from industry or proprietary sources.
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11.4.2 PERFORM QUANTITATIVE RISK ANALYSIS: TOOLS AND TECHNIQUES

11.4.2.1 Data Gathering and Representation Techniques a. Interviewing. Interviewing techniques draw on experience and historical data to quantify the probability and impact of risks on project objectives. The information needed depends upon the type of probability distributions that will be used. For instance, information would be gathered on the optimistic (low), pessimistic (high), and most likely scenarios for some commonly used distributions. Examples of three-point estimates for cost are shown in Figure 11-13. Additional information on three point estimates is in Estimate Activity Durations (Section 6.4.2.4) and Estimate Costs (Section 7.1.2.5). Documenting the rationale of the risk ranges and the assumptions behind them are important components of the risk interview because they can provide insight on the reliability and credibility of the analysis.

Range of Project Cost Estimates WBS Element Design Build Test Total Project Low Rs. 5 M Rs. 15 M Rs. 10 M Rs. 30 M Most Likely Rs. 6 M Rs. 20 M Rs. 12 M Rs. 38 M High Rs. 8 M Rs. 25 M Rs. 20 M Rs. 53 M

Interviewing relevant stakeholders helps determine the three-point estimates for each WBS element for triangular, beta or other distributions. In this example, the likelihood of completing the project at or below the most likely estimate of $41 million is relatively small as shown in the simulation results in Figure 11-16 (Cost Risk Simulation Results). Low Most Likely High Figure 11-13. Range of Project Cost Estimates Collected During the Risk Interview b. Probability distributions. A smooth continuous curve of probability distributions, used extensively in modeling and simulation (Section 11.4.2.2) shows the uncertainty in values i.e. inaccurate values such as durations of schedule activities and costs of project components. In such cases we can take nearest suitable but definite values to represent uncertain events such as the outcome of a test or a possible scenario in a decision tree. A sample of widely used continuous distributions are shown in Figure 11-14. These distributions depict shapes that are compatible with the data typically developed during the quantitative risk analysis. Uniform distributions can be used only if there is no obvious
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value that is more likely than any other between specified high and low bounds, such as in the early concept stage of design.

Figure 11-14. Examples of Commonly Used Probability Distributions

11.4.2.2 Quantitative Risk Analysis and Modeling Techniques Commonly used techniques include both event-oriented and project-oriented analysis approaches including: a. Sensitivity analysis. Sensitivity analysis helps to determine which risks have the most potential impact on the project. It examines the extent of uncertainty of each project element affecting the objective under examination when all other uncertain elements are held at their baseline values. One typical display of sensitivity analysis is the tornado diagram, which is useful for comparing relative importance and impact of variables that have a high degree of uncertainty to those that are more stable. b. Expected monetary value analysis. Expected monetary value (EMV) analysis is a statistical concept that calculates the average outcome for uncertain scenarios (i.e., analysis under uncertainty). The EMV of opportunities will generally be expressed as positive values, while those of risks will be negative. EMV requires a risk-neutral assumption, neither risk averse, nor risk seeking. EMV for a project is a numerical product of the value and probability of occurrence and adding the products together. A common use of this type of analysis is in decision tree analysis (Figure 11-15).

c. Modeling and simulation. A project simulation uses a model that translates the specified detailed uncertainties of the project into their potential impact on project objectives. Iterative simulations are typically performed using the Monte Carlo technique. In a simulation, the project model is computed many times (iterated), for different input values (e.g., cost estimates or activity durations) chosen at random. A probability distribution (e.g., total cost or completion date) is calculated from the iterations. For a cost risk analysis, a simulation uses cost estimates. For a schedule risk analysis, the schedule network diagram and duration estimates are used. The output from a cost risk simulation is shown in Figure
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11-16. It illustrates the respective likelihood of achieving specific cost targets. Similar curves can be developed for schedule outcomes. 11.4.2.3 Expert Judgment Experts should have relevant, recent experience. Expert judgment is required to identify potential cost and schedule impacts, to evaluate probability, and to define inputs (such as probability distributions) into the tools. Expert judgment also comes into play in the interpretation of the data. Experts should be able to identify the weaknesses of the tools as well as their relative strengths. Experts may determine when a specific tool may or may not be more appropriate for or suitable to the organizations capabilities and culture.
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11.4.3 PERFORM QUANTITATIVE RISK ANALYSIS: OUTPUTS

11.4.3.1 Risk Register Updates The risk register is further updated to include a quantitative risk report detailing quantitative approaches, outputs, and recommendations. Updates include the following main components: a. Probabilistic Analysis of the project. Estimate of potential project schedule and cost with the possible completion dates and costs with their associated confidence levels are made. This output, often expressed as a cumulative distribution, can be used with stakeholder risk tolerances to permit quantification of the cost and time contingency reserves. Such contingency reserves are needed to bring the risk of overrunning stated project objectives to a level acceptable to the organization. For instance, in Figure 11-16, the cost contingency to the 75th percentile is $9 million US, or about 22% when compared to the $41 million US sum of the most likely estimates shown in Figure 11-13. b. Probability of achieving cost and time objectives. With the risks facing the project, the probability of achieving project objectives under the current plan can be estimated using quantitative risk analysis results. For instance, in Figure 11-16, the likelihood (in terms of percentage) of achieving the cost estimate of $41 million US (from Figure 1113) is about 12%. c. Prioritized list of quantified risks. This list of risks includes those that pose the greatest threat or present the greatest opportunity to the project. These include the risks that may have the greatest effect on cost contingency and those that are most likely to influence the critical path. These risks may be identified, in some cases, through a tornado diagram generated as a result of the simulation analyses. d. Trends in quantitative risk analysis results. As the analysis is repeated, a trend may become apparent leading to conclusions affecting risk responses. Organizational historical information on project schedule, cost, quality, and performance should reflect new insights gained through the Perform Quantitative Risk Analysis process. Such history may take the form of a quantitative risk analysis report. This report may be separate from, or linked to, the risk register.
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