ENGR 3360U Winter 2014

Unit 10-4
Quantitative Assessment of Risk
Dr. J. Michael Bennett, P. Eng., PMP,
UOIT,
Version 2014-I-01

Unit 10 Project Risk Management

Change Record
2014-I-01 Initial Creation

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Unit 10 Project Risk Management

10.4 Quantitative Risk Analysis

10.4.1 Inputs
.1 EEP
.2 Project Scope Statement
.3 Risk Management Plan
.4 Risk Register
. 5 PMP
10.4.2 Tools and Techniques
.1 Data Gathering & Representation Techniques
.2 Quantitative Risk Analysis & Modeling
10.4.3 Outputs
.1 Risk Register Updates

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Unit 10 Project Risk Management

Our Risk Paradigm

Control
Track

Plan

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Identify

Q&Q Analyze

Dr. J.M. Bennett, P.Eng., PMP

ENGR 3360

Unit 10 Project Risk Management

Quantitative
Here we put numbers on the risks
Here be Dragons
Just because there is a number, does not make it
true!
Not everything that matters, can be measured.
Not everything that is measured, matters

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Unit 10 Project Risk Management

The Ideal is to
Quantify the possible outcome
Assess the probability of achieving objectives
Use the numeric ranking to watch the highest
Identify realistic costs, schedules, scope targets
in the face of the project risks
Determine the best PM decision when some
risks rear their ugly heads
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Unit 10 Project Risk Management

.1 Data Gathering & Representation Teks

Interviewing
Probability distributions
Expert judgment

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Unit 10 Project Risk Management

Range of Cost Estimates

WBS
Element

Low

Likely

High

Design

10

Build

16

20

35

Test

11

15

23

Total
Project
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Unit 10 Project Risk Management

Probability Distributions
Likely

Likely

Beta

0.00

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Triangular

0.50

0.75

1.00

0.00

0.25

0.50

Dr. J.M. Bennett, P.Eng., PMP

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Unit 10 Project Risk Management

.2 Quantitative Risk Analysis & Modeling

Sensitivity analysis
Expected monetary value
Decision tree analysis
Modeling and simulation

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Unit 10 Project Risk Management

Risk Register Updates

Probabilistic analysis of project
Probability of achieving cost and time
objectives
Prioritized list of quantified risks
Trends in quantitative risk analysis results

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Unit 10 Project Risk Management

Range of Estimates
We cant foretell precisely the costs and
benefits for future years.
Its more realistic to describe a range of
possible values.

For example a range could include:

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Optimistic, most likely, and pessimistic

estimates
The analysis could then determine whether the
decision is sensitive to the range of values.

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Unit 10 Project Risk Management

The Rule of Six

Examples, how long does it take you to
drive to UOIT? You live in Scarberia.

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Unit 10 Project Risk Management

Probability
Probability of flipping a coin:

Head (50%), Tail (50%)

This is the long range frequency and the single trial

likelihood.
Probabilities can also be based on past data, expert
judgement, or some combination of both.
Mathematically:

Between 0 and 1

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0 (can never happen) 0%

1 (will always happen) 100%
0.5 (half the timeas in the above example of flipping a coin
50%)

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Dr. J.M. Bennett, P.Eng., PMP

ENGR 3360

Unit 10 Project Risk Management

Probability, contd.
The sum of all probabilities must equal 1.

Head (0.5), Tail (0.5)

0 <= Probability <= 1
P(outcomej) = 1, where there are K outcomes

As opposed to large distributions, it is more

common in economic analysis to use 2 to 5
discrete possibilities.

This is because:

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Each outcome requires more analysis.

Expert judgement should be limited for accuracy.

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Dr. J.M. Bennett, P.Eng., PMP

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Unit 10 Project Risk Management

Joint Probability Distribution

The product of two independent events
P(A and B) = P(A) x P(B)

Example: Flipping a coin and rolling a die

Turning up a head and rolling a 4

x 1/6 = 1/12 joint probability

Joint probabilities can increase the number

of possibilities and become arithmetically
burdensome.
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Unit 10 Project Risk Management

Expected Value
The Expected Value:

Each outcome is weighted by its probability

and the results are summed:

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Expected value = OutcomeA x P(A) + OutcomeB x P(B). . . .

This is NOT a simple average.

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Dr. J.M. Bennett, P.Eng., PMP

ENGR 3360

Unit 10 Project Risk Management

Economic Decision Trees

A useful tool in deciding alternatives

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Unit 10 Project Risk Management

Decision Trees
Decision Trees can be created for complex
decision making:

Symbols:

Decision Node
Choose a path

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C1
P1
P2
C2
P3 C3
Chance Node
Chance event
with prob Pi

Dr. J.M. Bennett, P.Eng., PMP

Prune

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Unit 10 Project Risk Management

Decision Trees, contd.

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Unit 10 Project Risk Management

Problem
What decision should be made on the
choice of a new product as just described?
MARR is 10%. If the project is terminated
after 1 year, salvage is 550,000. If it is used
to 8 years, 0.

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Unit 10 Project Risk Management

Solution
Node 7 PW = 550000
Node 8 PW is 100000(P/A, 10%, 7) =
486,800
CHOOSE NODE 7

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Unit 10 Project Risk Management

Node 9 PW = -800K + 600K(P?A, 10%, 7)

= 2,120,800
Node 10 PW = 400K(P/A, 10%, 7) =
1,947,200
Prune 10

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Unit 10 Project Risk Management

Decision Trees, contd.

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Unit 10 Project Risk Management

Finish
PW Node 4 = (100K+550K)(P/F, 10%, 7) = 590,
915
PW Node 5 = 200K(P/A, 10%,8) = 1,067,000
PW Node 6 = [400K-800K+600K(P/A, 10%, 7)]
(P/A, 10%, 1) = 2,291,660
EV Node 2 = .3(590,915) + .6(1,067,000) + .
1(2,291,660) = 1,046,640
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Dr. J.M. Bennett, P.Eng., PMP

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Unit 10 Project Risk Management

Final Solution

PW Node 4
=
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Unit 10 Project Risk Management

Quantifying Risks with Probability

Sev = Likelihoodi x Impacti
Problem is that it is hard to quantify these
For example, what is the likelihood of a
ship hitting an iceberg in the North
Atlantic?

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Unit 10 Project Risk Management

Prioritizing Risks
Use the Pareto Rule
Pick the top 10

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Unit 10 Project Risk Management

Risk Example
Suppose that you have identified the triplet:
1. r1 high staff turnover
2. l1 estimated at 0.70
3. x1 impact of increasing project duration by 15% and
overall cost 12%
4. s1 severity is .7 X .15

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Unit 10 Project Risk Management

Risk Example cont.

Steps to Reduce the Risk of Turnovers might include:
meet with current staff to determine causes of high turnover
change these before project commences
assume that turnover WILL occur during project and build that into plan
organize project teams so that information about each development activity is
widely dispersed
define documentation standards
establish mechanism so that these are developed in a timely manner
conduct peer reviews and walkthroughs for second-sourcing
identify critical technologists
define a backup person for each critical technologist

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Dr. J.M. Bennett, P.Eng., PMP

ENGR 3360

Unit 10 Project Risk Management

Our Risk Paradigm

Control
Track

Plan

10-31

2014-I-01

Identify

Q&Q Analyze

Dr. J.M. Bennett, P.Eng., PMP

ENGR 3360