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–What’s the probability of my project finishing before April under one million euros?
If you need to answer professionally, you can use the so called Monte Carlo method.
You only need to open an Excel file, model activity risks on cost and schedule, and
produce two charts:
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11/10/2019 Monte Carlo with Microsoft Excel - PMPeople - Medium
–There is simply no chance of finishing before the first of March. Considering risks, the
most likely date for delivery of an acceptable product is March 31st. Even that date is not
particularly bankable. You probably don’t want to publish any delivery date before April
15. At least with a later date, you’ll have a better than fifty-fifty chance of making it. If you
want a date you’ll have virtually zero chance of missing, you’ll have to go all the way out to
the first of June.
When he asks you how these useful graphs have been produced, you can answer:
–We’ve used a quantitative risk analysis technique called Monte Carlo method.
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11/10/2019 Monte Carlo with Microsoft Excel - PMPeople - Medium
–I assume you are using some expensive tool for that? I did not authorize such a cost!
Using these numbers, you can simulate a lot of possible results for activity durations
and costs, which you can sum up to compute the total project duration and cost, in
order to represent uncertainty ranges with probability graphs.
In the figure above, you can see, for instance, that point (0.4,0.3) falls inside the
circular sector since 0.4²+0.3²=0.25<=1, whereas the point (0.8,0.8) falls outside
because 0.8²+0.8²=1.28>1.
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11/10/2019 Monte Carlo with Microsoft Excel - PMPeople - Medium
What is the probability of any point (x,y) of the square falls inside the circular sector? If
you divide favorable by possible outcomes, you get a probability of π/4.
If you are proficient in statistics, you will know how to obtain this result algebraically.
You model X and Y as uniform distribution variables U(0,1) and then you calculate that
the probability of the compound variable (X²+Y²) being less or equal 1 is just π/4.
Monte Carlo is a numeric method to get these results. Using Monte Carlo we don’t get
any algebraic expressions, but numbers, the more accurate the higher the number of
simulations.
Let’s see now how to use Monte Carlo to calculate π. You can download here the Excel
file I’ve used.
First you generate enough random points (x,y) with RAND() function, then you count
the amount of them meeting the condition x²+y²<=1, divide this number by the total
and multiply by 4, and you will get a number close to π.
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11/10/2019 Monte Carlo with Microsoft Excel - PMPeople - Medium
And finally, using 30,000 simulations, I’ve got a result 99.97% precise:
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11/10/2019 Monte Carlo with Microsoft Excel - PMPeople - Medium
If the activity has no risk, we can trust single point estimate coming from expert
judgment. You can model the activity with the most likely estimate.
If the activity has low risk –estimation is quite precise except for unexpected
variations due to random factors– you can use a symmetric beta or triangular.
If the activity has a known risk –causes of variances are well known and the
project management team know the activity will be earlier or later if causes
happen– then you can use a asymmetric beta or triangular.
If the activity has an unknown risk –the project management don’t have the
proper knowledge to produce a reliable estimate– you can set a range of possible
values and model the activity as a uniform distribution.
If the activity is a black swan –beyond the expected situation, very low
probability, very high impact– you can manage them as assumptions. With regard
to Monte Carlo analysis, you can model them as no risk activities.
The book uses a case study of a tennis stadium construction project. See the following
table with activity duration estimates.
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11/10/2019 Monte Carlo with Microsoft Excel - PMPeople - Medium
To consider risk, activities are modeled with three points: optimistic, pessimistic and
most likely. In order to choose the type of statistical distribution, we have to consider
the qualitative risk analysis for the activity:
Impact could be modeled according to the distance between optimistic and pessimistic
points.
Using the table data, applying the central limit theorem, you can estimate the project
duration as a normal distribution of mean 53 weeks and standard deviation of 1.83
weeks.
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11/10/2019 Monte Carlo with Microsoft Excel - PMPeople - Medium
Since this is a normal function, we know that there is a 68% probability for the interval
(μ-σ,μ+σ), a 95% probability for the interval (μ-2σ,μ+2σ) and a 99% probability for
the interval (μ-3σ,μ+3σ). So, for our project, we could easily say:
We could also say, for instance, using Excel formula NORMDIST(50,53,1.83,1) = 5%:
The probability of the project being earlier than 50 weeks is just a 5%.
The issue is that, in project management, it is not quite applicable the central limit
theorem, since there are not enough activities, they are not totally independent to each
other, and critical path may change from one simulation to another.
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11/10/2019 Monte Carlo with Microsoft Excel - PMPeople - Medium
Using Monte Carlo simulations, you will get a more precise probability distribution. As
you can see below, it does not look much like a bell curve:
In the lower graph you can see that percentiles 22%, 33% and 93% corresponds,
respectively, to weeks 48, 50 y 60. So you can say this:
There is a probability of 71% (=93%–22%) for the project to finish between weeks 48 and
60, and a 33% of finishing before 50 weeks.
If you click this link you can download the Excel file I’ve created. I encourage you to use
it and share it freely. I thank you in advance for any comments, please.
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11/10/2019 Monte Carlo with Microsoft Excel - PMPeople - Medium
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