Project Ri sk Anal ysi s & Management

PROJECT RISK ANALYSIS AND

MANAGEMENT
A GUIDE BY
THE ASSOCIATION FOR PROJECT MANAGEMENT
(formerly The Association Of Project Managers)
Compi l ed from i nformati on provi ded by members of
the Speci al Interest Group on Ri sk Management
Catri ona Norri s - UMIST
Professor John Perry - The Universi ty of Bi rmingham
Peter Si mon - CPS Project Management
Project Ri sk Anal ysi s & Management
PROJECT RISK
ANALYSIS AND MANAGEMENT
Contents Page
1. Introduction -------------------------------------------------------------------------------------------3
2. What Is Project Risk Analysis And Management?------------------------------------------3
3. What Is Involved-------------------------------------------------------------------------------------3
4. Why Is It Used?---------------------------------------------------------------------------------------4
5. When Should It Be Used and Who Should Do It?-------------------------------------------5
6. How To Do It - Techniques And Methods----------------------------------------------------6
7. What Experience Is Available?-----------------------------------------------------------------10
!
Thi s Gui de may not be reproduced wi thout wri tten permi ssi on of The Associ ati on of Project Managers.
The Associ ati on for Project Management, 85 Oxford Road, Hi gh Wycombe,
Bucki nghamshi re HP11 2DX
March1992, republ i shed January 2000
Thi s mi ni gui de has been expanded, updated and rewri tten as the Project Ri sk Anal ysi s and
Management (PRAM) Gui de edi ted by P Si mon, D Hi l l son and K Newl and, publ i shed by the APM 1997,
ISBN 0953159000.
Project Ri sk Anal ysi s & Management
3
PROJECT RISK ANALYSIS AND
MANAGEMENT
1. Introduction
Thi s Gui de provi des an i ntroducti on to the
processes i nvol ved i n Project Ri sk Anal ysi s and
Management, offeri ng a si mpl e but robust and
practi cal framework to hel p new users get started.
It i s not a defi ni ti ve expl anati on of al l the
techni ques and methods that can be used i n the
process.
Project Ri sk Anal ysi s and Management can
be used on al l projects, whatever the i ndustry or
envi ronment, and whatever the ti mescal e or
budget.
2. What Is Project Risk Analysis And
Management?
Project Ri sk Anal ysi s and Management i s a
process whi ch enabl es the anal ysi s and
management of the ri sks associ ated wi th a
project. Properl y undertaken i t wi l l i ncrease the
l i kel i hood of successful compl eti on of a project to
cost, ti me and performance objecti ves.
Ri sks for whi ch there i s ampl e data can be
assessed stati sti cal l y. However, no two projects
are the same. Often thi ngs go wrong for reasons
uni que to a parti cul ar project, i ndustry or
worki ng envi ronment. Deal i ng wi th ri sks i n
projects i s therefore di fferent from si tuati ons
where there i s suffi ci ent data to adopt an actuari al
approach. Because projects i nvari abl y i nvol ve a
strong techni cal , engi neeri ng, i nnovati ve or
strategi c content a systemati c process has proven
preferabl e to an i ntui ti ve approach. Project Ri sk
Anal ysi s and Management has been devel oped to
meet thi s requi rement.
3. What Is Involved
The fi rst step i s to recogni se that ri sk exi sts
as a consequence of uncertai nty. In any project
there wi l l be ri sks and uncertai nti es of vari ous
types as i l l ustrated by the fol l owi ng exampl es:
the management and fi nancial authority
structure are not yet establ i shed
a the technol ogy i s not yet proven
i ndustri al rel ati ons probl ems seem l i kel y
resources may not be avai l abl e at the
requi red l evel .
Al l uncertai nty produces an exposure to ri sk
whi ch, i n project management terms, may cause a
fai l ure to:
keep wi thi n budget
achi eve the requi red compl eti on date
achi eve the requi red performance objecti ve.
Project Risk Analysis and Management i s a
process desi gned to remove or reduce the ri sks
whi ch threaten the achi evement of project
objecti ves. The next section of this Guide
descri bes the benefi ts whi ch Project Ri sk Anal ysi s
and Management can bri ng to a project and al so
the wi der benefi ts to the organi sati on and i ts
customers. It shoul d be regarded as an i ntegral
part of project or busi ness management and not
just as a set of tool s or techni ques.
The Project Risk Analysis and Management
Process
Experi enced ri sk anal ysts and managers hol d
percepti ons of thi s process whi ch are subtl e and
di verse. In order to si mpl i fy the process thi s
Gui de di vi des the overal l process i nto two
consti tuents or stages:
Ri sk Anal ysi s
Ri sk Management.
Risk Analysis
Thi s stage of the process i s general l y spl i t
i nto two 'sub-stages'; a qual i tati ve anal ysi s 'sub-
stage' that focuses on i denti fi cati on and subjecti ve
assessment of ri sks and a quanti tati ve anal ysi s
'sub-stage' that focuses on an objecti ve assessment
of the ri sks.
QualitativeAnalysis
A Qual i tati ve Anal ysi s al l ows the mai n ri sk
sources or factors to be identified. Thi s can be
done, for exampl e, wi th the ai d of check l i sts,
i ntervi ews or brai nstormi ng sessi ons. Thi s i s
usual l y associ ated wi th some form of assessment
whi ch coul d be the descri pti on of each ri sk and i ts
i mpacts or a subjecti ve l abel l i ng of each ri sk (e.g.
Project Ri sk Anal ysi s & Management
4
hi gh/ l ow) i n terms of both i ts i mpact and i ts
probabi l i ty of occurrence.
A sound ai m i s to i denti fy the key ri sks,
perhaps between fi ve and ten, for each project (or
part-project on l arge projects) whi ch are then
anal ysed and managed i n more detai l .
QuantitativeAnalysis
A Quanti tati ve Anal ysi s often i nvol ves more
sophi sti cated techni ques, usual l y requi ri ng
computer software. To some peopl e thi s i s the
most formal aspect of the whol e process
requi ri ng:
measurement of uncertai nty i n cost and
ti me esti mates
probabi l i sti c combi nati on of i ndi vi dual
uncertai nti es.
Such techni ques can be appl i ed wi th varyi ng
l evel s of effort rangi ng from modest to
extensi vel y thorough. It i s recommended that
new users start sl owl y, perhaps even i gnori ng
thi s 'sub-stage', unti l a cl i mate of acceptabi l i ty has
been devel oped for Project Ri sk Anal ysi s and
Management i n the organi sati on.
An i ni ti al qual i tati ve anal ysi s i s essenti al . It
bri ngs consi derabl e benefi t i n terms of
understandi ng the project and i ts probl ems
i rrespecti ve of whether or not a quanti tati ve
anal ysi s i s carri ed out. It may al so serve to
hi ghl i ght possi bi l i ti es for ri sk 'cl osure' i .e. the
devel opment of a speci fi c pl an to deal wi th a
speci fi c ri sk i ssue.
Experi ence has shown that qual i tati ve
anal ysi s - Identi fyi ng and Assessi ng Ri sks -
usual l y l eads to an i ni ti al , i f si mpl e, l evel of
quanti tati ve anal ysi s. If, for any reason - such as
ti me or resource pressure or cost constrai nts -
both a qual i tati ve and quanti tati ve anal ysi s are
i mpossi bl e, i t i s the qual i tati ve anal ysi s that
shoul d remai n.
It shoul d be noted that procedures for
deci si on maki ng wi l l need to be modi fi ed i f ri sk
anal ysi s i s adopted. An exampl e whi ch i l l ustrates
thi s poi nt i s the sancti on deci si on for cl i ents,
where esti mates of cost and ti me wi l l be
produced i n the form of ranges and associ ated
probabi l i ti es rather than si ngl e val ue fi gures.
Risk Management
Thi s stage of the process i nvol ves the
formulati on of management responses to the
mai n ri sks. Ri sk Management may start duri ng
the qual i tati ve anal ysi s phase as the need to
respond to ri sks may be urgent and the sol uti on
fai rl y obvi ous. Iterati on between the Ri sk
Anal ysi s and Ri sk Management stages i s l i kel y.
Ri sk Management can i nvol ve:
i denti fyi ng preventi ve measures to avoi d a
ri sk or to reduce i ts effect
establ i shi ng conti ngency pl ans to deal wi th
ri sks i f they shoul d occur
i ni ti ati ng further i nvesti gati ons to reduce
uncertai nty through better i nformati on
consi deri ng ri sk transfer to i nsurers
consi deri ng ri sk al l ocati on i n contracts
setti ng conti ngenci es i n cost esti mates, fl oat
i n programmes and tol erances or 'space' i n
performance speci fi cati ons.
Section 6 of thi s Guide considers some of the
techni ques of Project Ri sk Anal ysi s and
Management i n more detai l .
4. Why Is It Used?
There are many reasons for usi ng Project
Ri sk Anal ysi s and Management, but the mai n
reason i s that i t can provi de si gni fi cant benefi ts
far in excess of the cost of performi ng i t.
Benefits
The benefi ts gai ned from usi ng Project Ri sk
Anal ysi s and Management techni ques serve not
onl y the project but al so other parti es such as the
organi sati on and i ts customers. Some exampl es of
the mai n benefi ts are:
an i ncreased understandi ng of the project,
which in turn leads to the formulati on of
more real i sti c pl ans, i n terms of both cost
esti mates and ti mescal es
an i ncreased understandi ng of the ri sks i n a
project and thei r possi bl e i mpact, whi ch
can lead to the mi ni misati on of ri sks for a
party and/ or the al l ocati on of ri sks to the
party best abl e to handl e them
an understandi ng of how ri sks i n a project
can l ead to the use of a more sui tabl e type
of contract
an i ndependent vi ew of the project ri sks
whi ch can hel p to justi fy deci si ons and
enabl e more effi ci ent and effecti ve
management of the ri sks
a knowl edge of the ri sks i n a project whi ch
allows assessment of contingencies that
actual l y refl ect the ri sks and whi ch al so
tends to di scourage the acceptance of
fi nanci al l y unsound projects
Project Ri sk Anal ysi s & Management
5
a contri buti on to the bui l d-up of stati sti cal
information of hi storical ri sks that wi ll
assi st i n better model l i ng of future projects
faci l i tati on of greater, but more rati onal ,
ri sk taki ng, thus i ncreasi ng the benefi ts that
can be gai ned from ri sk taki ng
assi stance i n the di sti ncti on between good
l uck and good management and bad l uck
and bad management.
Who benefits from its use?
an organi sation and its senior management
for whom a knowledge of the ri sks
attached to proposed projects i s i mportant
when consi deri ng the sancti on of capi tal
expendi ture and capi tal budgets
cl i ents, both i nternal and external , as they
are more l i kel y to get what they want,
when they want i t and for a cost they can
afford
project managers who want to i mprove the
qual i ty of thei r work i .e. they want to bri ng
thei r projects i n to cost, on ti me and to the
requi red performance.
What are the costs of using it?
The costs of usi ng Project Ri sk Anal ysi s and
Management techni ques vary accordi ng to the
scope of the work and the commi tment to the
process. Bel ow are some exampl e costs, ti me-
scal es and resource requi rements for carryi ng out
the process.
Cost
The cost of usi ng the process can be as l i ttl e
as the cost of one or two days of a person's ti me
up to a maxi mum of 5-10% of the management
costs of the project, even thi s hi gher cost, as a
percentage of the total project cost, i s rel ati vel y
smal l . It can be argued that the cost i ncurred i s an
i nvestment i f ri sks are i denti fi ed duri ng the
process that may otherwi se have remai ned
uni denti fi ed unti l i t was too l ate to react.
Time
The ti me taken to carry out a ri sk anal ysi s i s
parti al l y dependent upon the avai l abi l i ty of
i nformati on. A detai l ed cost and ti me ri sk
anal ysi s usual l y requi res anywhere from one to
three months dependi ng upon the scal e and
compl exi ty of the project and the extent of
pl anni ng and cost preparati on al ready carri ed
out. However, as i ndi cated above, a useful
anal ysi s can take as l i ttl e as one or two days.
Resources
The mi nimum resource requirement is
obvi ousl y just one person wi thi n a organi sati on
wi th experi ence of usi ng Project Ri sk Anal ysi s
and Management techni ques. However, i f
experti se does not exi st wi thi n the organi sati on i t
can be readi l y acqui red from outsi de consul tants.
It i s l i kel y that once Project Ri sk Anal ysi s and
Management has been i ntroduced to an
organi sati on, i n-house experti se wi l l devel op
rapi dl y.
As stated i n Secti on 3, Project Ri sk Anal ysi s
and Management i s rel evant to al l projects and i s
an i ntegral part of project management. Thi s can
make i t very di ffi cul t to separate the costs of
performi ng i t. Some organi sati ons treat these
costs as an overhead to the organi sati on, and not
to the project.
5. When Should It Be Used and Who
Should Do It?
Project Ri sk Anal ysi s and Management i s a
conti nuous process that can be started at al most
any stage i n the l i fe-cycl e of a project and can be
conti nued unti l the costs of usi ng i t are greater
than the potenti al benefi ts to be gai ned. As ti me
progresses, the effecti veness of usi ng Project Ri sk
Anal ysi s and Management tends to di mi ni sh,
therefore i t i s most benefi ci al to use i t i n the
earl i er stages of project.
There are fi ve poi nts i n a project where
parti cul ar benefi ts can be achi eved by usi ng i t.
Feasibility Study - At thi s stage the project i s
most fl exi bl e enabl i ng changes to be made
whi ch can reduce the ri sks at a rel ati vel y
l ow cost. It can al so hel p i n deci di ng
between vari ous i mpl ementati on opti ons
for the project.
Sanction - The cl i ent can make use of i t to
vi ew the ri sk exposure associ ated wi th the
project and can check that al l possi bl e steps
to reduce or manage the ri sks have been
taken. If a quanti tati ve anal ysi s has been
carri ed out then the cl i ent wi l l be abl e to
understand the 'chance' that he has of
achi evi ng the project objecti ves (cost, ti me
and performance).
Tendering - The contractor can make use of
i t to ensure that al l ri sks have been
i denti fi ed and to hel p hi m set hi s ri sk
conti ngency or check hi s ri sk exposure.
Project Ri sk Anal ysi s & Management
6
Post Tender - The cl i ent can make use of i t to
ensure that al l ri sks have been i denti fi ed by
the contractor and to assess the l i kel i hood
of tendered programmes bei ng achi eved.
At Interval s Duri ng Impl ementati on - It can
hel p to i mprove the l i kel i hood of
compl eti ng the project to cost and ti me-
scal e i f al l ri sks are i denti fi ed and are
correctl y managed as they occur.
Which projects are suitable?
Many experi enced users of Project Ri sk
Anal ysi s and Management woul d say 'any and
al l ' i n answer to thi s questi on, and experi ence
does show that thi s i s the case - the reasons were
stated earl i er i n the Gui de. Al l projects contai n
ri sk and ri sk anal ysi s and management i s an
i ntegral part of project or busi ness management.
Attend any conference or read any l i terature
on ri sk and i t i s cl ear that the most extensi ve
appl i cati ons have occurred on l arge capi tal
projects such as defence, oi l and gas, aerospace
and ci vi l engi neeri ng - these projects have been
the provi ng ground for many of the techni ques.
However the process has been appl i ed to smal l er
constructi on projects such as a water suppl y
rehabi l i tati on project i n West Afri ca and the
proposed constructi on of a gas pi pel i ne across
Hampstead Heath i n London.
In other fi el ds there are exampl es of ri sk
anal ysi s and management appl i ed to i nsurance,
IT projects and software devel opment and
projects for organi sati onal change.
The onl y general gui dance i s that the more
the ri sks or more i nnovati ve the project the
greater wi l l be the benefi ts. On smal l projects, the
budget wi l l probabl y justi fy onl y a l ow l evel of
appl i cati on, perhaps omi tti ng the quanti tati ve
anal ysi s.
What type of project?
It can be used on any type of project, but i t i s
more benefi ci al for some projects than others.
Some exampl es of projects whi ch woul d benefi t
from Project Ri sk Anal ysi s and Management are:
i nnovati ve, new technol ogy projects
projects requi ri ng l arge capi tal outl ay or
i nvestment
fast-track projects
projects whi ch i nterrupt cruci al revenue
streams
unusual agreements (l egal , i nsurance or
contractual )
projects wi th sensi ti ve i ssues
(environment/ rel ocation)
projects wi th stri ngent requi rements
(regul atory/ safety)
projects wi th i mportant
pol i ti cal / economi c/ fi nanci al parameters.
When should it be done?
There are a few ci rcumstances when i t i s
parti cul arl y advi sabl e to use Project Ri sk Anal ysi s
and Management techni ques, these are:
when there are speci fi c targets that must be
met
when there i s an unexpected new
devel opment i n a project
at poi nts of change i n the l i fe-cycl e of a
project.
When shouldn't it be done?
There are no parti cul ar ci rcumstances under
whi ch Project Ri sk Anal ysi s and Management
techni ques shoul d not be used except perhaps for
repeat projects, where such anal yses have al ready
been carri ed out, unl ess, of course, there are
speci fi c di fferences between the projects.
In the presence of uncertai nty, where severe
constrai nts gi ve ri se to si gni fi cant ri sk, the
absence of rel evant data may make a quanti tati ve
assessment not worthwhi l e. However, such
ci rcumstances must never prevent a ri gorous
qual i tati ve anal ysi s bei ng carri ed out.
Who should do it?
Many peopl e advocate the use of an
i ndependent expert or external consul tant to
ensure that they recei ve an unbi ased vi ew,
whereas others suggest that Project Ri sk Anal ysi s
and Management support shoul d be an i nternal
functi on. Opi ni ons di ffer wi del y at thi s stage but
essenti al l y anyone can do i t provi ded
consi derati on i s gi ven to the 'angl e' from whi ch
they are vi ewi ng the project. In any event, the
project management team shoul d be cl osel y
i nvol ved i n the anal yti cal process to ensure
val i di ty of the anal ysi s and al so to al l ow them to
bel i eve i n the resul ts.
6. How To Do It - Techniques And
Methods
As outl i ned i n Secti on 3, Project Ri sk
Anal ysi s and Management can be spl i t i nto i ts
two consti tuents or stages - Ri sk Anal ysi s
(Qual i tati ve and Quanti tati ve) and Ri sk
Management. There i s no one techni que or
method for carryi ng out ei ther stage of the
Project Ri sk Anal ysi s & Management
7
process. Some of the techni ques and methods that
can be empl oyed are detai l ed bel ow.
Qualitative Risk Analysis
The fi rst phase of the qual i tati ve anal ysi s i s
i denti fi cati on. Thi s i s consi dered by some as the
most important el ement of the process si nce once
a ri sk has been i denti fi ed i t i s possi bl e to do
somethi ng about i t. Identi fi cati on can be achi eved
by:
i ntervi ewi ng key members of the project
team
organi si ng brai nstormi ng meeti ngs wi th al l
i nterested parti es
by usi ng the personal experi ence of the ri sk
anal yst
revi ewi ng past corporate experi ence i f
apprai sal records are kept.
Al l of the above methods are greatl y
enhanced by the use of check l i sts whi ch can
ei ther be generi c i n nature i .e. appl i cabl e to any
project or speci fi c to the type of project bei ng
anal ysed.
Once i denti fi ed, the ri sks are then subjected
to an i ni ti al assessment that categori ses the ri sks
i nto hi gh/ l ow probabi l i ty of occurrence and
major/ mi nor i mpact on the project shoul d the
ri sk materi al i se. It i s often advi sabl e to prepare
i ni ti al responses to each i denti fi ed ri sk, especi al l y
i f ri sks are i denti fi ed that requi re urgent
attenti on. The anal ysi s may be termi nated duri ng
thi s phase i f the assessment i mmedi atel y suggests
a way i n whi ch many i denti fi ed ri sks can be
mi ti gated.
It may be necessary to revi si t the
i denti fi cati on phase after the assessment phase to
see i f any consequenti al 'secondary' ri sks can be
i denti fi ed: a secondary ri sk may resul t from a
proposed response to an i ni ti al ri sk and mi ght
therefore l ead to the response bei ng unsuccessful .
The necessi ty of doi ng thi s wi l l l argel y be
dependent on the si ze and/ or compl exi ty of the
project.
Quantitative Risk Analysis
Once al l ri sks have been i denti fi ed, duri ng
the qual i tati ve anal ysi s, i t may be appropri ate to
enter i nto a detai l ed quanti tati ve anal ysi s. Thi s
wi l l enabl e the i mpacts of the ri sks to be
quanti fi ed agai nst the three basi c project success
cri teri a: cost, ti me and performance. Several
techni ques have been devel oped for anal ysi ng the
effect of ri sks on the fi nal cost and ti me-scale of
projects. However, such techni ques do not al ways
readi l y appl y themsel ves to the anal ysi s of
performance objectives.
The mai n techni ques currentl y i n use are:
Sensitivity Analysis, often considered to
be the si mpl est form of ri sk anal ysi s.
Essenti al l y, i t si mpl y determi nes the effect
on the whol e project of changi ng one of i ts
ri sk vari abl es such as del ays i n desi gn or
the cost of materi al s. Its i mportance i s that
it often hi ghlights how the effect of a single
change i n one ri sk vari abl e can produce a
marked di fference i n the project outcome.
In practi ce, a sensi ti vi ty anal ysi s wi l l be
performed for more than one ri sk, perhaps al l
i denti fi ed ri sks, i n order to establ i sh those whi ch
have a potenti al l y hi gh i mpact on the cost or
ti me-scal e of the project. The techni que can al so
be used to address the i mpact of ri sk on the
economi c return of a project. Fi gure 1 shows an
exampl e of a sensi ti vi ty di agram.
Project Ri sk Anal ysi s & Management
8
Sens it i vi t y Di agr am f or a manuf act ur i ng Plant
-100
-50
0
50
100
150
-40% -20% 0% 20% 40%
% Change in Variables
%

C
h
a
n
g
e

i
n

I
R
R
Demand for product Cos t of Raw Materials
Revenue from Product Energy Costs
Figure 1 Sensitivity Diagram for a New Manufacturing Plant
This diagram shows that theproject is very
sensitive, as measured against theinternal rateof
return, to any changes in both thedemand for the
product and therevenuefrom theproduct, however,
changes in energy costs or thecost of raw material
havemuch less impact.
Probabilistic Analysis speci fi es a
probabi l i ty di stri buti on for each ri sk and
then consi ders the effect of ri sks i n
combi nati on. Thi s i s perhaps the most
common method of performi ng a
quanti tati ve ri sk anal ysi s and i s the one
most peopl e consi der, i ncorrectl y, to be
synonymous wi th the whol e Project Ri sk
Anal ysi s and Management process. In fact,
as thi s Gui de i l l ustrates, i t i s but one facet
of that process.
The most common form of probabi l i sti c
anal ysi s uses 'sampl i ng techni ques', usual l y
referred to as 'Monte Carl o Si mul ati on'. Thi s
method rel i es on the random cal cul ati on of val ues
that fal l wi thi n a speci fi ed probabi l i ty di stri buti on
often descri bed by usi ng three esti mates:
mi ni mum or opti mi sti c, mean or most l i kel y and
maxi mum or pessi mi sti c. The overal l outcome for
the project i s deri ved by the combi nati on of
val ues sel ected for each one of the ri sks. The
cal cul ati on i s repeated a number of ti mes,
perhaps between 100 and 1000, to obtai n the
probabi l i ty di stri buti on of the project outcome.
It i s usual to carry out a probabi l i sti c ti me
anal ysi s wi th the ai d of a CPM network to model
the project schedul e. The same method can be
used for probabi l i sti c cost anal ysi s especi al l y
when the cost esti mate can be broken down i nto
the same categori es or acti vi ti es as the schedul e
and when cost ri sks are rel ated to ti me ri sks. If an
i ndependent cost anal ysi s i s undertaken then
It may be appropri ate to use a spreadsheet
method. Fi gure 2 shows an exampl e of a
hi stogram and cumul ati ve curve deri ved from a
probabi l i sti c ti me anal ysi s usi ng a model based
on a CPM network.
Project Ri sk Anal ysi s & Management
9

0
1
2
3
4
5
6
31 Mar 90 30 Apr 90 30 May 90 29 J un 90 29 J ul 90 28 Aug 90
Period Ending
%
F
r
e
q
u
e
n
c
y
0
20
40
60
80
100
120
Based on 1000 trials
Mean =29 J un 90
Standard deviation =25 days
Each bar represents 3 days
%
C
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a
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v
e
An Oilfield Development
Early Finish Histogramfor Activity G44 (First Oil)
Figure 2 Time Probability Histogram and S-curve for a New Oil Field Development
This diagram shows the distribution of finish
dates for the achievement of first oil. It is based on
1000 iterations using Monte Carlo Sampling. The
actual finish date of this particular project was
achieved within 2 days of themean.
Another techni que i s the Controlled Interval
and Memory Method for combi ni ng probabi l i ty
di stri buti ons whi ch provi des an al ternati ve to
Monte Carl o Si mulati on. This techni que can offer
greater preci si on for much l ess computeri sed
effort if ei ther complex CPM networks or
'feedback l oops' are not i nvol ved.

Mill ion
A New Office Building
Project Cost
0%
20%
40%
60%
80%
100%
120%
P
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b
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y

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w
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a

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85% - upper limit 22.1m
15% - lower limit 13.1m 7
0
%

C
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I
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v
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Accuracy Range
+ve -ve
54% - expected cost 17.4m
41% - unadjusted cost 16.1m
Unallocated Provision
Figure 3 Cost Probability S-curve for a New Office Building
This diagram shows the distribution around a
cost estimate for the final, out-turn cost for a new
building. It is based on 1000 iterations using Monte
Carlo Sampling. Thehighlighted figures represent the
unadjusted cost i.e. the sum of all the cost elements
without any risk treatment, theexpected cost derived
from the statistical mean and a suggested accuracy
range. Thedifferencebetween theunadjusted cost and
the expected cost is considered to be an unallocated
provision.
Project Ri sk Anal ysi s & Management
10
Influence Diagrams are a relati vel y new
techni que for ri sk anal ysi s. They provi de a
powerful means of constructi ng model s of
the i ssues i n a project whi ch are subject to
ri sk. As a resul t i nfl uence di agrams are
now used as the user i nterface to a
computer based ri sk model l i ng tool thus
al l owi ng the devel opment of very compl ex
ri sk model s that can be used to anal yse the
cost, ti me and economi c parameters of
projects.
Decision Trees are another graphical
method of structuri ng model s. They bri ng
together the i nformati on needed to make
project deci si ons and show the present
possi bl e courses of acti on and al l future
possi bl e outcomes. Each outcome must be
gi ven a probabi l i ty val ue i ndi cati ng i ts
l i kel i hood of occurrence. Thi s form of ri sk
anal ysi s i s often used i n the cost ri sk
anal ysi s of projects.
Risk Management
Risk management uses the i nformation
col l ected duri ng the ri sk anal ysi s phase to make
deci si ons on how to i mprove the probabi l i ty of
the project achi evi ng i ts cost, ti me and
performance objectives. This i s done by reduci ng
the ri sk where advantageous to do so and
monitori ng and managi ng the ri sk which
remai ns.
The project manager uses the i nformati on
at hi s di sposal to choose between the feasi bl e
responses to each ri sk i denti fi ed duri ng the
qual i tati ve phase. Thi s may i nvol ve amendi ng the
project pl ans to reduce the ri sk e.g. movi ng hi gh
ri sk acti vi ti es off the cri ti cal path, devel opi ng
conti ngency pl ans to al l ow rapi d response i f
certai n ri sks occur or setti ng up moni tori ng
procedures for cri ti cal areas i n order to get earl y
warni ng of ri sks occurri ng.
There are two types of response to a ri sk
immedi ate and conti ngency which can be defi ned
as fol l ows:
immediateresponse: an al terati on to the
project pl an such that the i denti fi ed ri sk i s
mi ti gated or el i mi nated
contingency response: a provi si on i n the
project pl an for a course of acti on that wi l l
onl y be i mpl emented shoul d the adverse
consequences of the identifi ed ri sk
materi al i se.
Responses to ri sks can do one or a
combi nati on of fi ve thi ngs:
remove- ri sks that can be el i mi nated from
the project and therefore no l onger propose
a threat
reduce- ri sks that can be decreased by
taki ng certai n acti ons i mmedi atel y
avoid - ri sks that can be mi ti gated by taki ng
conti ngency acti ons shoul d they occur
transfer - ri sks can be passed on to other
parti es, unfortunatel y thi s does not
normal l y el i mi nate the ri sk i t just makes
someone el se worry about it
acceptance- the benefi ts that can be gai ned
from taki ng the ri sk shoul d be bal anced
agai nst the penal ti es.
The ri sk management phase begi ns
i mmedi atel y the qual i tati ve anal ysi s i s compl ete
and i s then a conti nui ng process through the
compl ete l i fe-cycl e of the project. The i nformati on
gai ned duri ng the quanti tati ve anal ysi s al l ows the
project manager to trade off taki ng acti ons now
agai nst the l i kel i hood and i mpact of ri sk
occurri ng. The project manager may choose to
i mmedi atel y amend hi s overal l ti me and cost pl an
i n order to i ncrease the probabi l i ty of achi evi ng
his ti me and cost objectives.
7. What Experience Is Available?
The majori ty of the methods, techni ques and
processes descri bed i n thi s Gui de have been used
i n a number of i ndustri es si nce the earl y 1970s.
Project Ri sk Anal ysi s and Management has
hi stori cal l y been associ ated wi th very l arge, hi gh
capi tal projects i n speci fi c i ndustri es such as
defence, oi l and gas, aerospace and ci vi l
engi neeri ng. The experi ence gai ned i n these
i ndustri es si nce the 70s has now begun to
di ssemi nate through other industri es such as
i nformati on technol ogy and manufacturi ng.
The number of compani es practi si ng
Project Ri sk Anal ysi s and Management i s
conti nui ng to increase due to the realisati on that
the methods, techni ques and processes i nvol ved
form an i ntegral part of project and busi ness
management. The i ncrease i n i ts use has l ed not
onl y to experti se bei ng gai ned by i ndi vi dual s
wi thi n compani es but the arri val of speci al i st
consultancies that can trai n, advise and carry out
Project Ri sk Anal ysi s and Management for thei r
cl i ents. Project Ri sk Anal ysi s and Management
has al so establ i shed i tsel f as an i mportant el ement
i n the syl l abuses of many uni versi ti es and hi gher
educati onal establ i shments.
Project Ri sk Anal ysi s & Management
11
!
Further i nformati on regardi ng computer
software avai l abl e to assi st i n performi ng
quanti tati ve ri sk anal ysi s and references to
further i nformati on, papers and publ i cati ons can
be obtai ned from:
The Secretary
The Associ ati on of Project Managers
85 Oxford Road, Hi gh Wycombe
Bucki nghamshi re HP11 2DX