Adding Quantitative Risk Analysis to your Swiss Army knife

John C. Goodpasture Managing Principal

Square Peg Consulting

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Schedule: Your Swiss Army Knife

Calendar Deliverables Tasks Work Breakdown of scope Project Logic Resource plan Margin of Risk [slack]

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Whats missing?
Not much Quantitative risk analysis

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Project Context
Projects are the result of business investment decisions
Investors seek returns commensurate with risk and resources committed Public sector, private sector, nonprofits Monetary or mission-success returns
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Project Managers mission: Deliver the scope, taking measured risks to do so

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Balancing the Project

Investor
Business driven outcomes Deterministic, limited, resources Risk proportional to expected reward Unknowing of implementation details

Project Manager
Charter specified outcomes Resources estimates with variation Risk driven by internal & external events and conditions Details drive risk assessments and resource estimates

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Project Equation: Resources committed = Resources Estimated + Project Risks

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Risk balances Value with Capacity

Project Value from the Top Down Project Estimate from the Bottom Up

Risk Investors Resource Commitment

Scope Time Resources

Projects Employment of Investment

Managements Expected Return on Investment

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Managing risk
All plans have uncertainties, and thus outcomes are at risk Probabilities and statistics are important data to understand and deal with uncertainties Information provides insight for problem avoidance
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Why apply risk analysis to schedules?

Determine the likelihood of overrunning the schedule Find architectural weakness in the schedule Estimate risk needed to balance investor commitment

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Quantitative Methods
Statistics and Probabilities are the main tools Important equations and most useful distributions are found in the PMBOK
Triangular & Beta distributions simulate many project situations Asymmetry is key to real world estimates

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The Math of Distributions

Averages of independent distributions can be added Variances of independent distributions can be added Most Likelys can not be added
CPM dates are deterministic, but if taken from distributions, they should not be most likelys

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Three Basic Components of Schedules

Activity duration risk Parallel Paths: convergence risk

Path duration risk

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Managing Long Task Duration Risk

Baseline Long task 1/1 Path 1.0: 60 work days 3/25 CPM Date
1.2 1.3

Replanned 1.1 short task 1/1 1/21

3/15 2/12
1.4

3/25

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Variance improved by 1/N

Managing D uration Risk Work Breakdow n Triangle Probability Distribution of Duration Structure of Scheduled Minimum Most Maximum Activities in Days [-10% ] Likely [+30% ] Average WBS Activity 1.0 54 60 78 (Baseline) 64.00 Variance Standard (DaysDeviation squared) (D ays) 26.00 5.10

Baseline restructured into four subtasks and a summ ary task

WBS WBS WBS WBS

Activity Activity Activity Activity

1.1 1.2 1.3 1.4

13.5 13.5 18 9

15 15 20 10

19.5 19.5 26 13

16.00 16.00 21.33 10.67

1.63 1.63 2.89 0.72

1.27 1.27 1.70 0.85

WBS Activity 1.0 Summary (New B aseline)

Distribution Unknown

64.00
No change from Baseline

6.86
74% improved from Baseline

2.62
49% improved from Baseline

Average = [min + m ax + most likely]/3 Variance = [[max-m in][max-min] + [most likely - min][most likely - max]]/18 Standard Deviation = sq root [Variance]

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Applying the Math

Average may not improve with task subdivision
Sum of the Averages, 64 days, is the average of the Summary task

Variance is reduced by subdividing tasks into independent sub-tasks

Variances of independent tasks add

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Monte Carlo Simulation

Automates the tedium of calculations Runs the project schedule many times, independently
Each run uses the probability distribution to determine a duration for each task, runby-run

Result is a distribution of outcomes

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1/1
1.1

60 work days
1.2

3/15
1.3

1/21

2/12

1.4

3/25
results Calculated 2.62, Simulation 2.4
Date 3/31/99 3/31/99 4/1/99 4/1/99 4/1/99 4/2/99 4/2/99 4/5/99 4/6/99 4/9/99

Date: 3/9/99 10:30:27 PM Number of Samples: 1000 Unique ID: 6 Name: Task 1.4
170 153 136 119 102 85 68 51 34 17 3/23/99 3/31/99 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 4/9/99

Completion Std Deviation: 2.4d 95% Confidence Interval: 0.1d Each bar represents 1d.

Completion Probability Table Prob 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45 0.50 Date 3/25/99 3/25/99 3/26/99 3/26/99 3/29/99 3/29/99 3/29/99 3/30/99 3/30/99 3/30/99 Prob 0.55 0.60 0.65 0.70 0.75 0.80 0.85 0.90 0.95 1.00

Completion Date

Monte Carlo Simulation proves the calculations

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Cumulative Probability

Sample Count

1/1
1.1

60 work days
1.2

3/15
1.3

1/21

2/12

1.4

3/25

Date: 3/9/99 10:30:27 PM Cumulative Number of Samples: 1000 Unique ID: 6 Probability Name: Task 1.4
170 153 136 119 102 85 68 51 34 17 3/23/99 3/31/99 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 4/9/99

95% Confidence Interval: 0.1d Probability of 3/25 = Each bar represents 1d. 0.1 or less Completion Probability Table Prob 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45 0.50 Date 3/25/99 3/25/99 3/26/99 3/26/99 3/29/99 3/29/99 3/29/99 3/30/99 3/30/99 3/30/99 Prob 0.55 0.60 0.65 0.70 0.75 0.80 0.85 0.90 0.95 1.00 Date 3/31/99 3/31/99 4/1/99 4/1/99 4/1/99 4/2/99 4/2/99 4/5/99 4/6/99 4/9/99

Completion Std Deviation: 2.4d

Completion Date

3/25 is 5% probable
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Cumulative Probability

Sample Count

More Schedule Math

Joint Probabilities describes the probability of occurrence two or more independent events
Joint Probability is the product of the individual probabilities Important tool for schedule analysis of joining or merging tasks

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Joining tasks have Merge Bias

Cumulative Probability Task 1 Task 2 Task 1 & 2 P2 P3=P1*P2 D1 Date D2

P1

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Task 1 & 2 at Task 1& 2 at Date D2 Date D1 with with cum probability cum P2 probability P3

1/1
1.1

60 work days
1.2

3/15
1.3

1/21

2/12

1.4

3/25

Date: 3/9/99 10:30:27 PM Number of Samples: 1000 Unique ID: 6 Name: Task 1.4
170 153 136 119 102 85 68 51 34 17 3/23/99 3/31/99 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 4/9/99

95% Confidence Interval: 0.1d Probability of 3/30 = Each bar represents 1d. 0.5 or less Completion Probability Table Prob 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45 0.50 Date 3/25/99 3/25/99 3/26/99 3/26/99 3/29/99 3/29/99 3/29/99 3/30/99 3/30/99 3/30/99 Prob 0.55 0.60 0.65 0.70 0.75 0.80 0.85 0.90 0.95 1.00 Date 3/31/99 3/31/99 4/1/99 4/1/99 4/1/99 4/2/99 4/2/99 4/5/99 4/6/99 4/9/99

Completion Std Deviation: 2.4d

Completion Date

3/30 is the 50% probable date for the milestone

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Cumulative Probability

Sample Count

1/21 1/1 1/21 2/12

Date: 3/8/99 9:31:06 PM Number of Samples: 2000 Unique ID: 12 Name: Finish Milestone
380 342 304

3/15 2/12 3/15 3/25 3/25

Project 2: 60 work days 2 parallel 4-task paths

ProbabilityInterval: 0.1d = 0.5 * 0.5 = 0.25 or 95% Confidence of 3/30 Each bar represents 1d. less
1.0 0.9

Completion Std Deviation: 2.0d

Completion Probability Table

Sample Count

266 228 190 152 114 76 38 3/24/99 4/1/99 4/12/99

0.7 0.6 0.5 0.4 0.3 0.2 0.1

Completion Date

Parallel Paths cause shift right bias

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Cumulative Probability

0.8

Prob 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45 0.50

Date 3/29/99 3/29/99 3/30/99 3/30/99 3/30/99 3/31/99 3/31/99 3/31/99 3/31/99 4/1/99

Prob 0.55 0.60 0.65 0.70 0.75 0.80 0.85 0.90 0.95 1.00

Date 4/1/99 4/1/99 4/2/99 4/2/99 4/2/99 4/2/99 4/5/99 4/5/99 4/6/99 4/12/99

Whats been learned?

Quantitative analysis can determine the likelihood of overrunning the schedule Architectural weaknesses in the schedule are revealed and quantified Risks needed to balance investor commitment can be estimated

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Questions?
John Goodpasture
Square Peg Consulting

info@sqpegconsulting.com

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