PMI RMP – PERFORM QUANTITATIVE RISK ANALYSIS QUIZ part 1

1. INTRODUCTION

Hi and welcome back again to a new process that perform quantitative risk analysis. It’s the fourth process in the risk management knowledge area. Now, we were done with the risk management planning as the first process and we developed the risk management plan. Then we identified all the project risks, then we performed the qualitative analysis. It was the first filter or it was the first analysis process. Now it’s designed to quantitatively analyze our project risks listed in the rest register. So it’s the process of numerically analyzing the combined effect of the identified individual project risks and other sources of uncertainty on overall project objectives.

So the key word of the quantitative risk analysis process is the numerical analysis. Performing qualitative risk analysis was subjective. While performing quantitative risk analysis is an objective process with a numerical basis, the key benefit of the quantitative risk analysis process is that it quantifies overall project exposure. The project risk exposure, it’s a figure that will represent the uncertainty on the project and it can also provide additional quantitative risk information to support risk response planning. This process is not required for every project, but where it is used, it’s performed throughout the project. So this is an important concept.

I faced one question in the exam about this concept. You need to know that the only process out of the seven processes which we can skip is the performing quantitative risk analysis process. It’s not necessary for all the projects. This will depend on the complexity and the degree of risk on the project. More efforts and time should be spent on the performing quantitative risk analysis process for complex projects and complex decisions, while less time should be spent for small projects and less important projects. Now, the size of the efforts should be decided in the risk management planning process and either we are going to perform the quantitative analysis on this project or not.

This decision will be made in the planned risk management process. The results of the quantitative risk analysis can be used to evaluate the likelihood of success in achieving project objectives and to estimate the contingency reserves. The results of this process will help you know exactly what’s the percentage of completing the project on a specific date or on completing the project on a specific budget. Also, this process will help us find out the exactly required contingency reserves to deal with the risks on the project. During the plant risk management process, the benefits of the quantitative risk analysis should be weighted against the effort required to ensure that the additional insight and value justify the additional efforts.

As I told you, this decision was made in the plant risk management process that perform a quantitative risk analysis process provides a numerical estimate of the overall effect of risk on the objectives of the project. Based on the current plans and information, we will have a numerical figure of the overall risk exposure on the project. Here is a high level comparison between the qualitative and the quantitative risk analysis. Performing qualitative risk analysis addresses the individual project risks. While in this process we are going to address the overall project risk. In the qualitative analysis, we did a subjective analysis. Here we are going to do a numerical or an objective analysis.

In the qualitative analysis, we calculated the risk score. In this process, we are going to calculate the expected monetary value, the EMV. We depended on the Pi matrix, the probability impact matrix. In this process we will be depending on a math formula and the performing qualitative risk analysis is necessary and required for all types of projects. While this process depends on the project priority, this is the high level comparison between the qualitative and the quantitative risk analysis processes. Now, the implementation of the overall risk analysis using quantitative methods requires, first of all, complete and accurate representation of the project objectives built up from individual project elements.

This is first of all you need also the identifying risks on individual project elements. Individual project elements like the project objectives, the schedule activities, the budget, or the line item cost at the level of detail that lends itself to specific assessment of individual risks, including general risks that have a broader effect than individual project elements. Applying quantitative methods that incorporate multiple risks in determining the overall impact on the overall project objective the results of the quantitative analysis will be compared to the project plan to give the senior management an estimate of the overall project risk and will answer few important questions.

These questions are very important for the senior management. First of all, what’s the exact probability of meeting the project objectives? How much contingency reserves is needed to provide the organization with the level of certainty it requires based upon its risk tolerance, that contingency reserves are something important to deal with the identified project risk. At the end of this section, you will be able to determine the exact contingency reserves required for the project. What are those parts of the project such as line item costs or schedule activities, which contribute the most risk when all risks are considered, and what are the individual risks that contribute the most overall project risk.

Now, what are the specific objectives of the performing quantitative risk analysis process? First of all, you will decide which risks warrant a response. What are the list of risks that you will move to the next process plan responses objectively evaluate the probability and impact of each risk. You will have a numerical and objective analysis and numerical figure for the probability and the impact of each identified risk. Determine the level of risk the project currently has and whether that level of risk is acceptable for the expected gain from the product of the project.

So it’s like a make go no go decision determine how much the project will cost and how long it will take if no further risk management actions are taken to reduce the project risk. This is how you are going to convince your senior management with the value of the risk management efforts you are going to spend on the project. Now, what are the critical success factors of the performing quantitative risk analysis process? First of all, the inputs of this process which depend on the prior risk identification and qualitative risk analysis. Reference to prioritized list of identified risks ensures that the performing quantitative risk analysis process will consider all significant risks when analyzing their effects quantitatively.

So the efforts and the results we are going to do as a part of the quantitative risk analysis process will depend on the prior risk identification in the identifier risks process and the qualitative analysis and the list of prioritized project risks as an output of the previous process, you need to use an appropriate project model. An appropriate model of the project should be used as the basis for quantitative risk analysis. Include the project schedule, cost estimates, decision tree and other project models. All the possible models you can use in this process will be explained for you in the coming lectures.

Commitment to collecting high quality risk data Accurate data can be collected by expert interviews, press workshops, expert judgment collection of risk data requires resources and time as well as senior management support and bias data. Success of risk data requires the ability to recognize when biases occur and these biases need to be removed and combating that bias or developing into other unbiased sources of data as per the qualitative risk analysis as well, we need to reduce any bias available on the risk data. Overall project risk derives from individual risks. The methodology of the quantitative risk analysis is based on deriving the overall project risk from the individual risk.

This is how we are going to find out the risk exposure representing the overall project risk based on the individual risks. The risks are specified to a level of detail, tasks or line time costs and incorporated into the model of the project to calculate effects on objectives such as schedule or course for the entire project. By combining those risks interrelationships between the project risks in quantitative analysis, you should give attention that the individual risks in the project model are related to each other, like having a root cause of several risks and therefore they are likely to occur together. So you need to give an attention to the relationships and the connectivity between the individual project risks. Now, here are the ITTOs, the input stools and techniques and outputs.

We are going to use the project management plan with the risk management plan specifically. In addition to the three performance baselines, few project documents like the assumption log cost estimates, basis of estimates, cost forecast, duration estimates, milestone lists, resources, requirements, risk register and report in addition to the scheduled forecast for the tools and techniques, we have a lot of important tools and techniques used in this process. Like the data analysis techniques, especially the Monte Carlo simulation, decision tree analysis, sensitivity analysis in addition to the representation of uncertainty. And the only output will be few updates on the risk report. This is all for the introduction lecture. Thank you so much. I will see you the following ledge.

2. INPUTS

Hi and we’ll come back again. Now, what are the inputs? What are the documents we need to have before we start the process of quantitative risk analysis? For sure, we’ll be starting with a project management plan. We are going to need four components of this plan. First of all, the risk management plan. As I explained in the previous lecture, the efforts we are going to spend and whether we are going to perform this process or not was documented in the plan risk management process. So it’s now the time to review this risk management plan which specifies whether this process is required for the project or not. It also details the resources of analysis.

What are the resources I’m going to use for the quantitative risk analysis process? We will need the three performance baselines, the scope baseline, the schedule baseline and the cost baseline. Each of them will describe the starting point for which the effect of project risks are evaluated in matter of scope, in matter of schedule, and in matter of cost. The second input will be the project documents. We will need the assumption log where assumptions may form input to the quantitative risk analysis process if they are assessed as posing a risk to the project objectives. You will need also the basis of estimates.

This may include information on the estimator purpose, classification, assumed accuracy, methodology and source actually from the name of this document. The basis of estimates. The basis of estimates are an output of the estimate costs process and the estimate durations process. We have the basis of estimates for the cost and the basis of estimates for the duration. The cost estimate that provides starting point from which cost variability is evaluated. The cost forecasts forecasts such as project estimate to complete, estimate at completion and variant at completion may be compared to the results of the quantitative risk analysis associated with achieving those targets.

All these cost forecasts are prepared in the control cost process. The formulas of the estimate to complete the estimate at completion. The variance accomplished are important for the PMI Rmp exam. Therefore, I’m going to explain these concepts in the math section of this course. For now, you need to know that these cost forecasts are an input to the quantitative risk analysis process. Duration Estimates whatever applies on the cost will apply on the duration, so the duration estimates will be an input as well. It provides starting point from which schedule variability is evaluated.

The milestone list significant events in the project define the schedule targets against which the results of the process are compared.The milestone is a significant event on the project schedule and the milestone list that documents all the milestones are an input to this process. The resources requirement that provides starting point from which variability is evaluated. The risk register is the most important input contains details on all the identified individual project risks. The risk report that describes the sources of the overall project risk status. The schedule forecasts forecast may be compared to the results of this process.

To determine the confidence level associated with achieving these targets, I’m going to explain also the confidence level in the Monte Carlo simulation lecture of this section. We will need also the enterprise environmental factors and the organizational process assets. Now these are the four inputs of the quantitative risk analysis process. Before we move to the tools and techniques, I just want to give you a brief about how to determine the probability and impact in numbers. If there is a risk which you want to assign a probability of 70% or 40% from where I’m going to get this number to make decisions based on 100% objective data, you would need to have a perfect understanding of the situation, the risk situation and complete information around this risk.

Some of the most commonly ways to quantitatively come up with the probabilities and impacts of the identified risks. First of all, you can just guess it as a percentage for the probability or a dollar or time impact. Using subjective information by experience, you can just guess that the probability of this risk is 50%. For example, if this risk occurs, there will be an impact of ten days delay. We will pay more $5,000. It can be only a guess. Calculate the actual cost and or the schedule impact. These calculations can be applied to impact but never to probability. There is no way to calculate the probability of risk.

You can calculate the impact if you assume or if you imagine that this risk really occurred, what will be the exact impact? So impact can be calculated, but the probability will still, I guess, use historical records from similar previous projects on the organization for the same risks identified. Or you can use the Delphi technique. The Delphi technique which I explained in the identify risks process. You can make use of the expert opinion and the expert judgment in reaching consensus about probability and impact. You can do it only for high priority risks. Here are the four common ways of defining the probability and the impact of any individual risk on an objective basis. Figures, numbers so this is all for the inputs. Thank you so much, shall see you at the next lecture.