Join Bob McGannon for an in-depth discussion in this video Performing quantitative risk analysis, part of Project Management Foundations: Risk.
Project risks can be like ghosts, they can haunt you if you don't address them. Constantly waiting to catch you when you're distracted, risks need your attention before they cause chaos on your project. So, how do you know what risks to address and when you need to purge them from your project? First, after you've performed a qualitative analysis, you then conduct a quantitative risk analysis on your most substantial risks. Quantitative Analysis is the process that guides you on how much you can spend to address a risk.
For example, you don't want to spend 10,000 dollars to address a risk that will cost you 5,000 dollars. I want to share with you a few steps that you can take that will help you insure you're addressing the right risks on your project. The first step is to look more closely at the probability of each risk occurring. Because we're looking for a more refined estimate in this quantitative analysis stage, I would assign a probability in increments of 10. So ten percent, twenty percent and so forth.
The second step is to estimate the cost to your project, or your organization, if a risk came to fruition. The dollar values you choose to estimate the cost would depend upon the overall budget of your project. If you were managing a project whose total budget is 100,000 dollars or less, then I would estimate the cost in increments of 5,000 dollars. Half a million or less, then I would use estimates in increments of ten thousand dollars. For one million or more of total project budget, I would use increments of 50,000 dollars.
If you're managing multi-million dollar projects, then you might want to conduct more detailed approaches to estimate the impact of risks. The third step, is to multiply your estimates for the probability and cost impact and sort the answers so you have a guide to determine what your most important risks are that you should address. For example, if Risk A has a probability of occurring of 70 percent and an impact of 10,000 dollars, the resulting answer would be 70 percent of 10,000 dollars, which is 7,000 dollars.
If Risk B had a probability of occurring of 30 percent but a cost impact of 150,000 dollars, the resulting importance ranking would be 30 percent of 150,000 dollars or 45,000 dollars. This method suggests Risk B be addressed before Risk A. Remember, this is only a guide. You should look at each of your projects risks to determine what makes sense. The last step, is to take your most important risks and ask "If I was going to "address this risk, how much would that cost?" You certainly should spend an appropriate amount of money to mitigate a risk that is vital to your projects success.
There could potentially be a number of ways to address a risk however. The greater the potential impact, the more analysis you may want to perform to investigate alternatives to relieve your project of the risk. The thing you should remember, is that quantitative analysis can be a bit of a balancing act. You want to dedicate enough time so that you get a thorough analysis but not too much time so you get bogged down with your estimates. Allocate your time based on the potential impact of each risk.
This will give you the information you need and let you get on with the job of managing your risks. Performing a quantitative risk analysis helps you ensure that you have control over the elements that can adversely impact your project. When you have those adverse elements under control, you are well on your way to ensuring your project can be delivered with integrity.
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- Incorporating risk management into your project
- Identifying risk
- Categorizing risks
- Performing qualitative and quantitative risk analysis
- Building a risk-response plan
- Deciding when to execute a risk-response plan<br><br>
- The PMI Registered Education Provider logo is a registered mark of the Project Management Institute, Inc.