A Quantitative Risk Assessment (QRA) in project management is the process of expressing the impact of risk on the project in numerical terms. This information is frequently used to determine the cost and time contingencies of the project, which provide more accurate information for risk management and planning purposes. Several methods of contingency determination, which are based on the results of a QRA, can be used.
The risk of a wrong decision is preferable to the terror of indecision - Maimonides
A QRA is a numerical assessment of project risk. It is formally defined as risk analysis used to estimate a numerical value (usually probabilistic) on risk outcomes wherein risk probabilities of occurrence and impact values are used directly rather than expressing severity narratively or though ranking as in qualitative methods.
The aim of a QRA is to determine time and cost values that represent risk, usually expressed as contingency
There are three types of risk that are considered in a QRA, namely; estimation accuracy, project specific risk and systemic risks. Risks from all three of these areas may impact the project’s time and/or cost.
Estimation accuracy risk as a result of:
- Level of project definition
- Method of measurement
- Method of pricing
Project Risk: Project specific risks related to the intrinsic characteristics of the project. This is captured in the risk register.
Systemic Risk: Risk associated with system/process/organisation, e.g. EPCM experience, stakeholder alignment, management, decision-making policies, project complexity, labour intensity, project location etc.
The impact of risk is the sum of all three types of risk.
The variances in cost and time that result from the three risk types are simulated with a Monte Carlo simulation. This simulation produces a risk probability distribution which is used to determine suitable contingency values.
QRAs are ideal for clients who seek to understand the degree of certainty of time and cost parameters associated with a project, program, or even portfolio. Risks that are formulated through the qualitative risk analysis process can often not be completely mitigated and always retain a degree of uncertainty. A QRA enables decision-makers to make informed decisions about the probability of achieving cost and time objectives and commensurate with their risk appetite.
A client stands to benefit from a QRA because it supports informed decision-making in terms of a project`s risk profile versus competing projects and informs contingency and management reserve allocations. Another benefit of a QRA is that the detailed report indicates areas of concern within the CAPEX, schedule and OPEX with recommendations of what changes should be applied to improve the project`s profile.
A QRA typically considers cost estimates for both capital and operational expenditure, i.e. CAPEX and OPEX; as well as time estimates expressed in the project schedule.
CAPEX Estimate: The QRA informs the cost contingency that should be provided to cater for the uncertainty of completing the project within its defined budget.
Time estimate: The QRA informs the schedule contingency that should be provided to cater for the uncertainty of completing the project within its defined timeframe.
OPEX Estimate: The QRA determines the variability in the OPEX estimate which should be used to test the sensitivity of the projects financial feasibility model.
At the end of the QRA process, the results are applied to the project business case to confirm that the project is still viable if the agreed contingencies are applied.
Inputs to the QRA are; the project risk register, the CAPEX and OPEX estimates, the project schedule, and the project’s Work Breakdown Structure (WBS). The primary output is a QRA report, which could, in turn, necessitate another iteration of the process, including refined QRA input parameters.