Reason and Need for Quantitative Risk Assessments
Quantitative Risk Management in project management is the process of converting the impact of risk on the project into numerical terms. This numerical 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 Quantitative Risk Assessment, can be used.
Overview of Quantitative Risk Assessments
Qualitative Risk Assessment
Qualitative Risk Assessment is a non-numerical assessment of project risk. This assessment involves assessing risks in terms of their probability and impact. The probability and impact are often rated on a scale of 1 to 5, and usually have a supporting description for each score.
The Qualitative Assessment gives a subjective view of the project risk, since the probability and impact scores that are assigned to a project depend on the context, experience, and interests of the person doing the assessment.
“The risk of a wrong decision is preferable to the terror of indecision.” – Maimonides
Quantitative Risk Assessment
A Quantitative Risk Assessment (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 by ranking as in qualitative methods.
The aim of a QRA is to determine time and cost values that represent risk, this is usually referred to as contingency. This is typically done using a Monte Carlo simulation, but other approaches are sometimes more appropriate.
There are three sources of risk that are considered in a QRA, namely; estimation accuracy, project risk, and systemic risks. Risks from all three of these areas may impact on the project’s time and/or cost.
Project specific risks related to the intrinsic characteristics of the project. Captured in the risk register.
Risk associated with system/process/organisation, e.g. EPCM experience, stakeholder alignment, management, decision-making policies, project complexity, labour intensity, project location etc.
Estimation accuracy risk as a result of:
- Level of project definition
- Method of measurement
- Method of pricing
How Quantitative Risk Assessments are Conducted
The main building blocks of ProjectLink’s QRA process is illustrated below. Three types of QRAs can be done for projects.
Cost Estimate: QRA determines the cost contingency that should be provided to cater for risks that could cause the project not to be completed within the estimated budget.
Time estimate: QRA determines the schedule contingency that should be provided to cater for risks that could affect the on time delivery of the project.
Operational cost: QRA determines the contingency that should be provided for to ensure that the operational cost of the project caters for risks associated with the operation of the project’s product.
ProjectLink’s QRA process can be applied to any combination of these risk assessments.
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.