Project Risk Analysis

Project Risk Analysis: Quantification and Qualification of Risks

This article describes the qualitative and quantitative approaches to risk analysis on a project.

Definition of the Risk Analysis Process

When it come to analyzing risks, the project team needs to consider both probability and impact. It is important to developing a risk profile for the project in which risks are prioritized for immediate attention.

Risk quantification is performed whenever:

  • A new risk is identified;
  • An existing risk changes;
  • Influential factors change;
  • New information surfaces;
  • The customer proposes a change;
  • Market conditions change; and
  • Significant personnel leave the project.

In order to quantify risks the project team or project estimator should know stakeholder risk tolerance levels, the sources of risk and the actual potential risk events. The team must also be aware of the cost and duration estimates.

Describe the Characteristics of a Quantitative Approach and a Qualitative Approach

The quantitative approach relies on the use of numeric value. It uses objective data to determine values and requires an understanding of probability theory. The level of uncertainty is removed (or at least greatly reduced) due to historical data that must be provided. Using the following as a simple example:

  • If all the members of the project team state that the probability of a risk event occurring is 50%, then that risk probability is listed as 50%.
  • Suppose, however, the members are in disagreement, say Mary thinks it is 50%, Joe thinks it is 40% and San thinks it is 30%. Given that Mary has more experience, the project estimator can decided to assign twice as much credence to Mary and calculate the weighted average probability as: [(2 × 50%) + 40% + 30%] ÷ 4 = 42.5%

There are more complex mathematical and statistical methods used to quantify risks. However, these methods are used when there is very little experience on the project team and are not part of the scope for this article.

The qualitative approach on the other hand, uses subjective values such as High Risk, Medium Risk or Low Risk. It requires common understanding of the team’s preferred ordinal ranking system and is less precise than the quantitative approach. It relies more on experience and is an effective way of prioritizing risk.

In developing an appropriate quantitative or qualitative risk analysis approach for a project, many project teams use the qualitative approach first to filter out the significant risks. The team then assesses the impact of the risk event. Some areas of possible impact on the project are cost, schedule, quality, resources and customer satisfaction.

The values (high, medium or low) are given for every impact of every risk. This approach determines which risks are significant. The qualitative approach is then used to feed to quantitative approach. At this point, the project team performs a quantitative analysis on the significant risks.

Guidelines for Decision Making

The project team needs to review all assumptions used to develop the probability estimate for the risk event. The team should:

  • Determine the source of the data;
  • Validate the age of the data;
  • Review the adjustments made to the data; and
  • Ensure that the method used corresponded to the right approach with the correct data.

Individuals who have experience in a certain area should be consulted. The team may also use a single opinion such as the Delphi Technique.

Remember that risks can interact in unanticipated ways. A single risk even can cause multiple effects. Also, opportunities for one activity may be a threat to another.

It is prudent to be objective and not have any preconceived ideas. Avoid biased probability judgments and use the conservative estimates. Do not take the risk if the outcome can be changed with slight adjustments or if there are any doubts. Remember to have a contingency plan. When sorting and prioritizing risk, compare risks of similar values.

Results of Risk Quantification and Qualification Analysis

  • The project team knows the likelihood of something happening;
  • The team knows the amount at stake;
  • The team has a sense of what is important;
  • The team knows which opportunities to pursue;
  • The team knows to which threats they must respond;
  • The team knows which opportunities to ignore and which threats to accept.

Remember that with risk analysis it is improtant to determine the type of data that is available, whether quantitative or qualitative. Develop an appropriate risk analysis method to ensure as much consistency as possible in the process. Define any qualitative assessment approach within the context of the project’s cost and schedule.

The project team should define as many areas of impact as possible for each significant (primary list) risk event. The entire team should be involved in the risk analysis process. Even risks that are not so significant risks (those on the secondary risk list) should be prioritized in order to identify potential high risks.