Probabilistic Analysis of the Project

In the previous section we took a detailed look at the Quantitative Risk Analysis process, its inputs and tools. As we saw in the previous chapter, the output of the process is a series of updates to the Risk Register and the first update in the list is “Probabilistic Analysis of the Project” which is the topic of our discussion in this chapter. 

The focus or purpose of this update is to identify the Probabilities relating to the Project as a whole. 

How probable are we to achieve our Project Schedule? How probable are we to complete the project within budget? These are some of the probabilities that we aim at identifying and updating the Risk Register during this step. Once our quantitative analysis is complete, we should be in a position to show possible completion dates and costs that are associated with our Project, along with the confidence levels with which we predict the aforementioned information. 

In all practical situations, by the time you start your quantitative analysis, your projects schedule would already be ready or would in its final stages of finalization. So, based on the risks that could affect our project, we will try to figure out if our schedule is realistic. We try to figure out if it takes into account the cost limitations as well as any other risk that could affect it. 

The biggest problem in most failed project is either Unrealistic Schedule or Unrealistic Budget. Many PMs miss out this part and pay a dear price towards the end of the project, where they are forced to see their project sink. The whole purpose of risk management is to minimize this kind of a scenario. 

The PMBOK guide says that, the result of this kind of analysis is typically displayed as a Cumulative Distribution. These distributions are then used along with Stakeholder Risk Tolerances to allow for the quantification of Cost and Contingency Reserves. As with any value that is calculated by us, these reserves must be appropriate and realistic. 

Trivia: 

Do you remember where these Contingency Reserves are developed??? 

If you haven’t done your PMP Certification already you may not know the answer. But, nonetheless, if you are already PMP Certified, do you remember??? 

Plan Risk Responses is the process where we calculate these contingency reserves.

Contingency Reserves are extremely important for any project because, whenever a project overruns its budget or schedule, the Project Manager may need to take corrective action and this would involve some additional unplanned expenses (both time and effort) which may not be possible if appropriate reserves aren’t available. The presence of proper contingency reserves can help both the Project and the Project Manager try to achieve the project goals in case of an unfortunate event that threw the whole project off-track. 

In General – After Quantitative Analysis, we must remember that: 

• Experts are an important source of Risk Related information 
• Expert Judgment is important in quantifying risks 
• Often information from experts is expressed as a probability distribution and it forms the basis to the whole risk analysis process 
• It is always a good idea to document all the information obtained from experts because, everyone must know how the estimates and values were derived. This adds a lot of credibility to the information
• Three Point Estimates are frequently used to arrive at overall project estimates
• Remember three point estimates? We use the Optimistic, Most Likely and Pessimistic values to arrive at an estimate. Here these 3 numbers are given to us by experts 
• Majority of the output information is displayed using probability distributions
• Based on the distribution we intend on using, we must determine and prepare the information that is required to come up with that report.
• All information we used/considered must be properly documented in the Risk Register 

Probability of Achieving Cost and Time Objectives

In this process, we are going to quantify the probability of achieving the cost and time objectives of our project.

This comes about by using all of the tools and techniques that are used by the Quantitative Analysis process. It requires a thorough understanding of the current project’s objectives as well as a thorough knowledge/understanding of all the risks. Our focus here is to find out the probability of achieving our project’s objectives under the existing plan – for both the Cost and the Schedule

The results of this activity too are displayed as a probability distribution. It is simply a representation of the probability of meeting the project’s cost and time objectives.

Ex: let us say the current project budget is USD 5 million and based on quantitative risk analysis, it is determined that there is a 65% probability that our project will be within budget. If the budget were USD 7.5 million then, there will be a 80% probability that our project will be within budget and if the budget were USD 10 million, then there will be a 100% probability that our project will be within budget.

In all practical scenarios, project managers don’t have the luxury of determining the best possible budget (10 million here) and give 100% accuracy on cost estimates. They are probably given a number that would result in a very low probability of meeting the budget and are asked to work around it. So, in real life, don’t expect your sponsor to say, ok buddy, I need 100% probability of meeting the budget, so here you take this 10 mil and work with it. Most probably he will say “5 million is the max you will get and if you finish within 4.5 you will get a small incentive and if you exceed 5.5 million start uploading your resume in job sites!!!”

Prev: Introduction - Updates to Risk Register after Quantitative Analysis

Next: Prioritized List of Quantified Risks