Quantitative Risk Analysis
Quantitative Risk Analysis (#5 in the series How To Effectively Manage Project Risks)
By Michael D. Taylor
Once the qualitative assessments of project risks are completed, the estimates can be examined to determine the magnitude of the risks. A technique that not only considers risk probability and risk consequence but also takes into account the project priorities is the “weighted risk factor (WRF)” technique. For each sets of project risks a WRF is calculated as follows:
WRF=W1*RFTECH+W2*RFSCHED+W3*RFCOST
Where:
- “RF” means Risk Factor1 =
(P+C) – (P x C), where P stands for Risk Probability, and C stands for Risk Consequence. - The value for weight (W) is dependent upon its project priority within the triple constraint.
- W1, W2, and W3 are valued 0 through 1.0 depending on the priorities of the project, and together must sum to 1.0.
A completed WRF table might look like the following.
The question facing the risk management team is what to do with the results. As can be seen in the above table, WRFs range from 0.96 to 0.54. Values for each WRF can be used to place risks into one of three categories—low, medium, and high which can these be used to determine the proper risk response.
| Weighted Risk Factor (WRF) | Risk Level | Risk Response |
| 0.0 to 0.4 | Low | None |
| 0.4 to 0.7 | Moderate | Judgment call |
| 0.7 to 1.0 | High | Develop abatement plans |
Risk quantification may also be made using stochastic techniques.
1 The above RF equation is based on the general disjunctive rule which means that as either P or C approaches zero, the RF will approach the other value. This is felt to be superior to the general conjunctive rule (RF = P x C) which tends to be too optimistic. The above risk factors are calculated for the technical, schedule, and cost aspects of the project. Other factors can be included.
MICHAEL D. TAYLOR, M.S. in systems management, B.S. in electrical engineering, has more than 30 years of project, outsourcing, and engineering experience. He is principal of Systems Management Services, and has conducted project management training at the University of California, Santa Cruz Extension in their PPM Certificate program for over 13 years, and at companies such as Sun Microsystems, GTE, Siemens, TRW, Loral, Santa Clara Valley Water District, and Inprise. He also taught courses in the UCSC Extension Leadership and Management Program (LAMP), and was a guest speaker at the 2001 Santa Cruz Technology Symposium. His website is www.projectmgt.com.
