855. Many people get confused between qualitative and quantitative risk analysis. Remember that qualitative risk analysis is a subjective evaluation, even though numbers are used for the rating.
In contrast, quantitative risk analysis is a more objective or numerical evaluation; the rating of each risk is based on an attempt to measure the actual probability and amount at stake (impact).
Therefore, while the rating for a risk in qualitative risk analysis might be a 5, it might be stated as a$40,000 cost impact in quantitative risk analysis.
As a project manager, you should always do qualitative risk analysis, but quantitative risk analysis is not required for all projects and may be skipped in favor of moving on to risk response planning. You should proceed with quantitative risk analysis only if it is worth the time and money on your project.
For some projects, you may have a subset of risks identified that require further quantitative analysis.
But why spend time quantitatively assessing risks for a low-priority or short-term project or when the effort will provide minimal returns?
The Perform Quantitative Risk Analysis process can include a lot of calculation and analysis. Luckily, the details of these efforts are not a focus of the exam.
You need to know the following actions are part of quantitative risk analysis but not how to do them beyond what is explained in this chapter:
Interviews for Further investigate data of the highest rated risks on the project.
Take these data and Perform sensitivity analysis to determine which risks have the most impact on the project.
Determine how much quantified risk the project has through expected monetary value analysis or mote Carlo analysis.
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856. You do not need to know how to perform Monte Carlo Analysis calculation for the exam. Simply know the following.
Monte Carlo analysis:
Is usually done with a computer-based program because of the intricacies of the calculations
Evaluates the overall risk in the project
Determines the probability of completing the project on any specific day, or for any specific cost
Determines the probability of any activity actually being on the critical path Takes into account path convergence (places in the network diagram where many paths converge into one activity)
Translates uncertainties into impacts to the total project
Can be used to assess cost and schedule impacts
Results in a probability distribution
857. Monte Carlo analysis gives you: An indication of the risk involved in the project 858. Sensitivity Analysis are part of Quantitative Risk Analysis
859. Decision Trees
Some examples of decision trees have the costs occurring only at the end of the project, while others have costs occurring early or in the middle of the project. Because a decision tree models all the possible choices to resolve an issue, costs can appear anywhere in the diagram, not just at the end.
860. On the exam, don't get confused when you look at examples of decision trees. Pay attention to the data provided in the question in order to correctly interpret the answer.
861. A decision tool that illuminates a possible path forward based on a decision made by the business and the probability of success of each decision path is called a decision tree analysis
862. Net path value in a decision tree node is (cost impact only without probability)
863. The following exercise shows a picture of a decision tree. The box represents a decision to be made, and the circles represent what can happen as a result of the decision.
EXERCISE11
A company is trying to determine if prototyping is worthwhile on the project. They have come up with the following impacts (see the diagram) of whether the equipment works or fails.
Based on the information provided in the diagram, what is the expected monetary value of each option? Which is the cheaper option-to Prototype or not to prototype?
Answers
If you just look at the setup cost of prototyping, it would seem like an unwise decision to spend money on prototyping. However, the analysis proves differently.
Taking into account only the one future event of whether the equipment works or fails, the decision tree reveals that it would be cheaper to do the prototyping.
The expected monetary value of prototyping is $242, 000, the expected monetary value of not prototyping is
$315,000.
Prototype 35%× $120,000=$42,000
$42,000+$200,00=$242,000 Do Not Prototype 70%× $450,=$315,000
EXERCISE 12
You need fly from one city to another. You can take airline A or B.
Considering the data provided, which airline should you take, and what is the Expected monetary value of your decision?
Answers
If you just look at the cost of the airfare, you would choose airline because it is cheaper. However, the airlines have different on-time-arrival rates. If the on-time-arrival rate for airline A is 90 percent, it must be late 10 percent of the time. Airline B is on time 70 percent of the time, and is therefore late 30 percent of the time. We have a $4,000 impact for being late. The result is that you should choose airline A, with an expected monetary value of$1,300 as shown below.
Airline A
(10%×$4,000)+$900
$400+$900=$1,300 Airline B
(30%× $4,000)+$300
$1,200+$300=$1,500
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864. Proving the value of project management project management saves time and money on projects. Getting your organization`s executives to understand that fact can be difficult at times. How beneficial would it be if you could prove the value of project management?
Imagine you have just done the first calculation of the expected monetary value of all the risks that were assigned high ranking and priority in qualitative risk analysis or that you have completed a Monte Carlo analysis for the project. In either case, you calculate that you need a $ 98,000 contingency reserve on the project to accommodate risks. That number can be used in many ways. Let's try this example.
The team moves on to the plan risk responses process and therein eliminates some risks and reduces the probability or Monte Carlo analysis is then redone, showing a revised need for only a$12,000 reserve. You have just saved $86,000 and you have not even started the project yet! Can you imagine how much value information like that would have in gaining support for project management in the real world?
865. Reserves
(Contingency) having reserves for time and cost is a required part of project management. You cannot come up with a schedule or budget for the project without them. Reserves are covered in the Cost Management chapter, but let's look at them again here as well.
There can be two kinds of reserves for time and cost: contingency reserves and management reserves.
Contingency reserves account for "known unknowns" (or simply "know ns"); these are items you identified in risk management. Management reserves account for "unknown unknowns" (or simply "unknowns"); these are items you did not or could not identify in risk management. Projects can have both kinds of reserves. As shown in the following diagram (also in the Cost Management chapter), contingency reserves are calculated and become part of the cost baseline. Management reserves are estimated (e.g., 5 percent of the project cost), and then these reserves are added to the cost baseline to get the project budget. The project manager has control of the cost baseline and can approve use of the contingency reserves, but management approval is needed to use management reserves.
Make sure you realize that reserves are not an additional cost to a project. The risk management process should result in a decrease to the project's estimated time and cost. As risks are eliminated or
their probability or impact reduced, there should be a reduction to the project`s schedule and budget.
Contingency reserves are allocated for the Contingency plans and fallback plans associated, accepted opportunities and threats that remain after the risk management planning processes have been completed.
No matter what you do, risks will remain in the project, and there should be a time or cost allotment for them, just as cost or time is allotted to work activities on the project.
There may be questions on the exam that ask you to calculate the contingency reserve for several risk events, which may be a combination of opportunities and threats. To do this, you must calculate the amount of each risk using the equation for expected monetary value (EMV = P x I).
But think about this a minute. Can you just add all of the expected monetary value amounts of the opportunities and threats together and come up with one grand total? No! You'll need to subtract the total expected monetary value of the opportunities from the total expected monetary value of the threats. Why?
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Opportunities will save money and time on the project if they occur. This can reduce the cost baseline.
Conversely, the threats will add cost and time to the project.
Wait! We're telling you to subtract opportunities here, but didn't we tell you earlier than expected monetary value is often presented as a positive amount for opportunities and a negative amount for threats? That 'softens true when the values are depicted on something like a decision tree, so you can easily identify positive and negative outcomes and their overall effect on project costs. But here we're specifically looking to determine how much money to set aside for the contingency reserves, and threats are going to add to the contingency reserve amount, whereas opportunities will decrease it.
Name Formula interpretation
Cost Variance (CV) EV-AC NEGATIVE is over budget; POSITIVE is Under budget.
Schedule Variance (SV) EV-PV NEGATIVE is behind schedule; POSITIVE is Ahead of schedule.
Cost Performance Index (CPI)9
EV/AC We are getting $ _____ worth of work out of Every $1 spent. Funds are or are not being used
Efficiently. Greater than one is good; less than One is bad.
Schedule Performance Index
EV/PV We are (only) progressing at __ percent of The rate originally planned. Greater than one is Good; less one is bad.
Estimate at Completion (EAC)
NOTE:
There are many ways to calculate EAC, depending On the assumptions made.
Notice how the purpose of the formulas really is to create forecasts based on past performance On the project.
Exam questions may require you to determine which EAC formula is appropriate; you will need to pay attention to the information provided in the question to decide Which formula to use.
AC+ Bottom-up ETC
BAC/CPIC
AC + (BAC - EV)
AC+(BAC-EV)/( CPIC x SPIC)
As of now, how much do we expect the total project to cost? (See formulas to the left, below.)
This formula calculates actual costs to date plus a new estimate for the remaining works.
It is used when the original estimate was fundamentally flawed.
This formula is used if no variances from the BAC have occurred or you will continue at the same rate of spending (as calculated in your cumulative CPI or based on the trends that have led to the current CPI).
This formula calculates actual costs to date plus remaining budget. It is used when current variances are thought to be atypical of the future. It is essentially AC plus the remaining value of work to perform.
This formula calculates actual to date plus the remaining budget modified by performance.
It is used when current variances are thought to be typical of the future and when project schedule constraints will influence the completion of the remaining effort. So for example, it might be used when the cumulative CPI is less than one and a firm completion date Must be met.
To-Complete Performance Index (TCPI)
(BAC- EV)/(BAC-AC)
This formula divides the work remaining to be done by the money remaining to do It. It answers the question
"In order to stay within budget, what rate we must meet for the Remaining work?"
Greater than one is bad; less than 1 is good.
Estimate to Complete (ETC)
NOTE: You can determine ETC by either using the first formula listed at right or re-estimating the work remaining.
EAC-AC Re-estimate
How much more will the project cost?
Re-estimate the remaining work from the bottom up.
Variance at completion (VAC)
BAC-EAC How much over or under budget will we be at the end of the project?
866. Reserve analysis as a analytical technique is used in:
Planning for estimation purposes in: estimate duration, estimate cost and determine budget
M&C in: control cost and control risks.
867. A project was funded with 50$ and finished with 40$, there is a high probability that the 10$ was a contingency reserve.
868. Let's try an example of calculating a contingency reserve in the next exercise.
EXERCISE 13
Imagine you are planning of modifications to an existing product your analysis has come up with the following information.
What cost contingency reserve would you use?
Project Data Cost Contingency Reserve Calculations
There is a 30 percent probability of a delay in the receipt of parts, with a cost to the project of
$9,000.
There is a 20 percent probability that the parts will cost
$10,000 less than expected.
There is a 25 percent probability that two parts will not
Fit together when installed, costing an extra
$3,500.
There is a 30 percent probability that the manufacture may be simpler than expected, saving $2,500.
There is a 5 percent probability of a design defect, causing $5,000 of rework.
Total Cost Contingency
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You use the expected monetary value calculation (EMV = P x I) to determine the contingency reserve. The answer is $1,075 for the total cost contingency reserve. See the following table for the detailed calculations.
Project Data Cost Contingency Reserve Calculations
There is a 30 percent probability of a delay in the receipt of parts, with a cost to the project of
$9,000.
30% x $9,000 = $2,700
$9,000. Add $2,700 There is a 20 percent probability that the parts
will cost
$10,000 less than expected.
20% x $10,000 = $2,000 Subtract $2,000 There is a 25 percent probability that two parts
will not
Fit together when installed, costing an extra
$3,500.
25% x $3,500 = $875 Add $875
There is a 30 percent probability that the manufacture may be simpler than expected, saving $2,500.
30% x $2,500 = $750 Subtract $750 There is a 5 percent probability of a design
defect, causing $5,000 of rework.
5% x $5,000 = $250 Add $250
Total Cost Contingency $1,075
Now let`s try another exercise. If the risk management process is new to you, the following exercise should help you put it all together by looking at in a chart from.
869. Flowchart of the risk process from Identify Risks through Plan risk responses
You are nearing the end of the plan risks responses section! But first, let`s look at the types of questions you may see in Risk area on the exam. The exam often asks questions such as:
Question What do you do with noncritical risks?
Answer Document them in a watch and revisit them periodically Question would you choose only one risk response strategy?
Answer No, you can select a combination of choices.
Question what risk management activities are done during the execution of the project?
Answer watching out for watch-listed (noncritical) risks that increase in importance, and looking for new risks.
Question what is the most important item to address in project team meetings?
Answer Risk.
Question how would risks be addressed in project meetings?
Answer By asking, "What is the status of risks? .Are there any new risks? Is there any change to the order of importance?"
870. Monte Carlo Analysis: A schedule risk assessment technique that performs a project simulation many times in order to calculate a distribution of likely results.
871. Simulation involves calculating multiple project durations with different sets of activity assumptions, usually using probability distributions constructed from the three-point estimates to account for uncertainty.
PMBOK ® Guide - 5th Edition, page 430
872. Life cycle costing provides the lowest long- term cost of ownership and should be used as a management decision tool, in case of alternatives
873. If you identify new risk, you should make a reserves analysis first to see if you have contingency that may cover the new risk response strategy
874. Risk benefit analysis is the other name of risk assessment
875. Residual risks are REMINING RISKS after risk responses have been implemented 876. Risk mitigation is to DECREASE THE PROBABILITY OF RISK
877. Outsourcing IS RISK TRANSFERENCE
878. Networks (diagram) identify the Activity dependencies and path convergence risks 879. Sensitivity chart displays sensitivities in DESENDING ORDER
880. Status meetings: You should either make risk management a normal part of regular project meetings or schedule meetings with a special focus on risk management to ensure that you and the team remain focused on risk management activities throughout the life of the project. The purpose of these status meetings is to examine all aspects of risk management on the project and ensure they are still appropriate and effective.
Additionally, having regular meetings where risk management is a topic of discussion creates greater awareness and buy-in from team members, which in turn results in better risk management.
881. Residual risks are risks that remain even after you have planned for and implemented all of your risk response strategies. They don’t need any further analysis because you have already planned the most complete response strategy you know in dealing with the risk that came before them.
882. If a ( unknown – unknown ) risk has happened ; it's probability is 100%
883. Weather problems is considered as a ( known – unknown ) risks.
884. Defect repair might sound tempting - but it is only applicable for the issues found for the current delivery.
This is also not about Quality Control - so that leaves us with only two options - Corrective or Preventive actions. Corrective actions are always preceded by nonconformity while preventive actions are never preceded by nonconformity. In this case nonconformity in the form of a lot of issues during Quality Assurance were reported. The root cause was identified to be the need of a standard checklist which was then used preventive action is always taken proactively - in the question stated there is no demonstration of any proactive steps taken - hence this is not an example of Preventive action.
885. You create the Risk Breakdown Structure in Risk management planning process not in Identify Risk Process.
The RBS helps you to see how risks fit into categories so you can organize your risk analysis and response planning.
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886. Sensitivity analysis helps to determine which risks have the most potential impact on the project. It helps to understand how the variations in project`s objectives correlate with variations in different uncertainties.
Conversely, it examines the extent to which the uncertainty of each project element affects the objective being studied when all other uncertain elements are held at their baseline values. PMBOK ® Guide 5th edition, page 338
887. Risk avoidance involves changing the project management plan to eliminate the threat entirely. The project manager may also isolate the project objectives from the risk’s impact or change the objective that is in jeopardy. Examples of this include extending the schedule, changing the strategy, or reducing scope.
PMBOK® Guide - 5th Edition, page 344
888. Secondary risks are new risks appear after setting a certain risk response and need to be evaluated as a new risk. Or secondary risk. A risk that arises as a direct result of implementing a risk response.
889. Secondary risks are unexpected impacts of implemented risk responses.
890. Residual risks are appearing after applying a certain risk response. Can be handled first by Fall Back plan, if it isn't work, go to Work around.
891. Due to the uniqueness of the project, the project manager focuses on risk identification and risk
891. Due to the uniqueness of the project, the project manager focuses on risk identification and risk