Risk Event Modeling Risk event modeling in part of Intaver Institute’s presentations on project risk management and risk analysis Intaver Institute Inc. 303, 6707, Elbow Drive S.W, Calgary, AB, Canada Tel: +1(403) Fax: +1(403)

The Project Management Problem 10/26/ Intaver Institute 2 Many projects are unsuccessful! Budget Schedule Quality Other measures Projects consistently fail to meet:

10/26/ Intaver Institute 3 Key Project Management Issues How to estimate project duration or cost? What are the most critical risks and how to handle them? How to measure project performance? How to make an informed decision about the future course of the project? The Project Management Problem

10/26/ Intaver Institute 4 Reasons Human psychological limits Inadequate training Poor processes other The Project Management Problem

10/26/ Intaver Institute 5 Risk management key to project success Risks are events that can occur during a project that changes to course of a project Risk is key source of project uncertainty and major root cause of project failure Limited ability to forecast and manage project uncertainty due to risk The Project Management Problem

10/26/ Intaver Institute 6 Chains of unfortunate events Risks can form event chains A risk occurs and causes another risk to occur, which causes yet another Unexpected result of a series of events derail projects Statistical sampling or Monte Carlo simulations the best solution for modeling the effect of related and unrelated project risks The Project Management Problem

Benefits 10/26/ Intaver Institute 7 Understand impact of risk on projects Understand project risk and uncertainty in Cost and Duration Identify critical risks and activities Model risk handling efforts Improved contingency and buffer plans Monitoring with risks and uncertainties provides strong, early signals of impending issues

Uses common PM artifacts WBS Resources Costs Risk Register or Risk Lists developed for qualitative risk management Risk Event Modeling Workflow 10/26/ Intaver Institute 8

Risk Definition Risks – Risks are “events” that have a probability of occurring during a project – Risks are identified and assigned to tasks or resources – Define impact of risks by assigning: Chance of occurrence Outcome (e.g. delay, increase in cost) Result (percentage or fixed value of outcome) 10/26/ Intaver Institute 9

What is Monte Carlo Monte Carlo simulation is a mathematical method used in risk analysis. Monte Carlo simulations are used to approximate the distribution of potential results based on probabilistic inputs.

Monte Carlo Simulations

Monte Carlo Schedule Analysis

Two Approaches to Estimating Probabilities The relative frequency approach, where probability equals the number of occurrences of specific outcome (or event) divided by the total number of possible outcomes. The subjective approach represents an expert’s degree of belief that a particular outcome will occur.

Two Approaches for Defining Uncertainties Distribution-based approach Event-based approach

Which Distribution Should Be Used? Also useful: Lognornal Beta

Distribution Fitting

Before Eliciting Judgment You Need to Have: A clearly defined problem An identified list of risks, or a risk breakdown structure, for the project A project schedule A clearly defined set of questions you will ask experts In addition, your team of experts should be aware of any personal interest that expert may have regarding particular issues. It helps to mitigate motivational biases.

Psychological Factors Availability heuristic: people judge the probability of the occurrence of events by how easily these events are brought to mind. Anchoring heuristic: refers to the human tendency to remain close to the initial estimate. Wishful thinking: when we overestimate the probabilities of opportunities and underestimate the probabilities of risks.

Overestimating the Probability of Compound Events If the probability of a defect in a component is 20% and the device uses three redundant components, the probability of the defective device will be (0.2 * 0.2 * 0.2) = 0.008%. People tend to think this number is much higher.

Ignoring Base-Rate Frequencies Historically, the probability that a particular component will be defective is 1%. The component is tested before installation. The test showed that the component is defective. The test usually successfully identifies defective components 80% of the time. What is the probability that a component is defective? The correct answer is close to 4%, however, most people would think that answer is a little bit lower than 80%.

Eliciting Judgment About Probabilities of Single Events Pose a direct question: “What is the probability that the project will be canceled due to budgetary problems?” Ask the experts two opposing questions: (1) “What is the probability that the project will be canceled?” and (2) “What is the probability the project will be completed?” The sum of these two assessments should be 100%. Break compound events into simple events and review them separately.

Probability Wheel

Eliciting Judgment: Probability Method

Eliciting Judgment: Method of Relative Heights

How Many Trials Are Required? Huge number of trials (> 1000) usually does not increase accuracy of analysis Incorporate rare events Use convergence monitoring

What Is The Chance That a Project Will Be on Time And Within Budget?

Analysis of Monte Carlo Results Sensitivity and Correlations Critical Indices Crucial tasks Critical Risks Probabilistic Calendars Deadlines Conditional Branching Probabilistic Branching Chance of Task Existence

Analyze Results 10/26/ Intaver Institute 28

Result Gant 10/26/ Intaver Institute 29 When you have project schedule and risk breakdown structure ready click here to perform Monte Carlo simulations RiskyProject employs convergence monitoring to ensure fast calculation

Risk Register Pre-mitigation Probability, Impact, And Score Pre-mitigation Probability, Impact, And Score 10/26/ Intaver Institute 30

Result Gantt Chart 10/26/ Intaver Institute 31 White bars represent original project schedule (no risks) Blue bars represent project schedule with risks Because of risks, project duration significantly increased

Results of Risk Analysis 10/26/ Intaver Institute 32 Project Summary: project duration, cost, and finish time with and without risks Results of analysis for project cost, finish time, and duration Double click on any chart to view detailed information

Detailed Results of Analysis 10/26/ Intaver Institute 33 Move the slider to determine the chance that project will be within budget Get detailed statistical data Data can be exported as an image or text Detailed results can be shown for each tasks or whole project for cost, duration, start time, finish time, and income.

Sensitivity 10/26/ Intaver Institute 34 Tornado chart shows risks or other parameters have the most affect on the project schedule Top critical risks need to be mitigated first

Crucial Tasks 10/26/ Intaver Institute 35 Crucial tasks have the most affect on the project schedule Crucial tasks for project cost and duration can be different

Success Rate 10/26/ Intaver Institute 36 A task can be canceled if it reaches a task or a project deadline or if it is affected by risk with a “Cancel task” outcome. Success rate is calculated based on number of times the task is not canceled

Risk Chart 10/26/ Intaver Institute 37 Risk chart show risks, associated with task versus duration or cost This task has low duration but high risk These tasks have balanced risk versus duration ratio.

Risk Matrix 10/26/ Intaver Institute 38 Risk matrix shows probability/impact on 5x5 matrix Double-click on a risk to view risk assignments Risk Probability, Impact and Score for the current schedule

Risk Planning 10/26/ Intaver Institute 39 Modeling risk mitigation efforts Risk handling strategies Transfer Mitigate Eliminate Ignore Risk mitigation efforts represent their own costs etc. which must be accounted for Create multiple baselines that model pre and post mitigation risk handling efforts View results of risk handling efforts Select project alternative based on criteria (cost, duration, start and finish time, success rate)

Future Reading Lev Virine and Michael Trumper Project Decisions: The Art and Science Management Concepts, Vienna, VA, 2007 Lev Virine and Michael Trumper Project Think: Why Good Managers Make Poor Project Choices Gower, 2013