Individual project risk is an uncertain event or condition that, if
it occurs, has a positive or negative effect on one or more project
objectives.
Overall project risk is the effect of uncertainty on the project as
a whole, arising from all sources of uncertainty including
individual risks, representing the exposure of stakeholders to the
implications of variations in project outcome, both positive and
negative.
Non-event risks: Most projects focus only on risks that are uncertain future events that
may or may not occur. Examples of event-based risks include: a key seller may go out
of business during the project, the customer may change the requirement after design
is complete, or a subcontractor may propose enhancements to the standard operating
processes.
Variability risk: Uncertainty exists about some key characteristics of a planned event
or activity or decision. Examples of variability risks include: productivity may be above
or below target, the number of errors found during testing may be higher or lower than
expected, or unseasonal weather conditions may occur during the construction phase.
Ambiguity risk: Uncertainty exists about what might happen in the future. Areas of the
project where imperfect knowledge might affect the project’s ability to achieve its
objectives include: elements of the requirement or technical solution, future
developments in regulatory frameworks, or inherent systemic complexity in the project
Variability risks can be addressed using Monte Carlo analysis, with the range of
variation reflected in probability distributions, followed by actions to reduce the spread
of possible outcomes.
Ambiguity risks are managed by defining those areas where there is a deficit of
knowledge or understanding, then filling the gap by obtaining expert external input or
benchmarking against best practices. Ambiguity is also addressed through incremental
development, prototyping, or simulation.
Monte Carlo Analysis in Project Management
A Monte Carlo analysis is a quantitative analysis technique used to identify the risk
level of achieving objectives.
Monte Carlo Analysis is a risk management technique used to conduct a quantitative
analysis of risks. This mathematical technique was developed in 1940 by an atomic
nuclear scientist named Stanislaw Ulam and is used to analyze the impact of risks on
your project — in other words, if this risk occurs, how will it affect the schedule or the
cost of the project? Monte Carlo gives you a range of possible outcomes and
probabilities to allow you to consider the likelihood of different scenarios.
EXAMPLE
let’s say you don’t know how long your project will take. You have a rough estimate
of the duration of each project task. Using this, you develop a best-case scenario
(optimistic) and worst-case scenario (pessimistic) duration for each task.
The results would look something like this:
2% chance of completing the project in 12 months (if every task finished by the
optimistic timeline)
15% chance of completion within 13 months
55% chance of completion within 14 months
95% chance of completion within 15 months
100% chance of completion within 16 months (If everything takes as long as the
pessimistic estimates)
Using this information, you can now better estimate your timeline and plan your project.
Benefits of Monte Carlo analysis
• Provides early indication of how likely you are to meet project milestones and
deadlines
• Can be used to create a more realistic budget and schedule
• Predicts the likelihood of schedule and cost overruns
• Quantifies risks to assess impacts
• Provides objective data for decision making
Limitations of Monte Carlo analysis
• You must provide three estimates for every activity or factor being analyzed
• The analysis is only as good as the estimates provided
• The Monte Carlo simulation shows the overall probability for the entire project or a
POSITIVE RISK MANAGEMENT NEGATIVE RISK MANAGEMENT
AVOID: If you see a threat to your
EXPLOIT: Exploiting the risk is about
project, do what is necessary to lower the
increasing the chances of positive effects
risks. It may include such activities as
the risk may have on your project. It can
delegating tasks, changing the deadline,
include varied ways such as using the
increasing the number of people in the
proper tools or technology.
team, etc.
TRANSFER: If there is someone else or a
SHARE: Do you see that the risk is
third party to which you can transfer the
having a big positive impact on your
project, you may want to consider this
project but you don’t have the resources
strategy as your first aid. Don’t forget that
to boost it? Share it with other people or a
there are people who may be better at
third party to achieve the best result.
handling certain negative risks.
ENHANCE: If you can, do everything to MITIGATE: lessen the risk as much as
make the risk even bigger. Invest in better possible to avoid its negative impact on
resources, people, or try to deliver your the project.
project as fast as you can.
ACCEPT: If there is nothing you can do about the risk and there is no other way to
influence it, accept the final outcome. Wait for it to happen and learn how to work on
risk management in your future projects.
