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Quantitative Risk Assessment

Quantitative Risk Assessment

A Quantitative Risk Assessment (QRA) in project management is the process of expressing the impact of risk on a project in numerical terms. It is used to estimate a numerical value (usually probabilistic) on risk outcomes wherein risk probabilities of occurrence and impact values are used directly rather than expressing severity narratively or through ranking, as in qualitative methods.

The main aim of this assessment is to determine time and cost values that represent risk, these values are often referred to as contingencies and provide more accurate information for project risk management and planning purposes.  

Our experienced risk consultants analyse five sources of risk in a Quantitative Risk Assessment:
  • Level of Project Definition
  • Cost Estimate Accuracy: Method of measurement and of pricing
  • Project-Specific Risks: Project specific risks related to the intrinsic characteristics of the project. This is captured in the risk register.
  • Economic Risks (escalation and exchange rates)
  • Systemic Risks: Risk associated with system/process/organisation, e.g. EPCM experience, stakeholder alignment, management, decision-making policies, project complexity, labour intensity, project location etc.
The variations in cost and time that result from the five risk types are simulated with a Monte Carlo simulation.  This simulation produces a risk probability distribution which is used to determine suitable contingency values. Monte Carlo simulations allow decision makers to see a range of possible outcomes, from the most pessimistic to the most optimistic cases.
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The Quantitative Risk Assessment results are presented in a logical and precise manner and give decision makers a clear picture of the impact uncertainties may have on the project. The number of scenarios examined with a QRA is nearly infinite compared to the limited scenarios which can be expressed with traditional qualitative risk management methods. A Quantitative Risk Assessment enables decision makers to make better-informed decisions by providing the following information:

  • The probability of achieving cost and time objectives in proportion to risk appetite;
  • A project’s risk profile compared to other projects;
  • Estimated contingency and management reserve allocations; and
  • Areas of risk that should be managed closely.

ProjectLink caters for three types of Quantitative Risk Assessments:

Risk Assessment

A Quantitative Risk Assessment (QRA) in project management is the process of expressing the impact of risk on a project in numerical terms. It is used to estimate a numerical value (usually probabilistic) on risk outcomes wherein risk probabilities of occurrence and impact values are used directly rather than expressing severity narratively or through ranking, as in qualitative methods.

The main aim of this assessment is to determine time and cost values that represent risk, these values are often referred to as contingencies and provide more accurate information for project risk management and planning purposes.  

Our experienced risk consultants analyse five sources of risk in a Quantitative Risk Assessment:
  • Level of Project Definition
  • Cost Estimate Accuracy: Method of measurement and of pricing
  • Project-Specific Risks: Project specific risks related to the intrinsic characteristics of the project. This is captured in the risk register.
  • Economic Risks (escalation and exchange rates)
  • Systemic Risks: Risk associated with system/process/organisation, e.g. EPCM experience, stakeholder alignment, management, decision-making policies, project complexity, labour intensity, project location etc.
The variations in cost and time that result from the five risk types are simulated with a Monte Carlo simulation.  This simulation produces a risk probability distribution which is used to determine suitable contingency values. Monte Carlo simulations allow decision makers to see a range of possible outcomes, from the most pessimistic to the most optimistic cases.
.  

The Quantitative Risk Assessment results are presented in a logical and precise manner and give decision makers a clear picture of the impact uncertainties may have on the project. The number of scenarios examined with a QRA is nearly infinite compared to the limited scenarios which can be expressed with traditional qualitative risk management methods. A Quantitative Risk Assessment enables decision makers to make better-informed decisions by providing the following information:

  • The probability of achieving cost and time objectives in proportion to risk appetite;
  • A project’s risk profile compared to other projects;
  • Estimated contingency and management reserve allocations; and
  • Areas of risk that should be managed closely.

ProjectLink caters for three types of Quantitative Risk Assessments:

Risk Assessment

The need

QRAs are ideal for clients who seek to understand the degree of certainty of time and cost parameters associated with a project, program, or even portfolio.  Risks that are formulated through the qualitative risk analysis process can often not be completely mitigated and always retain a degree of uncertainty.  A QRA enables decision-makers to make informed decisions about the probability of achieving cost and time objectives and commensurate with their risk appetite.

Benefits

A client stands to benefit from a QRA because it supports informed decision-making in terms of a project`s risk profile versus competing projects and informs contingency and management reserve allocations. Another benefit of a QRA is that the detailed report indicates areas of concern within the CAPEX, schedule, and financial model with recommendations of what changes should be applied to improve the project`s profile.

Process

A QRA typically considers cost estimates for both capital and operational expenditure, i.e. CAPEX and financial model parameters; as well as time estimates.

CAPEX Estimate: The QRA informs the cost contingency that should be provided to cater for the uncertainty of completing the project within its defined budget.

Time estimate: The QRA informs the schedule contingency that should be provided to cater for the uncertainty of completing the project within its defined timeframe.

Financial Model: The QRA determines the variability of the financial model which should be used to test the sensitivity of the project's financial feasibility.

At the end of the QRA process, the results are applied to the project business case to confirm that the project is still viable if the agreed contingencies are applied.

Inputs to the QRA are; the project risk register, the CAPEX estimate, the financial model, the project schedule, and the project’s Work Breakdown Structure (WBS).  The primary output is a QRA report, which could, in turn, necessitate another iteration of the process, including refined QRA input parameters.

Physical Address

  • 243 Willem Botha Street
  • Wierda Park
  • Centurion

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  • PO Box 52810
  • Wierda Park
  • South Africa
  • 0149

Contact us

  • Phone: +27 (0) 12 660 0010
  • Fax: +27 (0) 12 660 0190
  • Email: sales@projectlink.co.za