Value of Project Risk Analysis

Many project managers are wounding if there is any value in project risk analysis. Project risk analysis takes effort, requires experienced personnel with specialize knowledge and requires risk analysis software. But does it provide benefits, namely reduction of project duration, cost reduction, efficient resource allocation and others?

We have worked with many clients in different industries. The research shows that the average delay of large IT projects is 30%; however many projects can be delayed significantly longer. Average delay of large unique construction and infrastructural projects is similar. This is a result of risks and uncertainties which were not taken into account when the original project schedule was created. However these risks can be mitigated and if risks are occurring, a response plan can be executed. Mitigation and response planning will not completely eliminate project delays or cost overruns. Plus the execution of such plans cost money and take some time. But based on our experience, execution of mitigation and response plans can reduce overall project delays and cost overruns by 50% on average.

The value of project risk analysis is not only in determining a realistic project schedule with risks and uncertainties, although it is very important. The most value in project risk analysis is risk mitigation planning, which includes:

• risk prioritization or determining what risks can be mitigated first
• analysis of efficiency of mitigation plans and calculating their cost and duration
• analysis of risks as part of project control and just-in-time execution of project risks

RiskyProject software has all the necessary functionalities to perform quantitative analysis, risk analysis with mitigation and response planning. RiskyProject has a depository of risk report and risk mitigation plans which can be assigned to different risks. Mitigation plants in RiskyProject can be presented using waterfall diagrams.

RiskyProject also supports multiple baselines. Each baseline has a set of risks assigned to different activities as well as mitigation and response plans. By comparing risk baselines it is possible to calculate the efficiency of mitigation and response efforts.

 

EVM and Project Risk Analysis

A question that we are often asked is how does project risk analysis (PRA) compare or relate to earned value management (EVM)? It often goes further, if I am doing EVM, is there a need for risk analysis, or is it redundant? In this case, while there is a little overlap, risk analysis and earned value are complementary practices as part of an integrated project/program management process. This begs the question, how do the two complement each other. First, let’s define earned value and project risk analysis.
Project risk analysis is a process of identifying project risk events and uncertainties and assessing their expected impacts on key project objectives such as cost, schedule, and performance using Monte Carlo simulations. EVM was developed to allow project teams to measure how well they are executing their project by comparing planned work against actual work performed over predetermined intervals. Earned value takes into account measures of planned work such as Budgeted Cost of Work Scheduled  (BCWS)  vs Budgeted Cost of Work Performed (BCWP), which provide an indicator of how much work was actually performed vs what was planned. Depending on the particular system, there are a plethora of such metrics which can seem very complex, but they answer a simple, yet very important question: Has the project produced the value for the funds provided? This lies at the heart of how contracts are managed as the payment is based not upon how much work or effort has been done by the project, but by the value that has been created. If you know that you are only going to get paid based upon delivering value according to plan, then it is incumbent upon you to ensure that your plan is realistic. This is where project risk analysis supports the goals of the EVM process.
One of the key objectives of project risk analysis is to create “risk adjusted” realistic project plans. It does this by assessing the possible impacts of risks and uncertainties on project objectives, managing risks, and adding appropriate schedule margin and cost contingency,  such that it provides a high confidence that the project can be executed according to plan. So in this process, project risk analysis is performed as part of the development of the project plan. In addition, project risk analysis, can also augment the EVM process as part of the forecasting of delivery dates.
EVM is used not only to track actual performance, but can include indicators that use current performance to estimate time to complete or cost at completion. These indicators ETC (Estimate to Complete) or EAC (Estimate at Completion) provide values forecast the required budget to complete the project (ETC) not taking into account budget already spent or how much the entire project will cost (EAC) which accounts for how much has been spent and the ETC. One of the main issues with these indicators is that they are single point estimates, which are notoriously inaccurate when estimating under conditions of uncertainty (risks and uncertainties). Project risk analysis can augment the EVM performance tracking by providing forecasts that account for future risks and uncertainties. In this scenario, project plans be analyzed to predict possible outcomes given both the actual project performance and the risks and uncertainties that project has yet to encounter. This is extremely useful as this provides a risk adjusted forecast given current project status.

In the example above, we can see a plot that shows the project schedule plan vs. actuals with a forecast that shows how the actuals will affect the possible schedule outcomes.  In the EVM world, the analysis would provide duration to calculate an EAC for a schedule as shown by the central blue line. But in reality, there is range of possible outcomes that can be expressed using confidence levels or percentiles (P values).  In the example above we can see while the EAC is calculated based on a single date, there is range that can be achieved from the very aggressive (P10) to very conservative and more likely (P80). In this case, the P80 represents a finish date at that is much more feasible than the one provided by the deterministic calculation. In practical terms it means that risk analysis will help to determine statistical distributions of remaining project finish time and remaining cost. These distributions will be used to calculate EAC based on selected percentile. This process will be repeated on different project milestone with taking into an account actual project performance.
So we can see that when in concert, EVM and project risk analysis can effectively used to improve not only chance that projects will deliver the planned value on time and budget, but can also be used together to understand how current project performance may impact future project execution.