Qualitative and Quantitative Assessment of risk - APM · PDF fileSemi- quantitative –...

Qualitative and

Quantitative

Assessment of risk

Vinay Shrivastava MEng MBA MAPM SIRM

UK MEA Skill Leader for Risk Management at Arup

E: Vinay.Shrivastava@arup.com M: 07545717824

Identify

Assess

Address

Monitor Report

Risk management

Evaluating risk: Qualitative or Quantitative?

Common Project risk measures/success criteria:

Time

Cost

Safety

Environment

Quality

Relationships

Reputation

Job satisfaction

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Qualitative risk assessment

Based on nominal or descriptive scales for describing the likelihoods and

consequences of risks;

Prioritises risks and effort for more detailed quantitative risk analysis;

Some risks can only be treated qualitatively;

Semi- quantitative – extends qualitative analysis by allocating numerical values

to the descriptive scales.

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Qualitative assessment: classification scheme

Probability of

Occurrence ( P ) Impact on the project (I)

Value Scale Typical

Range Value

Scale

(Viability)

Suggested

Project

Cost

Range

Suggested

Schedule

Range

Safety Reputation

1 Rare < 5% 1 Insignificant < 1% < 1 week Minor Injury No Press coverage

2 Low 6%-20% 2 Minor 1%-5% 1 week – 1

month Major Injury

Minor local adverse press

coverage

3 Medium 21%-50% 3 Moderate 5%-10% 1 – 3 months Multiple Major

Injuries

Major local adverse press

coverage

4 Likely 51%-80% 4 Significant 10%-20% 3 – 6 months Single Fatality National adverse media

coverage

5 Almost

Certain > 81% 5 Serious >20% > 6 months Multiple Fatalities

International adverse

media coverage (one year

or more)

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Descriptor

Description of Frequency

Rare

May occur only in exceptional circumstances - can be assumed not to

occur during period of the project (or life of the facility)

Unlikely

Event is unlikely to occur, but it is possible during period of the project

(or life of the facility)

Possible

Medium

Event could occur during period of the project (or life of the facility)

Likely

Event likely to occur once or more during period of the project (or life

of the facility)

Almost Certain

Event occurs many times during period of the project (or life of the

facility)

Qualitative assessment: measures of probability

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Risk

Reference

Cause Effect Risk

Measure

Prob Impact Risk

#01 Unforeseen ground

conditions

Increased cost of ground

improvements

Cost 2 3 6

#02 Loss or damage to

property, plant &

structures

Cost of repair or

replacement

Cost 3 5 9

#03 Worse weather than

expected

Construction programme

delay

Programme 2 2 4

Qualitative assessment: red-amber-green reporting

Qualitative assessment: risk matrix (PID)

Impact

Insignificant

(1) Minor (2) Moderate (3)

Significant

(4) Serious (5)

Likelihood

Almost

Certain (5) Medium Medium High High High (25)

Likely (4) Low Medium Medium High (16) High

Possible (3) Low Medium Medium (9) High High

Unlikely (2) Low Low (4) Medium Medium High

Rare (1) Low (1) Low Low Low Medium

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Other attributes that may be used for prioritisation

Variability;

Proximity of risk occurrence;

Urgency of required response;

Controllability;

Relatedness.

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Quantitative risk assessment

Why?

Quantify a project’s likely outturn cost/completion date and consequently

inform monetary contingencies;

More efficient in responding to risk by balancing reduction in exposure

against the cost of control;

Help focus senior management attention on priority areas;

To understand the combined impact of identified risk on a Project;

To incorporate the effect of correlated risk items.

Techniques

Optimism Bias (OB);

Expected Monetary Value (EMV)/Decision Trees;

Quantitative Risk Analysis (QRA) - Probabilistic modelling

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A demonstrated systematic tendency for project costs and duration to be

underestimated &/or benefits to be overestimated.

Ref: HMT Green Book – Appraisal & Evaluation in Central Government (2003)

Optimism Bias (%) = 100 X (Actual – Estimated)

Estimated

Quantitative assessment: Optimism Bias

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Build or Upgrade

Strong Demand

Weak Demand

Weak Demand

Strong Demand

£90m

65%

£120m

£60m

65%

35%

£200m

35%

Upgrade

existing railway

Build new

railway

-£120m

-£50m

0.35

EMV=£49m

0.65

-- -£30m

0.65

£70m

0.35

£10m

£80m

EMV=£42m

Decision Definition Decision Node Chance Node Net Path Value

(Decision Name) (Cost of Decision) (Prob. & Payoff) (Prob.*Payoff – Cost)

Quantitative assessment: EMV and Decision Trees

Quantitative assessment: 3 point estimates

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Risk % Likelihood Minimum Most Likely Maximum Comment

Single Point 20 £100 widely used

Two Point 20 £80 £120 useful

Three Point 20 £80 £100 £120 preferred

Max Min ML Min

ML Max Min

ML

Max

Quantitative assessment: Numerical models

Risk % Impact

(£)

EMV

X 10 50 5

Y 20 100 20

Z 50 120 60

Total 85

% Likelihood and a 3 point estimate

Triangular

probability

distribution

Bernoulli

probability

distribution

Cumulative

frequency curve

Typically 2000

MonteCarlo

simulations

Confidence level

risk exposure

EMV = Probability x Impact

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Pro

ba

bilis

tic m

od

el

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Numerical complexity leads to false confidence

Inability to cost ‘soft’ risks

Models correlation

Statistically robust

Unknown unknowns

Reliance on expert input

Quantitative assessment: MonteCarlo Simulation

Cost estimating uncertainty over Project Life Cycle

1.

Base Cost

Estimate

3.

Risk Analysis

2.

Uncertainty of

Base

Estimate

Outturn Cost

Estimate

Cost Contingency Spot/Base

Cost Estimate

Cost planning process

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Base Cost

Base Cost

plus 10%

P70 risk and

cost

uncertainty

Target Cost

Probabilistic Empirical (OB)

Base Cost

Total EMV

‘Deterministic’

Unknown

unknowns

Establishing contingencies

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Thank you

Vinay Shrivastava

E: Vinay.Shrivastava@arup.com M: 07545717824

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