Risk Management Framework: Probability Analysis

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probability analysis
probability analysis

Probability analysis is one of the techniques that can be used in the Risk Assessment process. Although there are many statistical techniques available to the project manager that can assist in assessing project risk, probability analysis is one of the more common ones. Here are a few examples:

  • Decision trees have been used to assess alternative courses or action using expected values.
  • Statistical variations of net present value (NPV) have been used to assess cash now risks in projects.
  • Correlations between past projects’ cash flow and S-curves (cumulative project cost curve—baseline— over the life or the project) have been used to assess cash flow risks.
  • PERT (program evaluation and review technique) and PERT Simulation can be used to review activity and project risk.

PERT and related techniques take a more macro perspective by looking at overall cost and schedule risks. Here the focus is not on individual events but on the likelihood the project will be completed on time and within budget. These methods are useful in assessing the overall risk of the project and the need for such things as contingency funds, and time.

Probability Analysis: PERT Simulation

The use of PERT Simulation is because it uses the same data required for PERT, and software to perform the simulation is readily available. Basically PERT simulation assumes a statistical distribution (range between optimistic and pessimistic) for each activity duration; it then simulates the network (perhaps over 1,000 simulations) using a random number generator. The outcome is the relative probability, called a criticality index, of an activity becoming critical under the many different, possible activity durations for each activity.

PERT simulation also provides a list or potential critical paths and their respective probabilities of occurring. Having this information available can facilitate identifying and assessing schedule risk.

This probability analysis article is strictly connected to the Risk Assessment process and is not a step in our Risk Management Framework.  If you have come to this article directly I would encourage you to take a look at our Risk Management Framework guide to get the full picture.

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