Project-Specific (event) Risks

Project-Specific (event) Risks

ValidRisk is a hybrid quantitative risk analysis method. This means it employs two methods to address two very different types of risk in an integrated way. A parametric model is used to quantify systemic risks, while the expected value method with Monte Carlo simulation is used to quantify project-specific risks.

Project-specific risks are occurrences, events or conditions that are specific to the project scope and execution. They are not uncertainties resulting from attributes of the project system. Typical examples are severe weather events, labor or material sourcing disruptions, discovery of adverse subsurface conditions, and so on. These risks tend to dominate risk registers, and most QRA methods, because, unlike systemic risks, those with experience have typically observed them in action. A team workshop can readily (with some facilitation help) identify them and conceptualize their cost and schedule impacts.

Project-specific risks may be either events (p < 100%) or uncertainties (p = 100%). An example of an event is the discovery of rock in the soils which may have a 50% probability of occurrence. An example of an uncertainty is variation in the site’s weather; there is 100% probability that the weather will not be exactly as planned in the base estimate.

In the ValidRisk hybrid method, one only quantifies “critical” project-specific risks using the expected value tool. A critical risk event is one that has a material impact on the success of the project. The threshold of what is material is decided by the business, and should be documented in the project “risk matrix” prior to starting risk management. For example, cost or schedule risks may be rated on a scale of 1 to 5 in terms of its impact on the IRR; e.g., a 5 (or “red”) risk may be one that decreases the IRR by 1% or more if it occurs. Typically, after risk treatment (the ValidRisk method only quantifies residual, post-treatment risk), a project will only have 2 or 3 or up to about 15 of these critical risks (if there are more, the project’s chance of meeting its goal is probably low). It is not recommended that the ValidRisk tool be linked to the risk register, or that qualitative risk assessments be used for the criticality determination. Take the time to carefully select the critical risks and enter them in the tool directly.

Note the risk register likely includes scores, if not hundreds of risks. By quantifying only critical risks, one is not neglecting the others; they are addressed in the distribution from the parametric model. The hybrid method reverses the process of developing a parametric model which starts with removing the impact of critical risks (and scope changes and escalation) prior to regression. We are adding those back.

The ValidRisk process has one further unique approach in that the 3-point impact estimates of the critical risks are based on defined scopes. That scope is the contingency plan or risk response (a response is not a treatment) that one will follow IF the risk occurs. This requires first that the business communicate to the team what their cost/schedule strategy is; is it cost or schedule-driven? If a risk occurs, should the team make a fast response even if the cost is very high? Or a lower cost response albeit relatively slow? (see cost/schedule trading). Because the cost and schedule impact estimates are based on the defined scope (the risk response) they are inherently integrated.

In the end, one should expect only a few of the critical risk events to occur (if any). It is the nature of the expected value method to quantify their overall impact by reducing each of their impacts by the percent probability of occurrence or each. See the expected value (EV) method section for more information on the method.