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Qualitative and
Quantitative
Assessment of risk
Vinay Shrivastava MEng MBA MAPM SIRM
UK MEA Skill Leader for Risk Management at Arup
E: [email protected] 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
3
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.
4
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)
5
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
14
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
17
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
18
