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A Guide to Project Management

# Impact can be ordinal or cardinal depending upon the

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Unformatted text preview: les, the WBS listing of all cost elements with cost estimates, and models of project technical objectives. 11.4.2 Tools and Techniques for Quantitative Risk Analysis .1 Interviewing. Interviewing techniques are used to quantify the probability and consequences of risks on project objectives. A risk interview with project stakeholders and subject-matter experts may be the first step in quantifying risks. The information needed depends upon the type of probability distributions that will be used. For instance, information would be gathered on the optimistic (low), pessimistic (high), and the most likely scenarios if triangular distributions are used, or on mean and standard deviation for the normal and log normal distributions. Examples of three-point estimates for a cost estimate are shown in Figure 11-4. Continuous probability distributions are usually used in quantitative risk analysis. Distributions represent both probability and consequences of the project component. Common distribution types include the uniform, normal, triangular, beta, and log normal. Two examples of these distributions are shown in Figure 11-5 (where the vertical axis refers to probability and the horizontal axis to impact). Documenting the rationale of the risk ranges is an important component of the risk interview, because it can lead to effective strategies for risk response in the risk response planning process, described in Section 11.5. 138 NAVIGATION LINKS ACROYMNS LIST ACRONYMS LIST ACROYMNS LIST A Guide to the Project Management Body of Knowledge (PMBOK Guide) 2000 Edition 2000 Project Management Institute, Four Campus Boulevard, Newtown Square, PA 19073-3299 USA Chapter 11--Project Risk Management Project Cost Estimates and Ranges WBS Element Design Build Test Total Project Low 4 16 11 Most Likely 6 20 15 41 High 10 35 23 The risk interview determines the three-point estimates for each WBS element. The traditional estimate of \$41, found by summing the most likely costs, is relatively unlikely, as shown in Figure 117. Figure 114. Cost Estimates and Ranges from the Risk Interview A Guide to the A Guide to the .2 Sensitivity analysis. Sensitivity analysis helps to determine which risks have the most potential impact on the project. It examines the extent to which the uncertainty of each project element affects the objective being examined when all other uncertain elements are held at their baseline values. .3 Decision tree analysis. A decision analysis is usually structured as a decision tree. The decision tree is a diagram that describes a decision under consideration and the implications of choosing one or another of the available alternatives. It incorporates probabilities of risks and the costs or rewards of each logical path of events and future decisions. Solving the decision tree indicates which decision yields the greatest expected value to the decision-maker when all the uncertain implications, costs, rewards, and subsequent decisions are quantified. A decis...
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