Monte Carlo simulation is one of the most widely practiced techniques for quantitative risk analysis. If used well, it can be used to combine estimates from plans, uncertainties and risks to assess “overall risk” from a time and/or cost perspective. The S-curve graph on the right shows an example taken from a project schedule risk analysis. Forecasts of this nature can be an invaluable aid for strategic management decisions. At a tactical level, it is also possible to apply the technique when modeling key features of a project or business operations. Practical examples of this have included:

• Modeling overall weight risk during the development of a military aircraft.
• Forecasting steel productivity rates during the stock build up period prior to a major outage.
• Control of the risk associated with the location of a ship’s centre of gravity.
• Forecasting the rate at which new service can be rolled out to a client’s organization.

However, the construction of risk models and the collection of realistic estimates are activities that require both skill and experience. Naive estimating processes can produce unrealistically optimistic forecasts, whilst poor modeling often produces irrational forecasts that may err on the side of either optimism or pessimism. The pages on schedule and cost risk analysis, together with the page on correlation, discuss some of the most important estimation and modeling issues.

HVR has been developing and using best practice in this area for more than 15 years. As a consequence, HVR has a track record of producing business and project risk analysis that:

• Produces realistic forecasts.
• Identifies the key drivers of risk in a way that focuses management response.

HVR maintains regular contacts with other leading risk management practitioners to ensure that it provides clients with a service based on evolving best practice. HVR contributions to professional forums include contributions to the Association for Project Management’s PRAM Guide chapters on risk management techniques and papers / conference presentations on the subject. A recent paper that includes advice on structuring risk models can be downloaded from the link below.

Download a paper: – “Top-down Approaches to Project Risk Analysis” (PMI Europe Congress 2006)

HVR also maintains contacts with suppliers of Monte Carlo analysis tools and sells a number of different products. HVR recommends Pertmaster for project schedule risk analysis or combined resource/schedule risk analysis. Details on Pertmaster and other products can also be found on the Risktools.com website.

Contact: martin.hopkinson@hvr-csl.co.uk