Qualitative and Quantitative Risk Assessment
Massey University | [Link] | 0800 MASSEY
Content
• Qualitative vs. Quantitative
• Qualitative Risk Assessment
• Quantitative Risk Assessment
Massey University | [Link] | 0800 MASSEY
Qualitative vs. Quantitative
• Qualitative techniques that employ subjective scoring
techniques
• Quantitative techniques using statistical and probabilistic
approaches
Massey University | [Link] | 0800 MASSEY
Qualitative vs. Quantitative
• Outcomes of qualitative risk analysis
• Overall risk ranking for the project
• List of prioritised risks
• List of risks for additional analysis and management
• Trends in qualitative risk analysis results
Massey University | [Link] | 0800 MASSEY
Qualitative vs. Quantitative
• Outcomes of quantitative risk analysis
• Probability analysis of the project
• Probability of achieving the cost and time objectives
• Trends in quantitative risk analysis results
Massey University | [Link] | 0800 MASSEY
Qualitative Risk Assessment
Massey University | [Link] | 0800 MASSEY
Qualitative Risk Assessment
• One way to determine the importance of addressing
specific risks and guiding risk responses.
• Requires that the probability and consequences of the
risks be evaluated using established qualitative-
analysis methods and tools.
• Indicate the need for more or less risk-management
action.
Massey University | [Link] | 0800 MASSEY
Qualitative Risk Assessment
• Risk probability is the likelihood that a risk will occur.
• Risk consequence is the effect on project objectives if
the risk event occurs.
• Risk probability and risk consequences may be
described in qualitative terms such as very high,
moderate, low, and very low.
• Probability and impact are assessed for each individual
risk.
Massey University | [Link] | 0800 MASSEY
Qualitative Risk Assessment
A. Consultants cannot complete the designs on time, which delays the lodgment of the NZTA funding
application and therefore delays the construction work.
B. Late design amendments that might need further consenting requirements, therefore, result in time delays.
C. NZTA delays the approval Category 1 funding application for construction.
D. The tender price is higher than the cost estimates and the available budget.
E. Watercare's contractor’s deep sewer construction causes a delay to AT's construction works.
F. Unforeseen underground services encountered during construction cause time delays and cost increases to
AT.
G. The Contractor failed to manage pedestrian safety and traffic safety during construction.
H. The bus services are not coordinated and managed properly during construction.
I. Disruption to local businesses during construction leads to complaints and compensation claims.
J. Disruption to power, telecommunication, etc., from the contractor's operations.
Massey University | [Link] | 0800 MASSEY
Likelihood
Massey University | [Link] | 0800 MASSEY
Consequences/Impact
Massey University | [Link] | 0800 MASSEY
Likelihood-consequences matrix
Massey University | [Link] | 0800 MASSEY
Probability And Impact Matrix
• Ratings are assigned to risks based on their assessed
probability of occurrence and impact on an objective if it
does occur.
• Evaluation of each risk’s importance is conducted using
a probability and impact matrix.
• Both descriptive terms or numeric values can be used
depending on organisational preference.
Massey University | [Link] | 0800 MASSEY
Rank the risk factors
• Risk factor 1: Likely to happen, with moderate impact
• Risk factor 2: Rarely happens, with catastrophic
consequences
• Risk factor 3: Possible, with major impact
Massey University | [Link] | 0800 MASSEY
Rank the risk factors
Consequences
Likelihood Insignificant Minor Moderate Major Catastrophic
1 2 3 4 5
A
H H E E E
Almost certain
B
M H H E E
Likely
C
L M H E E
Possible
D
L L M H E
Unlikely
E
L L M H H
Rare
Extreme, High, Moderate, Low risk
Massey University | [Link] | 0800 MASSEY
Rank the risk factors
Consequences
Likelihood Insignificant Minor Moderate Major Catastrophic
1 2 3 4 5
A
H H E E E
Almost certain
B
M H 1H E E
Likely
C
L M H 3E E
Possible
D
L L M H E
Unlikely
E
L L M H H
2
Rare
Massey University | [Link] | 0800 MASSEY
NZTA Risk Management Process Manual
• B Later design
amendments
• F Unforeseen
underground services
• I Disruption to local
business
Massey University | [Link] | 0800 MASSEY
Quantitative Risk Assessment
Massey University | [Link] | 0800 MASSEY
Quantitative Risk Assessment
• The process of numerically analysing the effect of
identified risks on overall project objectives.
• Produce quantitative risk information to support decision
making in order to reduce project uncertainty.
Massey University | [Link] | 0800 MASSEY
Quantitative Risk Assessment
• Probabilistic Risk Assessment
• Characterising the likely impacts of the risk
• Evaluating whether risk is tolerable or acceptable
Massey University | [Link] | 0800 MASSEY
Quantitative Risk Assessment
• In compliance with all rules, assumptions, limitations or
constraints introduced
• The analysis is relevant and useful
• The analysis and results are reliable and valid
Massey University | [Link] | 0800 MASSEY
Quantitative Risk Assessment
• Expected Value
• Decision tree analysis
• Sensitivity analysis
• Failure Mode and Effects Analysis
• Modelling and simulation
Massey University | [Link] | 0800 MASSEY
Expected Value
• The value/return can be expected
• In a choice situation, select the alternative that promises to bring the
highest payoff or expected value (EV). EV is determined by two factors:
(a) the likelihood that a particular action will lead to various outcomes
(b) the value of those outcomes
"
&# = ! % "$! !#!
! =#
Massey University | [Link] | 0800 MASSEY
Expected Value
• Treasure hunt
Chest 1: Guaranteed 50 coins
Chest 2: Even numbers win 100 coins, Odd numbers win nothing
Chest 3: With a six wins 500 coins, else wins nothing
"
&# = ! % "$! !#!
! =#
Massey University | [Link] | 0800 MASSEY
Expected Value
• Chest 1
Guaranteed reward: 50 coins
Probability: 100% (1.0)
Calculation:
EV=1.0×50=50 coins
• Chest 2
Outcome 1: Win 100 coins with probability 50% (0.5)
Outcome 2: Win nothing with probability 50% (0.5)
Calculation:
EV=(0.5×100)+(0.5×0)=50+0=50 coins
Massey University | [Link] | 0800 MASSEY
Expected Value
What is the expected value of “buy insurance” and “don’t buy insurance”?
• The premium of insurance: $850
• Value of the ute: $30,000
• Excess of insurance policy: $3,000
• Likelihood of theft: 1%
Buy or not buy insurance?
Massey University | [Link] | 0800 MASSEY
Expected Value "
&# = ! % "$! !#!
! =#
Massey University | [Link] | 0800 MASSEY
Sensitivity Analysis
• Determine how different input variables affect the output
• To identify influential factors, test robustness, and inform decision-making
Buy or not buy insurance? What input will affect your choice?
Massey University | [Link] | 0800 MASSEY
Decision Tree Analysis
• Flowchart-like structure
• Nodes, representing a “test”
• Branches, representing the outcome of the “test”
• Leaves, representing a decision
Massey University | [Link] | 0800 MASSEY
Using EV to determine the best option
Massey University | [Link] | 0800 MASSEY
Using EV to determine the best option
Massey University | [Link] | 0800 MASSEY
Failure Mode and Effects Analysis
Risk Value =Impact × Probability × Detection
• “Failure mode” means the ways, or modes, in which
something might fail
• “Effect analysis” refers to studying the consequences of
those failures
• Purpose of FMEA is to take actions to eliminate or
reduce failures, starting with the highest-priority ones
Massey University | [Link] | 0800 MASSEY
Failure Mode and Effects Analysis
Now look at the roading example
Massey University | [Link] | 0800 MASSEY
Modelling and Simulation
• Model situations of risk when more than one variable is
subject to risk
• The whole thing is too complex to model via
conventional approaches
• Involves the use of random numbers to represent risk
variables
• Using random numbers from an appropriate distribution
• Repeated a large number of times (500, 1000, 2000…)
Massey University | [Link] | 0800 MASSEY
Monte Carlo Approach
• Determine total probabilistic duration for the whole
project and final costs
• A statistical approach, assuming durations are of a
probabilistic nature with an unlimited scope (between
500 and 1000 sets of values per task)
• Uses random numbers to compute mean durations
• Utilises any probability distribution
Massey University | [Link] | 0800 MASSEY
Monte Carlo Simulation
3. Repeat steps 1 and 2
many times to build up a
distribution function of the
output
Massey University | [Link] | 0800 MASSEY
Monte Carlo Approach
Advantages:
• Very well-known methodology
• Reliable software, combined with Excel
• Considering uncertainty in full, increasing results reliability
• Allows for determining probability of criticality for non-critical
task
Limitations:
• Not very popular in the project management environment
• More complex than other methods (costly)
Massey University | [Link] | 0800 MASSEY
What Really Matters
• Risk assessment is to support decision-making.
• Quantitative analysis supports decision-making in order to
reduce project uncertainty.
• Qualitative analysis supports decision-making in order to
prioritise the risks.
• Assumptions justifying the levels assigned
• Probabilities (levels: low/high/medium, reasons, references)
• Impacts (specify the impacts of each level, reasons, references)
• Techniques used to assess the risk
• Quantitative (formulas)
• Qualitative (matrix)
Massey University | [Link] | 0800 MASSEY
