Risk management :Introduction,

nature of risk, managing risk, risk

identification, risk analysis
 Definition of Risk
• A risk is a potential problem – it might happen and it might not
• Conceptual definition of risk
– Risk concerns future happenings
– Risk involves change in mind, opinion, actions, places, etc.
– Risk involves choice and the uncertainty that choice entails
• Two characteristics of risk
– Uncertainty – the risk may or may not happen, that is, there are no 100%
risks (those, instead, are called constraints)
– Loss – the risk becomes a reality and unwanted consequences or losses
occur

2
Risk Categorization – Approach #1
• Project risks
– They threaten the project plan
– If they become real, it is likely that the project schedule will slip and that
costs will increase
• Technical risks
– They threaten the quality and timeliness of the software to be produced
– If they become real, implementation may become difficult or impossible
• Business risks
– They threaten the viability of the software to be built
– If they become real, they jeopardize the project or the product

3
Risk Categorization – Approach #1
(continued)

• Sub-categories of Business risks

– Market risk – building an excellent product or system that no one really
wants
– Strategic risk – building a product that no longer fits into the overall
business strategy for the company
– Sales risk – building a product that the sales force doesn't understand
how to sell
– Management risk – losing the support of senior management due to a
change in focus or a change in people
– Budget risk – losing budgetary or personnel commitment

4
Risk Categorization – Approach #2
• Known risks
– Those risks that can be uncovered after careful evaluation of the project plan,
the business and technical environment in which the project is being
developed, and other reliable information sources (e.g., unrealistic delivery
date)
• Predictable risks
– Those risks that are extrapolated from past project experience (e.g., past
turnover)
• Unpredictable risks
– Those risks that can and do occur, but are extremely difficult to identify in
advance

5
 Reactive vs. Proactive Risk Strategies

• Reactive risk strategies

– "Don't worry, I'll think of something"
– The majority of software teams and managers rely on this approach
– Nothing is done about risks until something goes wrong
• The team then flies into action in an attempt to correct the problem rapidly
(fire fighting)
– Crisis management is the choice of management techniques
• Proactive risk strategies
– Steps for risk management are followed (see next slide)
– Primary objective is to avoid risk and to have a contingency plan in place
to handle unavoidable risks in a controlled and effective manner

6
 Steps for Risk Management
1) Identify possible risks; recognize what can go wrong
2) Analyze each risk to estimate the probability that it will occur and the
impact (i.e., damage) that it will do if it does occur
3) Rank the risks by probability and impact
- Impact may be negligible, marginal, critical, and catastrophic
4) Develop a contingency plan to manage those risks having high
probability and high impact

7
 Nature of Project Risks
• Planning assumptions
• Estimation errors
• Eventualities

Software Project Management 9

 Planning Assumptions
• Why assumptions
– Uncertainties in early stage of the project

Software Project Management 10

 Planning Assumptions (cont’d)
• Common assumption:
– “Everything will go smoothly”
• Environment is reliable and fixed
• Design will be perfect first time
• Coding will be ‘nearly perfect’

Software Project Management 11

 Planning Assumptions (cont’d)
• Guidelines
– List all the assumptions
– Identify the effects of these assumptions on the
project if they are no longer valid

Software Project Management 12

 Estimation Errors
• Difficult to have accurate size or time
estimations
– Lack of experience of similar tasks
– Lack of historical data
– Nature of the task

Software Project Management 13

 Estimation Error (cont’d)
• Estimation can be improved by analyzing
historic data for similar tasks and similar
projects
– Keep historic data of your estimation and the
actual performance
– Compare your estimation and the actual value
– Classify the tasks that are easy or difficult to give
accurate estimation

Software Project Management 14

 Eventualities
• Unexpected and unimaginable events
• Common unexpected events
– Hardware cannot be delivered on time
– Requirements specification needs to be rewritten
– Staffing problem

Software Project Management 15

 Boehm’s Risk Engineering
Risk
Engineering

Risk Risk
Analysis Management

Risk Risk Risk Risk Risk Risk Risk Risk

Identification Estimation Evaluation Planning Control Monitoring Directing Staffing

Software Project Management 16

 Managing Risk
• Step 1: Risk Identification
– Generate a list of possible risks through brainstorming,
problem identification and risk profiling.
• Macro risks first, then specific events
• Step 2: Risk Assessment
– Scenario analysis for event probability and impact
– Risk assessment matrix
– Failure Mode and Effects Analysis (FMEA)
– Probability analysis
• Decision trees, NPV, and PERT
– Semiquantitative scenario analysis
Risk Identification
 Background
• Risk identification is a systematic attempt to specify threats to the
project plan
• By identifying known and predictable risks, the project manager takes
a first step toward avoiding them when possible and controlling them
when necessary
• Generic risks
– Risks that are a potential threat to every software project
• Product-specific risks
– Risks that can be identified only by those a with a clear understanding of
the technology, the people, and the environment that is specific to the
software that is to be built
– This requires examination of the project plan and the statement of scope
– "What special characteristics of this product may threaten our project
plan?"

19
 Risk Item Checklist

• Used as one way to identify risks

• Focuses on known and predictable risks in specific subcategories (see
next slide)
• Can be organized in several ways
– A list of characteristics relevant to each risk subcategory
– Questionnaire that leads to an estimate on the impact of each risk
– A list containing a set of risk component and drivers and their probability
of occurrence

20
Known and Predictable Risk Categories
• Product size – risks associated with overall size of the software to be
built
• Business impact – risks associated with constraints imposed by
management or the marketplace
• Customer characteristics – risks associated with sophistication of the
customer and the developer's ability to communicate with the
customer in a timely manner
• Process definition – risks associated with the degree to which the
software process has been defined and is followed
• Development environment – risks associated with availability and
quality of the tools to be used to build the project
• Technology to be built – risks associated with complexity of the
system to be built and the "newness" of the technology in the system
• Staff size and experience – risks associated with overall technical and
project experience of the software engineers who will do the work

21
 Questionnaire on Project Risk
(Questions are ordered by their relative importance to project success)

1) Have top software and customer managers formally committed to

support the project?
2) Are end-users enthusiastically committed to the project and the
system/product to be built?
3) Are requirements fully understood by the software engineering
team and its customers?
4) Have customers been involved fully in the definition of
requirements?
5) Do end-users have realistic expectations?
6) Is the project scope stable?

(More on next slide) 22

 Questionnaire on Project Risk
(continued)
7) Does the software engineering team have the right mix of skills?
8) Are project requirements stable?
9) Does the project team have experience with the technology to be
implemented?
10) Is the number of people on the project team adequate to do the
job?
11) Do all customer/user constituencies agree on the importance of
the project and on the requirements for the system/product to be
built?

23
 Risk Components and Drivers
• The project manager identifies the risk drivers that affect the following risk
components
– Performance risk - the degree of uncertainty that the product will meet its
requirements and be fit for its intended use
– Cost risk - the degree of uncertainty that the project budget will be maintained
– Support risk - the degree of uncertainty that the resultant software will be easy
to correct, adapt, and enhance
– Schedule risk - the degree of uncertainty that the project schedule will be
maintained and that the product will be delivered on time
• The impact of each risk driver on the risk component is divided into one of
four impact levels
– Negligible, marginal, critical, and catastrophic
• Risk drivers can be assessed as impossible, improbable, probable, and
frequent

24
 Risk Analysis
• Main techniques include
– Decision tree analysis
– simulation

25
Decision Trees and Expected Monetary
Value (EMV)
• A decision tree is a diagramming method used
to help you select the best course of action in
situations in which future outcomes are
uncertain
• EMV is a type of decision tree where you
calculate the expected monetary value of a
decision based on its risk event probability
and monetary value

Copyright Course Technology 2001 26

Figure 10-3. Expected Monetary Value
(EMV) Example

27
 Simulation
• Simulation uses a representation or model of a
system to analyze the expected behavior or
performance of the system
• Monte Carlo analysis simulates a model’s outcome
many time to provide a statistical distribution of the
calculated results
• To use a Monte Carlo simulation, you must have
three estimates (most likely, pessimistic, and
optimistic) plus an estimate of the likelihood of the
estimate being between the optimistic and most
likely values
28
 Application & Scope of research
Application
• FAA Air traffic organization
Scope of research
• Risk assessment
 Sequencing& scheduling
activities, network planning
model
 Introduction to Sequencing &
scheduling activity
Scheduling activity
• Uses results of the other time management
processes to determine the start and end date of
the project
• Ultimate goal is to create a realistic project
schedule that provides a basis for monitoring
project progress for the time dimension of the
project
• Important tools and techniques include Gantt
charts, critical path analysis, critical chain
scheduling, and PERT analysis
 Activity Scheduling
• Involves reviewing activities and determining
dependencies
• A dependency or relationship is the
sequencing of project activities or tasks
• You must determine dependencies in order to
use critical path analysis
Network Planning Models
A critical path model or network shows the
sequential dependencies among activities in a
project.
It permits the calculation of:
• the earliest project completion date
and
• the activities which will delay the project if not
completed on time
(the critical path).
 Network Planning Models (continued)

. FIGURE 14.1
Network Planning Models (continued)

A Gantt chart presents a project

schedule as horizontal bars on a vertical time
grid.

It does not show dependencies among

the project activities.
It can help communicate the overall features of a
project schedule.
 Network Planning Models (continued)

. FIGURE 14.2
 Precedence diagramming
method(representation of lagged activities)
• The precedence diagramming method (PDM)
adds to AON by showing the key sequence
relationships
– Finish to start (most common, sequential)
– Start to start
– Finish to finish
– Start to finish

Chapter 7 8
PDM node relationships

9
 PDM
• PDM can also show lead and lag times for
activities
– Lead time is an amount of time a task can start
before the end of its predecessor
– Lag time is the amount of time a task must start
after the end of its predecessor
• Hence lag time = negative lead time

10
 Project Management Tools

Program Evaluation and Review Technique(PERT)

PERT deals with the problem of uncertainty in the activity time. It helps to co-
ordinate the activities successfully to accomplish the objectives of a project on time.
It acts as a effective tool for decision making In pert the activity time usually
expressed in calendar weeks.

Advantages

• This technique helps the management to plan the best possible use resouces
to a given goal within the time and cost limitations.
• It helps management to handle the uncertainties involved in the program.
• It process for the right action point and at right time in the organization.
• It provides information on existence of slack period between activies and
what avtivities are crucial in terms of time to complete project.
• It gives a basis of obtaining the necessary facts for decision-making.
• PERT allows a large amount of data to be presented in a well-organized
diagram known as network from which both the executor and customer can
make joint decisions.

Limitations

• The basic difficulty comes in the way of time estimate for the completion of
activities because activites are non-repetitive type.
• The technique does not consider resources required at various stages of the
project.
• Use of this technique for active control of a project requires frequent updating
a revising the PERT calculations and this provesquite a costly affair.

When PERT applied properly it helps to do the following jobs effectively.

• Cut project cost and reduce time.

• Coordinate and expedite planning.
• Eliminate slack(idle) time.
• Cut time required for routine decisions,but allow more time for critical
decision-makings.

Network fundamentals:

Networks are composed of events and activities as defined below:

Event:

An event is defined as the starting or ending point of an activity or a group of

activites. It represents a milestone and does not consume time or resources. Event is
described by a circle (o).

Activity:

Activity is the work required to proceed from one event to another It consumes
therefore time and resources. It is represented by an arrow(->)

• To draw network diagram an interdependencies between events and activites

must be identified so that master plan can be developed which illustrate the
up-to-date picture of operations during the project.
• Network analysis provides valuable information for planning, integration of
plans, time scheduling , and resource management.
• The primary purpose of network is to eliminate crisis management by
providing a pictorial representation of the total program from which the time
estimates such as Early starting time(EST) and Late starting time(LST) and
their impact can be made.

Network Rules:

• Each activity must have a preceding and a succeeding event

• Each Event should have a distinct(unique) number.

• There should not be loop in the project network as shown below:

• Note More than one activity can have the same preceding and succeeding
event

• Any number of activities may merge with an event.

Network Development

1. Enmurate all those activities in the Project which needs close monitoring to
complete them in time.
2. Define each activity as
Preceding activity(the activity which preceed it).
Succeding activity(the activity which followed).
Concurrent activity(the activity that can be done concurrently)
3. Estimation of time for the completion of each activity.

The estimation of time for the completion of each activity is important in the
network analysis. This can be done using three possible assumptions.

I. Optimistic time(a):
This time assumes that every thing will go accordingly to with minimum a
mount ofdifficulties and such situation may occur approximately 1 percent of
time.

II. Most pessimistic time(b):

This time assumes that every thing will not go according to plan and that
the maximum potential difficulties will develop and may occur approximately
one percent of time .

III. Most likely or normal time(m):

This is the time that would most often occur should this effort be reported
over over again.
The estimated time of the completion of an activity is given by:

te= (a+4m+b)/6
Where
te = estimated time
a = most optimistic time
m = normal time
b = most pessimistic time

Standard Devation

Standard devation of the estimated time(te):

sd (te) = (b-a)/6

The time estimates(weeks) for various activities in a

dummy project is illustrated below:
Name of activity symbol a m b te sd

Literature collection A 9 12 21 13 2

Field Preparation B 6 12 18 12 2

Sowing C 2 4 6 2 0.67

Cultural Operation D 4 8.5 10 8 1

Harvesting E 6 8 10 15 0.67

Data Analysis F 1 2 3 2 0.33

Draw the flow-chart and network for the above table

Activity Table

Name of activity Symbol Preceding activity Te(weeks)

Literature collection A -- 13

Field Preparation B -- 12

Sowing C A 2

Cultural Operation D B,C 8

Harvesting E A 15

Data Analysis F D 2

Flow Chart

Network
Earliest Starting Time(EST)

EST is the time at which activity can not be started earlier than this time that means
it is an waiting time to start next activity.
In the above network,event 4 occurs when activites A(1-2),B(1-3),C(2-4) and D(3-4)
are completed. In other words event 4 occurs when paths (1-2-3-4) and (1-3-4) are
completed and the requirement time for the two paths are 23 and 20 weeks
respectively. In the above network 1-3-4 is the path with longest time (23
weeks).Therefore this is the EST for the activity F,it mean to start activity F one has
to expect to wait 23 weeks.

Latest Starting Time(LST)

LST is the time, at which the starting of an activity can not be delayed beyond this
time. In other words it includes non-waiting time. As further delay beyond this time
will adverse affect the project duration. The LST for an event is obtainedby making
EST and LST is equal for the end event and calculated by working backward. The
path with shortest time among the path is considered for LST. In this example the
LST of an event 2 is 13 since among the two paths 2-5 and 2-4-5, the path2-5 is the
shortest.
In general the WST of an event is indicated in the left half of the circle and LST is
indicated in the right half of the circle as shown below.

Slack Time:

Slack Time in a network is defined as the difference between Latest Starting

Time(LST) and Earliest Starting Time(EST) of an event.

Slack Time=LST-EST

Slack Time(week) in the above network for the events 2,3,and 4 are given below:

Events LST EST Slack(LST-EST)

4 26 23 3
3 18 15 3
2 13 13 0
The above figure indicated the activity E should be starting immediately after
completion of Event 2.Where as even if activity D and F are little delay in their start,
may notadversely effect the project duration much. If their is any shortfall or crunch
in resources,the priority should be given to activity A and followed by D and F.

Critical Path:

The critical path is one having longest-time span through the total system of events.
For example in the above network the possible paths and total time of each path are:

Path Total time

1-2-5 : 28

1-2-3-4-5 : 25

1-3-4-5 : 22

The Critical path in the above network composed of events 1-2-5, being longest
time-span among the three paths. The critical path is vital for successful control of
the project because it provides information to the management on two things:

1. Because there is no slack time in any of the events on the path, any delay will
cause a corresponding delay in the end-date of the program, unless the delay can
recovered during any of the downstream events on the critical path.

2. Because of the event on this path are the most critical for the success of the
project management must take a hardlook at this events, in order to improve the
total program. Also if we want to reduce the total duration of a project we should be
able to reduce the time taken by activity on the critical path.

Calculation of Probability of a Project

Assuming that the probability distribution of activities on the critical path are
independent, the variance of the critical path duration is obtained by adding
variances of activities on the critical path (C.P.) in the above network. A and E are
the activities on the critical path.

The variance of the activities on C.P. = Var(A)+ Var(E)

and Sd(CP) = SQRT[(Var(A)+Var(e)]

With the information on mean (m) and s.d (s) for critical path duration, which is
assumed as normally distributed, we can compute the probability of completion of a
project by a specific date (d) from the following steps

Step1:
Find Z = (d-m)/sd Where Z is known as standard normal
variate with mean and variance
Step2:
Obtain cumulative probability upto z from the table
"area under normal curve"
As an illustration consider a dummy network with mean(m) and s.d(s) of a critical
path 28 weeks and 3.0 weeks respectively. Then the Probability of completion of a
project by certain specified dates are given by:

Probabilityof
Specified completion of project
Z-value
period(d) (weeks) by a specified
period(d)
20 (20-28)/3=-2.67 0.005
25 (25-28)/3=-1.0 0.159
30 (30-28)/3=0.67 0.73

It is seen from the above table that the project can be completed within 30 weeks
with high probability (0.73).On the other hand it is impossible to complete it within
20 weeks as indicated by the probability(0.005).

Example

A farm manager has undertaken a project on to develop a farm in a regional station.

The activites identified in the project, their interrelationships and the time
distribution of each activity is shown in following activity table.

Name of the Preceding Time

S.No Symbol
activity activity Distribution(weeks)
a m b
1. Land Surveying A - 6 8 11
2. Plan preparartion B A 4 7 10
3. Rock blasting C B 15 20 24
4. Land leveling D C 5 9 12
Drainage channel
5. E D 4 6 10
digging
Stone pitching of
6. F E 12 16 22
drainage channel
7. Digging of wells G B 15 20 30
Laying of
8. H G 10 12 18
irrigation lines
Construction of
9. I G 8 14 21
pump house
Procurement of
10. J G 4 6 8
pumps
Installation of
11. K I,J 5 7 12
pumps
12. Finishing works L F,H,K 4 6 10

For the above project calculate Expected time(te) and s.d(te) and draw the flow
chart, network and find the critical path. Also calculate the expected time,slacks for
each event and the probability of completion of the project for different periods
60,65,70,75,80,85 ways.

Activity Sd(te)=(b-
Symbol Te=(a+4m+b)/6
number a)/6
1 A 8 0.83
2 B 7 1.00
3 C 20 1.50
4 D 9 1.20
5 E 6 1.00
6 F 17 1.70
7 G 21 2.50
8 H 13 1.33
9 I 14 2.16
10 J 6 0.67
11 K 8 1.16
12 L 6 1.00
Critical path 0-1-2-3-4-5-9-10
Critical path duration = 73 weeks
Mean duration of C.P: 73 weeks
Sd(c.p) = 3.4 weeks
Now let us find out the probability for the completion of project for specific dates(d)

Probability(from the
Specified
Z value area under normal
date(weeks)(d)
curve)
60-73/3.4= -
60 0.00005
3.82
65-73/3.4=-
65 0.015
2.35
70-73/3.4=-
70 0.47
0.09
75-
75 0.61
73/3.4=0.60
80-
80 0.98
73/3.4=2.06

From the above table it is seen that the project may be completed within 60 days is
highly impossible. It may be completed within 75 weeks with probability 0.61. The
project will however be completed in 80 weeks with certainity (P=0.98).

Reference Books

Harold Kerzner Project Management-A Systems Approach to Planning,Scheduling and

Controlling (1979)

Vasant Desai. Project Management Preparation,Appraisal Finance and Policy(1997)

K.Venkateswarlu and K.V. Raman. Project Management Techniques for R&d in

Agriculture(1993)
Critical path Method
 Critical path (CRM) method

● In project management, the critical path is the longest sequence of tasks that

must be completed to complete a project.

● The tasks on the critical path are called critical activities because if they’re delayed,

the whole project completion will be delayed.

● The critical path method (CPM) is a technique that’s used by project managers to create a project

schedule and estimate the total duration of a project.

Critical path (CRM) method

● The CPM method, also known as critical path analysis (CPA), consists in using a

network diagram to visually represent the sequences of tasks needed to complete a

project.

● Once these task sequences or paths are defined, their duration is calculated to

identify the critical path, which determines the total duration of the project.
Critical path (CRM) method

CPM History

● The critical path method was developed in the late 1950s by Morgan R. Walker
and James E. Kelley.
● The origins of the critical path method are closely related with the Program
Evaluation and Review Technique (PERT), a similar method which is commonly
used in conjunction with CPM.
Critical path (CRM) method
Finding the critical path is very important for project managers because it allows them to:

● Accurately estimate the total project duration.

● Identify task dependencies, resource constraints and project risks.
● Prioritize tasks and create realistic project schedules.
Critical path (CRM) method

Why Is CPM Important in Project Management?

➔ Projects are made up of tasks that have to adhere to a schedule in order to meet a timeline.
➔ It sounds simple, but without mapping the work, your project scope can quickly get out of
hand and you’ll find your project off track.
➔ Using the critical path method is important when managing a project because it identifies all
the tasks needed to complete the project, then determines the tasks that must be done on
time, those that can be delayed if needed and how much float or slack you have.
Critical path (CRM) method
critical path analysis can help you:

★ Identify task dependencies, resource constraints and project risks

★ Accurately estimate the duration of each task
★ Prioritize tasks based on their float or slack time, which helps with project scheduling
and resource allocation
★ Identify critical tasks that have no slack and make sure those are completed on time
★ Monitor your project progress and measure schedule variance
★ Use schedule compression techniques like crash duration or fast tracking
Critical path (CRM) method
CPM Key Elements

★ Earliest start time (ES): This is simply the earliest time that a task can be started in your
project. You cannot determine this without first knowing if there are any task
dependencies
★ Latest start time (LS): This is the very last minute in which you can start a task
before it threatens to delay your project schedule
Critical path (CRM) method

★ Earliest finish time (EF): The earliest an activity can be completed, based on its duration
and its earliest start time
★ Latest finish time (LF): The latest an activity can be completed, based on its duration and
its latest start time
★ Float: Also known as slack, float is a term that describes how long you can delay a task
before it impacts its task sequence and the project schedule. The tasks on the critical path
have zero float, because they can’t be delayed
Critical path (CRM) method
How to Find the Critical Path of a Project in 8 Steps

Collect Project Activities

Use a work breakdown structure to collect all the project activities that lead to the final deliverable.

Identify Task Dependencies

Figure out which tasks are dependent on other tasks before they can begin. Use your judgement and your team members’
feedback. Failing to define task dependencies correctly makes the critical path method useless.
Critical path (CRM) method

Create a Critical Path Diagram

A critical path analysis chart, or network diagram, depicts the order of activities.

Estimate Timeline

To use the critical path method, you’ll need to estimate the duration of each task. Use data from past projects
and other sources of information such as subject matter experts.
Critical path (CRM) method

Use the Critical Path Algorithm

The critical path algorithm has two parts; a forward pass and a backwards pass.

Forward Pass

Use the network diagram and the estimated duration of each activity to determine their earliest start (ES)
and earliest finish (EF). The ES of an activity is equal to the EF of its predecessor, and its EF is
determined by the formula EF = ES + t (t is the activity duration). The EF of the last activity identifies the
expected time required to complete the entire project.
Critical path (CRM) method
Backward Pass

Begins by assigning the last activity’s earliest finish as its latest finish. Then the formula to find the LS is LS =
LF – t (t is the activity duration). For the previous activities, the LF is the smallest of the start times for the
activity that immediately follows.

Identify the Float or Slack of Each Activity

Use this formula to determine the float or slack of each task. Float = LS – ES
 Critical path (CRM) method

Identify the Critical Path

The activities with 0 float make up the critical path. All of these critical path activities are dependent tasks
except for the first task in your CPM schedule. All project tasks with positive slack are parallel tasks to the
critical path activities.

Revise During ExecutionContinue to update the critical path network diagram as you go
through the execution phase.

These critical path analysis steps determine what tasks are critical and which can float,
meaning they can be delayed without negatively impacting the project schedule. Now
you have the information you need to plan the critical path schedule more accurately
and have more of a guarantee you’ll meet your project deadline.
Thank You
Scheduling resources, Creating
critical path
 Introduction to Scheduling resources
• It is next step to resource requirement
• This is best done by representing the activity
plan as a bar chart
 Scheduling Resources(Cont..)
• Changing the level of resource on a project
over a time , particularly personnel generally
adds to the cost of a project
• Recurring staff has costs and even where staff
are transferred internally time will be needed
for familaization
 Scheduling Resources(Cont..)
• Problem with an uneven resource histogram is
that it is more likely to call for level of
resource beyond those available
• In practice resource have to be allocated to a
project on an activity by activity basis &
finding the best allocation can be time
consuming and difficult
 Scheduling Resources(Cont..)
• By delaying start of some activity it has been
possible to smooth the histogram and reduce
maximum level of demand for the resource
• It is difficult to split task without increasing
the time they take
 Scheduling Resources(Cont..)
Two ways to prioritizing activities are
• Total float priority
• Ordered list priority
 Scheduling Resources(Cont..)
Demerits
• Resource smoothing or even containment of
resource demand to avail levels is not always
possible within planned timescale.
 Creating critical path
• Scheduling resource create new critical path
• Delaying start of activity may cause that
activity to become a critical
• A delay in one activity in competing one
activity can delay the avaibility of a resource
required for a later activity.
 Creating critical path
• In a large project, resource linked capability
can be quite complex
What is Monte Carlo Simulation? www.riskamp.com

What is Monte Carlo Simulation?

Monte Carlo simulation, or probability simulation, is a technique used to understand the impact of risk
and uncertainty in financial, project management, cost, and other forecasting models.

Uncertainty in Forecasting Models

When you develop a forecasting model – any model that plans ahead for the future – you make certain
assumptions. These might be assumptions about the investment return on a portfolio, the cost of a
construction project, or how long it will take to complete a certain task. Because these are projections
into the future, the best you can do is estimate the expected value.

You can't know with certainty what the actual value will be, but based on historical data, or expertise in
the field, or past experience, you can draw an estimate. While this estimate is useful for developing a
model, it contains some inherent uncertainty and risk, because it's an estimate of an unknown value.

Estimating Ranges of Values

In some cases, it's possible to estimate a range of values. In a construction project, you might estimate
the time it will take to complete a particular job; based on some expert knowledge, you can also
estimate the absolute maximum time it might take, in the worst possible case, and the absolute
minimum time, in the best possible case. The same could be done for project costs. In a financial
market, you might know the distribution of possible values through the mean and standard deviation of
returns.

By using a range of possible values, instead of a single guess, you can create a more realistic picture of
what might happen in the future. When a model is based on ranges of estimates, the output of the
model will also be a range.

This is different from a normal forecasting model, in which you start with some fixed estimates – say
the time it will take to complete each of three parts of a project – and end up with another value – the
total time for the project. If the same model were based on ranges of estimates for each of the three
parts of the project, the result would be a range of times it might take to complete the project. When
each part has a minimum and maximum estimate, we can use those values to estimate the total
minimum and maximum time for the project.

What Monte Carlo Simulation can Tell You

When you have a range of values as a result, you are beginning to understand the risk and uncertainty
in the model. The key feature of a Monte Carlo simulation is that it can tell you – based on how you
create the ranges of estimates – how likely the resulting outcomes are.

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How It Works
In a Monte Carlo simulation, a random value is selected for each of the tasks, based on the range of
estimates. The model is calculated based on this random value. The result of the model is recorded,
and the process is repeated. A typical Monte Carlo simulation calculates the model hundreds or
thousands of times, each time using different randomly-selected values.

When the simulation is complete, we have a large number of results from the model, each based on
random input values. These results are used to describe the likelihood, or probability, of reaching
various results in the model.

For Example
For example, consider the model described above: we are estimating the total time it will take to
complete a particular project. In this case, it's a construction project, with three parts. The parts have
to be done one after the other, so the total time for the project will be the sum of the three parts. All the
times are in months.

Task Time Estimate

Job 1 5 Months
Job 2 4 Months
Job 3 5 Months
Total 14 Months
Table 1: Basic Forecasting Model

In the simplest case, we create a single estimate for each of the three parts of the project. This model
gives us a result for the total time: 14 months. But this value is based on three estimates, each of which
is an unknown value. It might be a good estimate, but this model can't tell us anything about risk.
How likely is it that the project will be completed on time?

To create a model we can use in a Monte Carlo simulation, we create three estimates for each part of
the project. For each task, we estimate the minimum and maximum expected time (based on our
experience, or expertise, or historical information). We use these with the “most likely” estimate, the
one that we used above:

Task Minimum Most Likely Maximum

Job 1 4 Months 5 Months 7 Months
Job 2 3 Months 4 Months 6 Months
Job 3 4 Months 5 Months 6 Months
Total 11 Months 14 Months 19 Months
Table 2: Forecasting Model Using Range Estimates

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This model contains a bit more information. Now there is a range of possible outcomes. The project
might be completed in as little as 11 months, or as long as 19 months.

In the Monte Carlo simulation, we will randomly generate values for each of the tasks, then calculate
the total time to completion1. The simulation will be run 500 times. Based on the results of the
simulation, we will be able to describe some of the characteristics of the risk in the model.

To test the likelihood of a particular result, we count how many times the model returned that result in
the simulation. In this case, we want to know how many times the result was less than or equal to a
particular number of months.

Time Number of Times (Out of 500) Percent of Total (Rounded)

12 Months 1 0%
13 Months 31 6%
14 Months 171 34%
15 Months 394 79%
16 Months 482 96%
17 Months 499 100%
18 Months 500 100%
Table 3: Results of a Monte Carlo Simulation

The original estimate for the “most likely”, or expected case, was 14 months. From the Monte Carlo
simulation, however, we can see that out of 500 trials using random values, the total time was 14
months or less in only 34% of the cases.

Put another way, in the simulation there is only a 34% chance – about 1 out of 3 – that any individual
trial will result in a total time of 14 months or less. On the other hand, there is a 79% chance that the
project will be completed within 15 months. Further, the model demonstrates that it is extremely
unlikely, in the simulation, that we will ever fall at the absolute minimum or maximum total values.

This demonstrates the risk in the model. Based on this information, we might make different choices
when planning the project. In construction, for example, this information might have an impact on our
financing, insurance, permits, and hiring needs. Having more information about risk at the beginning
means we can make a better plan for going forward.

1 In this example, we use the beta-PERT distribution to generate random values based on a minimum, most likely, and
maximum value. The PERT distribution is often used to model estimates of expert data. For more information on this
and other probability distributions, see the documentation on our website.

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11.5

12.0

12.5

13.0

13.5

14.0

14.5

15.0

15.5

16.0

16.5

17.0
0% 20% 40% 60% 80% 100%

Figure 1: Probability of Completion Within Specified Time (Months)

How Reliable Is It?

Like any forecasting model, the simulation will only be as good as the estimates you make. It's
important to remember that the simulation only represents probabilities and not certainty.
Nevertheless, Monte Carlo simulation can be a valuable tool when forecasting an unknown future.

________________________________________

About RiskAMP
RiskAMP is a Monte Carlo simulation engine that works with Microsoft Excel®. The RiskAMP Add-
in adds comprehensive probability simulation to spreadsheet models and Excel® applications. The
Add-in includes 22 random distributions, 17 statistical analysis functions, a wizard for creating charts
and graphs, and VBA® support – all for a fraction of the price of competing packages.

For more information, visit our website at http://www.riskAMP.com.

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