CPM Project Risk Analysis by Simulation
April 19, 2013
Understand True Risk Exposure
Project risk analysis has always been as challenging and complicated as valuable and mission-critical. The information a team gathers while analyzing risks is valuable as long as it helps the team perceive true risk exposure and reduce the key drivers. The impact of uncertainties and risk events can jeopardize project schedule and push critical path completion dates out of alignment with project goals. A simulation-driven risk analysis in critical path management (CPM) gives the team a true sense of exposure. Risk models let ensure realistic CPM scheduling.
Why Conduct Project Risk Analysis
People can’t forecast everything in this world. Project management is not a perfect science, it can’t remove uncertainty completely. Even the very thought-out and planned project will face some trouble. We can’t create a perfect project plan that makes everything certain.
However, what we really can and should do is to account for the uncertainty in our project and manage discrete risk events which haven’t yet been considered and handled in the deterministic project plan. Here is where the risk analysis comes up. By analyzing project risks we understand what issues and events need to be managed in order to prevent negative external and internal impacts and reduce uncertainty of the outcomes.
The purpose of conducting risk analysis is to gain a deeper insight into the potential impact uncertainty and risk events will have on a project within its life-cycle, from conceptualization and development through to delivery and evaluation.
Traditional Planning and Realism
If employing traditional planning, we need to consider that there should be finite durations and costs for the project. This approach often works fine for short-term unsophisticated endeavors. However, these finite values become unrealistic when we forecast the schedule, cost and other key contracts for several or more years ahead. Even our best-made prediction can’t be 100% reliable and realistic because of inevitable long-term changes in rates, quantities, scope, human resources, and other variables. Traditional planning fails at long distance, and the situation becomes more challenging when the potential presence of threats and opportunities (risk events) are not taken into account.
CPM Simulation Drives Risk Analysis Success
When you begin to deal with all these uncertainties and risk events you wonder how to best budget and schedule your project activities. Critical path management gives you the right solution: you can combine everything into a network in which dependency determines the order of execution. And you can then manage the critical path to ensure your project won’t take longer than expected.
As such, CPM method is great for activity networking and scheduling. However, it sometimes slips because of unhandled uncertainty. Simulation and modeling lets make critical path management more accurate and certain. CPM simulation (e.g. with a Monte Carlo technique) enables you to develop an accurate forecast of ranges of project costs and activity durations, which is not provided by traditional critical path scheduling alone.
CPM simulation is nothing more than a critical path project risk analysis conducted thousands or millions of times. The impact of different risk combinations is carefully investigated. And the success in this simulation is not ensured by the cleverness of the risk model, but by the accurate interpretation of the results.
Project Risk Model Inputs
A risk model is only as sound as its inputs. So, before we can interpret the results of our risk model, first we need to understand the inputs. Uncertainty and risk events should be accurately captured, or otherwise our model will be useless.
CPM Schedule Analysis
Risk modeling usually starts with CPM schedule analysis. Our schedule should be well structured, provide a relevant level of detail, and have a free-flowing logic. Completion dates should be driven by realistic estimations, not by management or political considerations. The scheduled timeline for the project should reflect activity durations and sequences, with emphasis on the critical path completion time. However, the real-life situation can jeopardize the schedule and push the completion dates out of alignment with project goals.
By analyzing CPM schedule we can develop a model of the true risk exposure and then use it in creating an acceleration plan that will help us move project activities closer towards achieving the goals.
See my previous article about realistic project scheduling to learn more about how we handled team perception, schedule float and risk exposure.
Uncertainty Analysis and Risk Event Capturing
Uncertainty analysis lets understand circumstance, conditions and events when work complexity gets deepened. We can use a 3-point estimation technique to model uncertainties with different distribution types. It allows us to determine the reliability of our estimations and account for uncertainty sources in risk modeling input.
In parallel, we can hold risk workshops and interviews with the team to capture their perception of uncertainty ranges and risk events. We consider uncertainty a measure of team buy-in into the project schedule or cost estimate. This measure lets rate each project activity as realistic, aggressive, or conservative. Risk events data is captured by the team, and then we analyze it for the impact on risk results.
So both uncertainty analysis and risk event capturing are in the foundation of accurate risk model development.
Criticality Index to Identify Risk Drivers
Criticality lets measure CPM schedule reliability in terms of true risk drivers instead of perception. By analyzing the Criticality Index (CI, %) we can collect valuable information on how many times each scheduled activity falls on the critical path and then decide what actions can reduce risk exposure for the entire schedule. The key idea is that an activity becomes less reliable and therefore more risk-bearing for the project finish date if it falls on the critical path more often than other activities. This activity is going to be a risk driver and should be handled appropriately. The tornado chart can be used to create a visual report on key risk drivers.
However, it doesn’t necessary mean that a critical path activity with a higher criticality index is going to be significant to the project finish. For example, an activity that takes only 1 day off a 6-month duration project is likely to have no significant impact to the scheduled completion date of this project.
Sensitivity Index to Correlate Durations
So it depends on correlation between activity duration and overall project time length. This correlation can be made by calculating Schedule Sensitivity Index (SSI, %). SSI lets determine how often and how much a CP activity impacts a given finish date. Activity Standard Deviation (ASD) and Project Standard Deviation (PSD) need to be taken into account for SSI calculation, as follows:
We can use this measure to determine how each activity of our critical path contributes to the schedule’s overrun. The only thing is that we get a percentage-based metric which is good in theory but may be not so relevant to understanding. Anyway, it is the task of the project manager to interpret the results of CPM project risk analysis into each activity’s absolute or average impact to the schedule, so that it becomes easier for the team to understand the status quo.