Evaluation of risk

Evaluation of risk
See also
Project risk assessment Feasibility analysis Risk evaluation Maintenance strategy Assignable cause Project evaluation methods Contribution analysis Risk analysis in project Qualitative risk analysis

Evaluation of risk is a last step of risk assessment process and its main purpose is to make a summarized assessment of the net effect of all identified risks in the project. It allows to prioritize actions required to be taken against identified threats and opportunities of risks and to take a decision of the business validity of continuing the project based on risk effectiveness .

Risk evaluation process involves comparing results of risk analysing process with the risk evaluation criteria set by the Project Board. After the level of risk was established in risk analysis, there has to be created rating table for risk evaluation. Such table should contain factors like: risk rating, based on the likelihood of the risk occurring and severity of consequences, short description and needed actions with its execution times. Each risk evaluation should consider:

• the significance of the analyzed activity to the project,
• the amount of risk control activities,
• potential losses to the project,
• profits and opportunities resulting from the risk.

There are 2 main techniques of evaluating the risk in the project :

• Risk models,
• Expected monetary value analysis.

Risk modeling and simulations

Risk modeling and simulations allows to translate specified project uncertainties into its potential impact on objectives of the project. One of the most common model used in evaluation of risks is Monte Carlo simulation, quantitative uncertainty analysis of the risk. Simulation results are presented in the form of a histogram, showing different iterations of the risk in different ambient conditions, simulated for various scenarios (e.g. various probability, costs or time). Repeatedly runned simulations allows to predict the average level of the project risk .

Expected monetary value analysis

Expected monetary value technique provides quick assessment of all the occurring risks in the project to present their combined effect. It calculates average outcome of scenarios that may or may not occur (uncertainty analysis). Expected monetary value is calculated by summing possible outcomes values multiplied by the probability of its occurrence. It is assumed that all the identified threats are expressed in calculations as negative values, while risk opportunities are expressed as positive values.

Expected monetary value technique can be presented as a decision tree analysis (showing results of net path values for different decision nodes and chance nodes) or as a simple table (including e.g. percentage of the likelihood of each risk its impact and based on that its expected value, where sum of all the listed risks expected values gives overall expected monetary value).

References

• Arnold U., Yildiz Ö. (2015), Economic risk analysis of decentralized renewable energy infrastructures – A Monte Carlo Simulation approach Renewable Energy, Volume 77, Pages 227-239
• Kwan T.W., Leung H.K.N. (2011), A Risk Management Methodology for Project Risk Dependencies IEEE Transactions on Software Engineering, Volume: 37, Issue: 5
• Liu P., Zhang X., Liu W. (2011), A risk evaluation method for the high-tech project investment based on uncertain linguistic variables Technological Forecasting and Social Change Volume 78, Issue 1, January 2011, Pages 40-50
• Office of Government Commerce (2009), Managing Successful Projects with PRINCE2 The Stationery Office
• Project Management Institute (2013), Project Management Institute. A Guide to the Project Management Body of Knowledge (PMBOK® Guide) – Fifth Edition Project Management Institute, Inc., Pensylwania

Author: Natalia Kobos