Introduction to Quantitative Risk Analysis for the PMP Exam
Understanding how to gather, interpret, and act upon risk-related information is crucial for any project manager. Therefore, it’s crucial to learn how to perform quantitative risk analysis before taking the PMP Exam. This Project Management Academy resource will review what it is, why it matters, and how to perform quantitative risk analysis.
Prepare for the PMP exam and learn how to be a more effective project manager through this Project Management Academy introduction to quantitative risk analysis.
On this page:
- What is Quantitative Risk Analysis?
- Inputs Required to Perform Quantitative Risk Analysis
- Outputs from Performing Quantitative Risk Analysis
- Tools and Techniques to Help you Perform Quantitative Risk Analysis
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What is Quantitative Risk Analysis?
Quantitative risk analysis is a process within the Risk Management Knowledge Area. This process is called, fittingly, “Perform Quantitative Risk Analysis.” Quantitative Risk Analysis is a Risk Management process that helps managers numerically analyze how identified risks may affect a project’s objectives and what contingency reserves may be required to account for those risks.
How is quantitative risk analysis used in projects?
Project managers can perform quantitative risk analysis to inform sound project decisions supported by numerical data, like the schedule or financial cost associated with the risk. Assessing project risks through quantitative risk analysis is also helpful for estimating or simulating risk-related information to appropriately plan for risks.
Learning more about the risks associated with your project through quantitative risk analysis enables you to better plan risk responses, monitor risks, and control some of the variables that are associated with project risks.
When and how often is quantitative risk analysis used?
Quantitative risk analysis is typically performed alongside qualitative risk analysis, after the risk identification process. Both processes deal with risks that have already been identified. While qualitative risk analysis helps you prioritize project risks on your risk register, quantitative risk analysis allows to understand the probability of success of a project given the current risk information, as well as plan for appropriate contingency amounts, in both time and money.
Risk identification and analysis should occur as early in your project as possible. However, risk management is an ongoing process throughout the entire project. You can continue to use quantitative risk analysis as you identify new risks or update your risk register.
Pros and cons of quantitative risk analysis
Quantitative risk analysis comes with many advantages, but it can also be a tedious, time-consuming process. Ensure you carefully consider if these pros make it worth investing time and energy into quantitative risk analysis:
- Informs project decisions with objective data
- Guides discussions with stakeholders: what and when risks are or are not acceptable
- Helps organize risk-related information for large, complex projects
- Provides a high level of visibility for projects and project reporting
Despite these benefits of performing quantitative risk analysis, it may not be a worthwhile process if your project is small or relatively straightforward.
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Inputs Required to Perform Quantitative Risk Analysis PMP
To perform quantitative risk analysis, you will need various data inputs to help you calculate and analyze risk-related information.
- Risk register: an organized list of all the risks you and your project team have identified, along with other helpful information such as type, probability, and response plan.
- Risk management plan: a document defining a level of tolerable risk, actionable steps for managing risks before or after they occur, and more.
- Schedule baseline: a document establishing a baseline for the work to be accomplished, detailing how project risks may affect the project’s timing, and describing any actionable steps related to this information.
- Project documents: forms and files such as the assumption log, basis of estimates, milestone list, resource requirements, and more.
- Cost baseline: similar to the schedule baseline, but dealing with financial costs related to your project and its identified risks.
- Organizational process assets: any resources you can use to help you manage your project. These can include enterprise environmental factors, risk templates, information from past projects, or established policies, procedures, and guidelines.
All of this information contains quantifiable components you can use to provide additional risk information that will help support risk response planning.
Outputs After You Perform Quantitative Risk Analysis PMP
What does quantitative risk analysis drive in the Project Risk Management process? A potential output of performing quantitative risk analysis is project document updates, such as updating the risk report. The risk report can provide a list of suggested risk responses based on the level of overall project risk exposure or explore critical individual project risks.
Remember, project risks are not always negative. Risks with a negative impact are called threats, while risks with a positive impact are called opportunities. Your risk report should include information about both types of risks. The risk report and the recommendations made in it will become inputs to the Plan Risk Responses process.
Tools and Techniques to Help you Perform Quantitative Risk Analysis
There are many useful tools and techniques that can help you perform quantitative risk analysis as a project manager. These can include:
- Data gathering: structured interviews with project team members, stakeholders, or subject matter experts to better understand the optimistic, pessimistic, and realistic probability and impact of each risk
- Expert judgment: conversations with experts who review your risk data, data gathering methods, and risk register to identify any gaps in information
- Representations of uncertainty
- Monte Carlo analysis: an example of a modeling and simulation activity that typically uses a computer to analyze various scenarios to understand the potential impact of risk events on your project’s schedule
- Sensitivity analysis: reviewing the impact and severity of identified project risks through tornado diagrams and other methods to understand how sensitive your project may be to those risks
- Decision tree analysis: a method of calculating expected monetary value (EMV) by plotting project decisions in a flow diagram
- Influence diagrams: a graphical tool to facilitate decision making when uncertainty is present by depicting the project as a set of entities, outcomes, and influences while mapping the relationships and effects between them.
- Interpersonal and team skills: your ability to facilitate and perform the tools and techniques listed above is, in itself, a crucial tool at your disposal
Approaching quantitative risk analysis can be daunting at first, but these tools and techniques offer a great starting point to help you perform thorough and accurate quantitative risk analysis during the risk management process.
Learning how to perform quantitative risk analysis can help prepare you for passing the PMP exam and becoming a more efficient project manager. Here’s a quick review of what you should know about performing quantitative risk analysis for the PMP exam:
- What inputs you need to perform quantitative risk analysis
- What information or outputs you obtain when performing quantitative risk analysis
- The different tools and techniques associated with quantitative risk analysis
- How to interpret information related to quantitative risk analysis and the overall health of your project
- How quantitative risk analysis fits into the overall risk management process
You may not have to calculate any information related to performing quantitative risk analysis. Instead, try to prepare to answer situational questions. For example, if you are given information related to quantitative risk analysis, you should be able to interpret how this information could impact your project.
Visit our blog to learn more about project risk management topics. If you are learning this information in preparation for the PMP exam or other professional certifications, take a look at some of the Project Management Academy courses available to help you succeed.
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