Project Risk and Cost Analysis

Project Risk and Cost Analysis

Project Risk and Cost Analysis

Project Risk and Cost Analysis


Project Risk and Cost Analysis focuses on risk in the context of project management, primarily in the area of risk's effects on project costs, with emphasis on the many modern tools that help you and your organization quantify and manage project risk. You will learn how to perform a formal risk and cost analysis, apply the Earned Value Method to risk management, and adjust schedule and budget reserves appropriately for your project conditions. The book follows the basic project risk management approach as laid out in A Guide to the Project Management Body of Knowledge (PMBOK® Guide), 4th Edition, popularly known as the PMBOK® Guide, along with other sources listed in the bibliography and suggested reading.


“I cannot conceive of any vital disaster happening to this vessel. Modern ship
building has gone beyond that.”

RMS Titanic Captain Edward j. Smith, 1907

“We are ready for any unforeseen event that may or may not occur.”

—Dan Quayle, quoted in Cleveland Plain Dealer, 27 September 1990

Things don’t always go according to plan. That’s why we have risk management.

In the case of RMS Titanic, both management and operations thought the risk of catastrophe was low, and indeed—measured objectively—it was. The Titanic was, in many respects, a marvel of safety engineering, with watertight compartments designed to keep it buoyant even in case of collision. It traveled in shipping lanes filled with other ships, so that even in case of disaster, help would arrive quickly. All of these steps reduced the risk, but as we all know, did not eliminate it altogether.

A report on the late-2000 financial crisis by the leaders of the Group of Twenty (G20) nations focused on the failure of risk management as one of the root causes. They wrote, “During a period of strong global growth, growing capital flows, and prolonged stability earlier this decade, market participants sought higher yields without an adequate appreciation of the risks and failed to exercise proper due diligence. At the same time, weak underwriting standards, unsound risk management practices, increasingly complex and opaque financial products, and consequent excessive leverage combined to create vulnerabilities in the system. Policy-makers, regulators and supervisors, in some advanced countries, did not adequately appreciate and address the risks building up in financial markets, keep pace with financial innovation, or take into account the systemic ramifications of domestic regulatory actions.” When risk management fails, the damage can be incalculable.

Risk, fundamentally, is the measurement of uncertainty about the future as it applies to us—our project objectives, corporate goals, or personal goals. How long will the project take? How much will the project cost? Will the project be successful? The answer is, of course, that even when probability is . . .

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