Academic journal article Management & Marketing

Project Risk Simulation Methods - a Comparative Analysis

Academic journal article Management & Marketing

Project Risk Simulation Methods - a Comparative Analysis

Article excerpt

Abstract. Effective risk management provides a solid basis for decision-making in projects, bringing important benefits. While the financial and economical crisis is present at the global level and the competition in the market is more and more aggressive, the interest in project risk management increases. The paper presents a comparative analysis of the effectiveness of two quantitative risk analysis methods, Monte Carlo simulation and the Three Scenario approach. Two experiments are designed based on real projects, in order to compare the effectiveness of these methods. The conclusions of the comparative analysis are that Three Scenario approach, even if is not as accurate as Monte Carlo, assures the results stability, if the same shape of the probability distribution curve is considered. The Three Scenario approach is easy to be applied in practice and requires a shorter computation time than Monte Carlo.

Keywords: project risk management, Monte Carlo, Three Scenario approach, simulation.

(ProQuest: ... denotes formulae omitted.)

1. Introduction

While the financial and economical crisis is present at the global level and the competition in the market is more and more aggressive, the interest in risk management increases (Hulett, 2009; Kendrick, 2003; Pritchard, 2011). Effective risk management provides a solid basis for decision-making in projects, bringing important benefits, such as: reduced costs, increased engagement with stakeholders and better change management (Bayati, Gharabaghi and Ebrahimi, 2011). Different project risks management approaches were defined in standards and guidelines such as:

- ICB v3.0, International Competence Baseline, International Project Management Association (IPMA, 2006);

- AS/NZS 4360, Risk Management, Standards Australia/Standards New Zealand (AS/NZS, 2004);

- ISO 21500, Guidance on Project Management, STD v2, International Organization for Standardization (ISO, 2012);

- PMBOK Guide®, Guide to the Project Management Body of Knowledge (PMI, 2008);

- SDPM, Success Driven Project Management, Spider Project Team (Liberzon and Lobanov, 2000).

The project management standards and guidelines recommend similar frameworks for project risk management. What it is really relevant for differentiating between risk management approaches is not the process structure as such, but how the integration of the risk management with all other project management processes is reinforced. Chapman and Ward (2002) identify a lot of limitations and errors arising when the risks are managed in projects, even if the project manager has considerable experience in managing risks. The principal shortcomings relived by Chapman and Ward are the following: the initial activities for managing risks are too detailed and fails to underlay the connections with different projects elements in a balanced manner; the risk identification fails to provide a good structure of the sources of uncertainty, and to identify significant linkages and interdependences between issues; the risk estimates are highly dependent on the project scope hypothesis and not on other kind of assumptions; the risk estimations are costly, but not cost-effective; the risk evaluation fails to combine properly different source of uncertainty because crucial dependences are not captured and a weak implementation of the project plan. The majority of these limitations are linked to the integration of the risk management processes with each other and with the project management processes in large.

What it is considered by many professionals as being critical for an effective risk management in projects it is the risk assessment (Bayati, Gharabaghi and Ebrahimi, 2011; Makait, 2011; Andersen, 2011). If we accept that risk management is all about identifying, measuring and minimizing uncertain events effecting projects, then the secret for a good risk management lies in the ability to quality and quantify the risk elements. …

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