Risk Management
RISK MANAGEMENT 2
Context: As a project manager, you are considering using either the risk driver method of project cost risk
analysis or the traditional 3-point cost analysis on your latest project.
Task: Write a minimum 8 page paper comparing and contrasting the steps of the traditional 3-point cost
analysis method and the risk driver method. In addition, provide a specific example that determines total
project cost with 4 cost elements using the 3-point cost
analysis method. Show each step of the process and the associated tables to depict the data.
Risk Management
Risk management is one of the essential strategies that determine the success or
failure of a project. Business organizations should ensure a proper risk management process in
order to achieve efficient project implementation process. Project managers to mitigate all risks
and hazards associated with project execution should use risk management. Risk management is
one of the techniques used to determine the success of companies. A proper risk management
process is used to ensure useful risk identification, assessment, prioritization, and development
RISK MANAGEMENT 3
of strategies to mitigate all risks that impact project implementation negatively. Risk managers
use different methods to carry out risk analysis process in order to ensure that all threats and
project hazards are mitigated. A project manager can use a risk driver technique of project cost
risk analysis or the traditional 3-point cost analysis in order to establish the risks associated with
project execution and develop effective and appropriate strategies to mitigate all risks which
have significant impacts on project cost or schedule or overall success (Garvey, Book, & Covert,
2016). This paper provides the steps for the risk driver method and the 3-point method,
comparison and the contrast of each method as well as giving the pros and cons. The paper also
provides a project cost element with associated 3-point estimates, variances, and means in order
to enhance prioritization of risks to cost, risk mitigation and schedule.
The Risk Driver Method
The risk driver method is a more complete and powerful technique of cost risk
analysis than the standard qualitative risk analysis. This is because it uses the impact and
probability approach. The risk driver method computes the impact of individual risks on costs
and a sort of risks according to their priorities. Risks are prioritized by impact and probability as
they affect the cost of the project through a simulation model of the project. This process helps
project managers in making risk mitigation risks. The steps of cost driver method include the
identification of risks to be added in risk register, quantifying the impact and probability risks.
The identification of risks ensures that impacts are factored in cost determination (Garvey, Book,
& Covert, 2016).
The risk cost method allows project managers to specify the risks by use of their
probability of influencing the cost or schedule and the uncertainty of their impact in case they
RISK MANAGEMENT 4
occur. This helps to assign the risks to all specific tasks that they influence. The application of a
risk driver method demands that the risk to the project cost and schedule be directly and driven
by a quantifiable and identifiable risk. Thus, the risks listed in the risk register drive the
simulation of a cost analysis process. The risks that are selected the risk driver method cost
analysis are the risks that are taken as high and probably reasonable risks to cost from the risk
register. The risk driver method ensures that risks are generally strategic risks instead of
technical and detailed risks. During the collection of risk for projects, the new risks emerge for
further analysis. The risk driver method includes risk events that might or might not occur as
well as uncertainties that will occur, but with specific impacts (Glendon & Clarke, 2015).
The identification of the risks from the risk register leads to a collection of
specific risk data. The project manager establishes the probability of occurring with some
quantifiable and measurable impacts on the cost and duration of the activities. According to the
risk driver method, a risk occurs or not regarding the probability, affecting all activities it is
associated with. Besides, it ensures that the risks have an impact on the cost and duration of
project activities and the impacts are given as a variety of possible effects. This should be
affirmed in multiples of the projected cost and schedule of the activities. For instance, a project
manager may decide to use 1.25 for high, 0.95 for low and 1.05 for most likely. These three
points can be used to define the probability of impact factors in case the risks happen on some
time. Thus, the costs and duration of tasks in the schedule for assigned risk are multiplied by the
same impact factor that is selected for the iteration range. Also, the risks are, therefore, aligned
with the resources and activities they impact. However, a risk may be aligned with multiple tasks
even though a task may be influenced by several risks (Garvey, Book, & Covert, 2016).
RISK MANAGEMENT 5
The extent of risk between durations of activities is essential in estimating project
schedule risk analysis accurately. Correction of the activities is the degree of impacted durations,
especially those that are uncertain. In risk driver method corrections arise when risk impacts two
or more durations of activities. Therefore, the risk driver method designs how correction between
durations of activities occurs in order to avoid guessing at the correlation coefficient between
activities. The method is useful as it ensures that impacts of risks are given as ranges of multiple
factors assigned to the cost and duration of tasks assigned. According to the risk driver method,
the probability of risk occurring on the project and 100% probability is certain while less than
100% shows that the occurrence will be a percentage of iterations. It ensures that the impacts of
risks are specified 3-point estimates of various factors for all schedule risk and durations
(Glendon & Clarke, 2015).
The 3-Point Method
The 3-point is the technique used to analyze and manages risks by approximating
probability distribution that represents the outcome of future events. The technique helps to
develop estimates with the team members of a project (Melchers & Beck, 2018). It is a three-
point estimate because members provide their optimistic, pessimistic and best guess estates for
the project deliverables. This risk analysis technique is the best practices as they give project
managers increased accuracy over-one point estimates, useful information on the risks of each
task and improved commitment from the group members of the project. This is because the
estimates are considered the risks in the project assignment (Glendon & Clarke, 2015). The 3-
point process uses the following steps to establish risks and provide mitigation decisions. The
first step is to work with the team members assigned to each task for identifying both negative
and positive risks. The adverse risks are issues that increase the cost and duration of the project
RISK MANAGEMENT 6
while the absolute risks are factors that could make the project to incur less cost or takes less
time. The second step allows team members to make three estimates using the best guess which
provides the best standard quantity of work the activity may acquire if done 100 times.
Pessimistic estimates provide the amount of work activity will take if the negative issues
identified happen. The optimistic estimates provide the quantity of work the activities will take if
the specific risks recognized happen. The last step allows project managers to do straightforward
calculations with 3-estimates by calculating the standard deviation and mean using the three-
point method formula of (O+ 4BG +P) = the weighted mean. P – O/6, gives the standard
deviation of the probabilities of the risk occurring. The weighted mean value established using
the 3-estimates from the team show the risk value in the activity and the cruelty of the impacts of
the pessimistic and optimistic risks (Melchers & Beck, 2018).
The Comparison and Contrast
Project managers use the risk driver method and 3-point estimate method for risk
analysis. They assist in providing the best information for mitigation decisions and ensure that
the right strategies are employed to mitigate the negative impacts of project risks. The risk driver
method varies from the traditional 3-point estimate technique in various ways. In the 3-point
estimate, the duration and the costs of the activity are given, and this influences the results of
potentially various risks which cannot individually be notable or kept active pathway. The 3-
point estimate method cannot be used to capture the entire influence of a risk since some will
impact several activities. Thus, it is challenging to capture impacts on specific activities using
traditional 3-point estimates. The risk driver method helps to solve the problem of estimating the
correlation between uncertain durations of activities, primarily when the risks are assigned to two
activities they become correlated. The risk driver method uses Monte Carlo simulations to
RISK MANAGEMENT 7
generate a correlation of activities in real life due to common uncertain risks or factors that affect
the activities. A risk driver method ensures that the correlation is consistent and correlation
coefficients are specified directly. The risk driver method ensures risk prioritization through
project scheduling. This is a substantial difference from the traditional 3-point method that
allows diagrams critically with risks as paths as their risk analysis arguments. Therefore, using
risk drivers for the project, project managers can prioritize the risks for easy mitigation decisions
and measures that management can comprehend.
Besides, identification of the causes of project cost and schedule risk demands
that the risks to the schedule of a project be directly and driven by quantifiable and identifiable
risks. The risks from the risk register drive the simulation in the risk driver technique. Thus, the
risk driver procedure varies from the traditional 3-point estimate procedure in that 3-point
method uses high, most likely and low estimates of the duration of activities directly to task
durations. However, the 3-point estimate represents the several influencing risks that affect the
activities in case they happen. Therefore, the significance of all risk cannot be independently
notable and keeping on track (McNeil, Frey & Embrechts, 2015). Besides, various risks are also
impacted various activities and can’t show the whole influence of risks using the traditional 3-
point method of impacts given to particular tasks.
In contrast, the risk driver method allows project managers to specify the risks by
their probability of influencing the costs, schedule as well as the uncertainties of their impacts in
case they occur. This helps to assign risks to all detailed activities they may influence. Also, the
3-point estimate lacks a clear way to indicate the probability of the risks occurring resulting to
miss of one or more critical risk characteristics. The risk driver method provides the correlation
between the duration of activities which is essential in the determination of the possible date of
RISK MANAGEMENT 8
completion in case the organization requires are relatively conservative estimates for the project
activity durations. However, in the traditional 3-point estimates the correlation coefficients are
estimated through guesswork and used between activity pairs. Correlation between durations of
activities is used in risk driver method to create simulation-based on common risks impacting the
activities (Modarres, 2016). Thus, they are no further need to estimate the correlation coefficients
with the probability that the identified coefficients assess an inconsistent correlation matrix.
Therefore, the most basic benefits of the risk driver method are that can identify and prioritize
the importance of risk. This is distinguishable from the importance of paths and activities in the
traditional 3-point method. Thus, as compared to traditional 3-point estimates, the risk driver
method has drivers that facilitate risk mitigation. The risk driver method is the best technique to
determine which risks a project manager should mitigate through transparent risks drive (Li,
2014).
Project Cost Estimate with Spreadsheet and Contingencies
The risk analysis spreadsheet helps project managers to establish the
contingencies necessary for ensuring that project execution is efficient and accurate. The
identification of project risks is a technique of establishing a risk management plan and
mitigation process. The risk management process ensures maximization of the consequences and
probability of positive risk events or opportunities and minimization of negative probability and
consequences of events or threats to the project tasks. The list and probabilities of projects help
project managers to develop technique and tools of standard contingency percentage. This helps
risk analysis to establish a work breakdown structure and self-modeling risk management plan
spreadsheet. The qualitative risk analysis helps to assess the general likelihood and impact of the
identified risks and establishes lists of project risks direct mitigation and for further analysis. The
RISK MANAGEMENT 9
listing and prioritization of risks helps to determine total project cost and helps the project
manager to diverse costs for the projects or a particular value of cost contingencies that will be
included to the base cost estimate for projects (McNeil, Frey & Embrechts, 2015).
Example
The 3-point estimation method is used in risk analysis of project execution
through probability distribution representing the results of the future events. The technique
involves that estimation of risks. This involves the best guess, pessimistic (P) and optimistic (O).
The triangular distribution E = (O + M +P)/3 and the beta distribution E = (O + 4M +P)/6
Let assume that the 3 estimates (most likely, optimistic and pessimistic) were 50 minutes, 200
minutes and 80 respectively.
The triangular distribution = (O + M +P)/3
= (50 +200+ 80)/3
=330/3
=110 minutes
Pert calculations = (50 *4 +200 +80)/6
=480/6
= 80 minutes
The estimates of pert are more close to the value of pessimistic.
RISK MANAGEMENT 10
P – O/6, gives the standard deviation of probabilities. This shows a deviation from the most
optimistic value of project risks. Therefore, the standard deviation is given as P – O/6
=80 – 200/6
= 46.67 minutes
Conclusion
The evaluation of risk analysis is the best way to provide the best mitigation
decision and risk management strategies for organizations. Companies should ensure that their
risk analysis is effective and most well-evaluated in order to ensure all risk lists and prioritization
are identified and evaluated in time for proper and accurate risk management and mitigation
techniques in order to ensure project success. Companies should treat risk analysis as one of the
key strategies for successful project execution. This is what defines a successful and failed
project implementation process. A project manager should be trained well for efficient project
implementation through risk identification, evaluation, and management strategies to ensure an
accurate and effective implementation process.
RISK MANAGEMENT 11
References
Garvey, P. R., Book, S. A., & Covert, R. P. (2016). Probability methods for cost uncertainty
analysis: A systems engineering perspective. Chapman and Hall/CRC.
Glendon, A. I., & Clarke, S. (2015). Human safety and risk management: A psychological
perspective. Crc Press.
Li, W. (2014). Risk assessment of power systems: models, methods, and applications. John
Wiley & Sons.
McNeil, A. J., Frey, R., & Embrechts, P. (2015). Quantitative Risk Management: Concepts,
Techniques and Tools-revised edition. Princeton university press.
Melchers, R. E., & Beck, A. T. (2018). Structural reliability analysis and prediction. John Wiley
& Sons.
Modarres, M. (2016). Risk analysis in engineering: techniques, tools, and trends. CRC press.
