JOHN SING: Although we are applying qualitative risk

assessment during this course, it

may be useful to provide an illustration of how
quantitative assessment is undertaken using
basic statistical simulation.
You may hear some project and risk managers
talking about how they have used a Monte Carlo simulation
and arrived at some 'hard numbers'.
To make the concept of quantitative assessment
clearer, let's consider some what-if scenarios
on a spreadsheet to see what effect they may have.
As an example, I'm attempting to prepare a cost estimate
for a simple pipeline project.
Using the spreadsheet, I include the number of pipes
that I need, which is, for the purpose of this illustration,
4,000 bits of pipe.
If I estimate the cost per pipe to be $75,
then I can determine the cost estimate
for the total parts, which is $300,000.
I also I know from my project scope
that I always undertake some rework just
to ensure the quality of the pipe network is established.
I know for sure that I undertake the rework,
but what I am unsure about is if this is the exact amount.
Hence, I will need to add an allowance for,
rework which I estimate to be $30,000 or 10% of the 300,000.
Now I need to make an estimate for the risks
or assessed level of uncertainty for my pipeline project.
I'm going to estimate this to be $4.00 per pipe,
adding a contingency of $16,000 to the cost estimate.
So all up, my materials plus allowance, plus contingency
equals $346,000.
Having a conversation with the project team,
I quickly realised that there may be some variation to both
the allowance and contingency.
For example, the rework that I estimated to be $30,000
could be as low as $28,000 or as high as $32,000.
So I end up with a range of dollars
for this particular variable.
Let's just say that we may also see some variation
in the contingency.
It could be as low as $3.00 and up to as high as $8.00,
but most likely, I think it will be $4.00.
So using the spreadsheet software,
it is now possible for me to go in
and make a change to one of these variables
and then see the outcome.
For example, it is easy to see what
would happen if I now changed the rework from $30,000
to $28,000.
I can also change contingency from, say, $4.00 to now $7.00.
However, it becomes a bit more challenging
if I wanted to change both variables simultaneously.
Here is where the Monte Carlo software can assist.
So if I now open up this particular software,
you can see that it appears to sit over
the top of the spreadsheet and has been
designed to give it a boost.
So what I am now going to illustrate
is with the assistance of the software undertaking
5,000 what-ifs.
To do this, I first need to let the software know
what it has to do.
We call this "defining the assumptions".
So for rework, I click on the define assumption
and I might select the rectangle.
I am then asked to specify the minimum, which
I determined to be $28,000 and maximum, which
I said was $32,000.
When I hit Enter and OK, we now see
that it has been highlighted.
Now, I do the same for the second variable, risks
or contingency.
This time, I might select a triangle and then specify
the amount of $3.00, maximum of $8.00,
with most likely sit at $4.00.
This time when I hit Enter and OK,
the triangle distribution skews out to the right.
Now that I have defined the assumptions,
I'm ready to run the 5,000 what-ifs simultaneously.
You can say that I specified 5,000 trials,
so when I hit the start button, we can observe what happens.

Now that the 5,000 trials have been completed,

I can now move along the distribution curve
to select the cost estimate with probabilities attached.
For example, the 50% probability level, or p50,
equals approximately 352,000.
This means that there is a 50% chance that the cost will
be above or below $352,000.
I can then move up and down to determine say the p90 or p70.
I can also find out of the two variables as to which one
is more sensitive to change.
This may be important for the project manager to understand,
and clearly, here it is, the risk or contingency component
that is highly sensitive.
So through this simple project example,
you can say that Monte Carlo simulation
is a way of taking some variables
and doing a large range of trials simultaneously.
This may be useful if you are confident enough
to include a number against each of your risks,
building some variance around these risk variables,
and then do some modelling using the software.
As we always say though, the outputs
from the simulation modelling are only as good as the inputs
that you use.
If you put rubbish into the model,
you will receive rubbish at the other end.
So if you are going to use this type
of quantitative assessment, you need
to be comfortable that you have captured
and fully understand the variables
that you are including in the modelling, as well
as the assumptions that you are using.