Risk and opportunities

10.2 Qualitative and quantitative approaches (Continued)

• Risks in the pink boxes need to be actioned

• Figure 10.2 Probability impact chart

10.2 Qualitative and quantitative approaches (Continued)

• Failure mode effect analysis (FMEA)
• Consider three elements of each activity or path through the activities:
• Likelihood, severity and hideability
• Estimate each on a scale of 1–10
• Total risk is product of all three: likelihood × severity × hideability

• Table 10.1 FMEA analysis

10.2 Qualitative and quantitative approaches (Continued)

• Quantitative approaches
• Mathematical models of the scenario
• Enables a large number of variables to be considered
• Useful guides for decision making
• Four models shown:
• 1. Expected Value
• The expected value of the event
• is the possible outcome multiplied by
• the probability of its occurrence
• Useful for comparing several projects or alternatives
• Percent chance (probability) can be estimated or calculated using Monte Carlo analysis.

Project	Possible outcome	Probability of occurrence	Expected Value
1	£200 mill	50%	£100 mill
2	£150 mill	70%	£105 mill

10.2 Qualitative and quantitative approaches (Continued)

• 2. Sensitivity analysis
• Use expected, optimistic and pessimistic value of inputs (e.g. costs)
• Shows effect on the outcome of a change in the variable
• Shows where management attention and control is needed
• Example
• Prices on materials and labour likely to fluctuate
• Contract price is fixed in advance
• Need to see effect of fluctuations on profit
• Costs of materials say £0.6m
• Costs of direct labour say £0.2m
• Contribution to say 175 percent of direct labour
• Revenues: fixed at £1.2m
• Profit = revenue – material costs – (labour + overheads)