Beyond probability-impact matrices in project risk management: A quantitative methodology for risk prioritisation

TL;DR

This paper introduces a novel quantitative methodology using Monte Carlo Simulation to prioritize project risks by assessing their impact on project duration and cost, overcoming limitations of traditional risk matrices.

Contribution

It proposes a Monte Carlo Simulation-based approach for risk prioritization that separately evaluates risks' impacts on project duration and cost, enhancing decision-making.

Findings

Quantitative assessment of risk impacts on project duration and cost.

Differentiation of critical risks based on impact on specific objectives.

Improved risk prioritization method for project management.

Abstract

The project managers who deal with risk management are often faced with the difficult task of determining the relative importance of the various sources of risk that affect the project. This prioritisation is crucial to direct management efforts to ensure higher project profitability. Risk matrices are widely recognised tools by academics and practitioners in various sectors to assess and rank risks according to their likelihood of occurrence and impact on project objectives. However, the existing literature highlights several limitations to use the risk matrix. In response to the weaknesses of its use, this paper proposes a novel approach for prioritising project risks. Monte Carlo Simulation (MCS) is used to perform a quantitative prioritisation of risks with the simulation software MCSimulRisk. Together with the definition of project activities, the simulation includes the identified risks by modelling their probability and impact on cost and duration. With this novel methodology, a quantitative assessment of the impact of each risk is provided, as measured by the effect that it would have on project duration and its total cost. This allows the differentiation of critical risks according to their impact on project duration, which may differ if cost is taken as a priority objective. This proposal is interesting for project managers because they will, on the one hand, know the absolute impact of each risk on their project duration and cost objectives and, on the other hand, be able to discriminate the impacts of each risk independently on the duration objective and the cost objective.