Risk and Estimation

I have received interesting comments on my Estimation model article which discuss the relationship between project risk and the estimation of a project. In the estimation model I presented there is a consideration of complexity, and an approach to adjust for the stability of the estimation within the different development areas . These areas are likely to use differing development approaches and technologies.  Thus, the estimation approach only factors risk into the estimation indirectly.

 The reason for this is that I intended the spreadsheet to be used early in the lifecycle, where it is often difficult to do a detailed and realistic risk analysis. I would suggest that at this point it is more likely to be successful, therefore, to consider the more general ideas of what will introduce complexity and how reliable the productivity estimates are likely to be.

 In later stages of the project, however, much more is likely to be understood about the specific risks that a project is carrying. At this point I would agree that estimating the risk of the project and including this as part of the project estimation, planning and tracking process is very important. I have previously mentioned the idea of a “Cost of Risk” assessment without elaborating what I meant by it. It seems worthwhile, therefore, to expand on it.

 It is important to consider all risks’ probability and impact. These are often considered in terms of “High, Medium and Low”, without actually detailing what really means. This makes it relatively easy to discuss and come up with an idea of priority for what to address next in risk management. It is possible to be slightly more sophisticated than this by putting numeric values against the values, and producing a product to focus the discussion numerically. It is also then possible, assuming that a log of all risks in a project exists, to provide a metric of the total project risk. This can be very useful in managing and comparing projects.

 There is a further sophistication, however, that is often worthwhile. This is based on estimating the cost to the project should the risk trigger and become an issue. This is usually done in addition to the “High, Medium and Low” impact, with guidance provided on the relationship between them. The cost of the risk being carried then is the product of the cost and the probability of it occurring. In this case the probability needs to be a numeric value from 0 to 1, such as a percentage. If a low probability risk is deemed to have a 5% chance of occurring during the project life, and the cost of recovering from it is £1M then the cost of risk is £50k. This figure can be very useful when deciding on what risk management activity is appropriate, and whether the project is viable. Let me know if you would find it worthwhile me producing a spreadsheet that embodies this. If I get sufficient interest I will do so for a future article.

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