What is Risk Analysis?
When you finish identifying the risks that could affect your construction project, you need to determine which of these risks you will spend time & money on.
Risk analysis is the process of prioritizing risks based on the risk occurring probability and the impact it would have on your project.
The Difference Between Qualitative and Quantitative Risk Analysis
Project managers should always develop qualitative risk analysis because it’s quicker than quantitative risk analysis. In some cases, quantitative risk analysis is not mandatory but merited.
There are two risk analysis techniques that you can use on any construction project :
- Qualitative Risk Analysis
- Quantitative Risk Analysis
The difference between them is that qualitative risk analysis uses a relative or descriptive scale to measure the probability of risk to occur whereas quantitative risk analysis uses a numerical scale.
What’s Qualitative Risk Analysis?
Qualitative risk analysis uses a pre-defined rating scale to prioritize the identified project risks. Risks will be graded based on their likelihood of occurrence and the impact on project objectives if they occur.
Probability/likelihood is commonly ranked on a zero to one scale (for example, .3 equating to a 30% probability of the risk event occurring).
The impact scale is organizationally defined (for example, a one to five scales, with five being the highest impact on project objectives – such as budget, schedule, or quality).
A qualitative risk analysis will also include the appropriate categorization of the risks, either source-based or effect-based.
Qualitative analysis of risk serves 3 functions:
- Prioritize risks according to probability & impact
- Identify the main areas of risk exposure
- Improve understanding of project risks
Projects are exposed to a wide range of risks, and it is impractical for project managers to deal with them all. In many cases, the resources expended to mitigate a risk outweigh the risk itself.
As a result, one of the primary objectives of qualitative risk analysis is to prioritize risks based on probability and impact. This enables project managers to concentrate on developing treatments for the most significant risks.
This method also provides project managers with a better understanding of the main areas of risk exposure. This can be accomplished by categorizing risks based on their source. This is important when it comes to prioritizing risk areas and treatment schedules.
Qualitative risk analysis can also help a project manager truly understand risks. This helps in the development of more effective risk treatment and contingency budgeting for future projects. Project managers learn a lot more than just risk probability and consequences. They also identify trigger conditions, assumptions, and project elements that are affected. All of this contributes to a clearer picture for future projects.
Types of Qualitative Analysis
Different types of projects demand different types of qualitative risk analysis. The availability of resources and personal experience also play a significant role in deciding how to approach assessing the risk of a project. The five most common types of analysis are as follows:
- Probability/Consequence Matrix
This is commonly recognized as the standard method of determining risk severity. The size of risk matrices differs frequently, but they all essentially do the same thing. They provide a practical way to rank the overall severity of risk by multiplying the risk’s likelihood of occurrence by the risk’s impact, should it still occur.
Ranking risk probability against risk consequence reveals the main driver of risk severity, whether it is a probability or a consequence. Based on the risk’s prominent drivers, this information assists in identifying appropriate treatments to manage the risk.
- Bow-Tie Analysis
One of the most useful techniques for identifying risk mitigations is a bow-tie analysis. Bow-tie analysis begins with a review of a risk event and then projects it in two directions. You list all of the possible causes of an event on the left. On the right, you list all of the possible outcomes of the event.
Using this straightforward method, you can identify and treat each of the causes and consequences separately. This allows you to address both sides of risk by lowering the likelihood of occurrence on one side while limiting the impact on the other.
- Delphi Technique
Using the Delphi Technique, experts in a field respond to several rounds of questionnaires. After each round, the responses are aggregated and shared with the group.
When applied to risk management, this technique can be used to identify risk and then assess its likelihood and impact. The experts are asked to form an opinion on how likely the risk is to occur, as well as the consequences of its occurrence. These responses are aggregated and reviewed by the experts until a consensus is reached.
- SWIFT Analysis
SWIFT, which stands for “Structured What-If Technique,” is a systematic, team-based approach to risk analysis in a workshop environment. Through a series of “What if” considerations, teams investigate how deviations from an approved plan may affect a project. This technique is especially useful for determining the viability of opportunity risks.
- Pareto Principle
The Pareto Principle, also known as the “80/20 Rule,” assists in identifying risks that will be most effective. It is known as the 80/20 principle because the principle thesis states that 80% of achievements are the result of 20% of the effort.
Pareto analysis is a tool used by risk managers to quickly identify the most critical 20% of risks that will effectively mitigate 80% of the impact.
The challenge for risk managers is determining how to effectively score each risk. Large projects may require multi-attribute weightings for business priorities such as security data and operational or compliance policies.
Qualitative Risk Analysis Process
Risk management, like any big task worth doing, can be daunting, especially when you’re starting from scratch. As a result, the best way to approach qualitative risk analysis is to divide it into smaller steps:
- Identifying Risks
- Impact Analysis
- Risk Treatment
- Review & Monitor
How to Perform a Qualitative Risk Analysis
There are many ways to perform a qualitative risk analysis. These analysis techniques require varying degrees of discipline & time.
If the project is small, project managers may use what I call the KISS (Keep It Super Simple) Method. This one-dimensional technique involves rating risks as:
- Very Low
- Very High
The common method is the probability/impact matrix. This 2D technique is used to rate probability & impact.
The impact is the consequence or effect of the risk, normally associated with the project objectives such as cost, schedule, scope, and quality.
Rate probability & impact on a scale such as 1 to 5 where 5 is the highest probability and impact. Then we multiply to calculate our risk score (probability times x impact).
That is, risk can be rated as 4 probability & 3 impacts. So there will be a risk score of 4 x 3 = 12.
The scale may be applied to both threats & opportunities. High-risk scores for threats indicate negative impacts such as adverse impacts on the schedule or budget. And high-risk scores for opportunities indicate positive impacts such as a reduction in the schedule or budget.
When Should You Perform Qualitative Risk Analysis?
Project managers should facilitate risk evaluation processes early in projects. Throughout the project, risk reviews can be conducted. Current risks are reviewed again & new risks are identified & analyzed.
Qualitative risk analysis will also help you decide if there are any particular forms or groups of threats that will need special consideration or any risk incidents that need to be handled in the near term.
Defining your rating scales is the most challenging aspect of performing a qualitative risk analysis. So after that has been achieved, you can use it for the remainder of the project to efficiently handle the risks of the project in a timely manner.