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Key benefit of project risk management, and three types of model variables

How can effective risk management contribute to the successful completion of a project?

Here is a brief answer.

There are three types of input variables in project models:

  1. constants (known with reasonable precision)
  2. chance variables (risks or uncertainties) and
  3. decision variables (controllable).

Project risk management is about identifying and, perhaps, controlling the second type.

Evaluating risk mitigation actions involves principally:

For "opportunities" (i.e., good risks), our desire is the exact opposite.

In decision analysis, evaluating candidate actions is called a "value of imperfect control" problem.

Risk management adds value if the actions taken (decision variables) improve the expected value (EV) of the projects (usually EV NPV, called expected monetary value or EMV). That is, the EV net result after recognizing the cost of the risk action is an improvement.

Some readers may be interested in my book, Risk and Decision Analysis in Projects, for more about project risk management (especially Chapter 8).

—John Schuyler, October 2001.

Copyright 2001 by John R. Schuyler. All rights reserved. Permission to copy with reproduction of this notice.