Project Risk Management: Essential Methods for Project Teams and Decision Makers

CHAPTER TWELVE

Applications of Monte Carlo Methods in Project Risk Management

Questions Addressed in Chapter 12

• What is the value and power of the Monte Carlo methodology?
• How do 5, 000 deterministic scenarios give rise to one probabilistic distribution?
• Why should deterministic and probabilistic methods be seamless?
• What are the origins and roles of general uncertainties and uncertain events in Monte Carlo models?
• What should be done to avoid double dipping?
• Why should correlations never be ignored?
• What is included in project reserves?
• What should project teams and decision makers know about probabilistic branching and merge bias?
• Is it really challenging to quantify unknowns?
• Why should integrated cost and schedule risk analyses come to maturity as soon as possible?

THIS CHAPTER EXAMINES UNCERTAINTY objects taken into account typically as inputs to probabilistic cost and schedule models. The major features of standard probabilistic cost and schedule risk analysis techniques are outlined. Some advanced modeling techniques are also introduced that might be regarded as either exotic or too complicated by some readers. Their application is a must in specific situations to adequately reflect reality in models. It is important to be aware of such techniques in the risk management toolbox.

FEATURES, VALUE, AND POWER OF MONTE CARLO METHODS

In the course of project development ...