Probabilities in Risk Management

Abstract

A project is generally a complex undertaking in which most things are uncertain (durations, costs, project and suppliers performance, weather, soil geology, public reaction, etc.), and thus, risk permeates everything. Risk is closely related to uncertainty, and the latter with probabilities and distributions the conceptual aspects of which are explained in Chap. 9. It is inconceivable to address risk without considering probabilities of occurrence, and the measures that must be taken to prevent or mitigate risk; in that sense, the ‘buffer’ concept is introduced. In Chap. 2, a comparison was mentioned between CPM, PERT and MC; now, Chap. 3 proposes a case for numerically demonstrating the advantage of working with probabilities using a network and its critical path for durations and costs; it is here in which the working of MC is explained in detail, using an Excel spreadsheet with commercial software. The chapter moves on to discrete distributions, and explains the mathematical expression of risk as the product of a probability of the occurrence of a threat and the impact that it can produce on human lives, assets, land, etc.; in other words, it puts a value to risk. The chapter finishes with the use of dedicated software and provides information about the companies that provide it.