A brief guide
Practical Project Risk Management
SERIES ARTICLE
By Martin Hopkinson
United Kingdom
Purpose
Use the statistical outputs of a risk model to identify the model’s components that have the greatest influence on the model’s simulation of project’s performance. This guidance should be read in conjunction with the Cost Risk Analysis and Net Present Value Risk Analysis guidance sheets (August & November 2023)
Displaying a Risk Model’s Prioritization Results with a Tornado Chart
A Monte Carlo cost risk model includes variable components, such as cost line items and risk events that can be used to simulate variations of overall project cost. A net present value (NPV) risk model has a similar cost structure, but also includes components to simulate the effect of benefits variance. These components, together with their associated estimates generate inputs to the model. When the model has been used to perform a Monte Carlo simulation, its outputs can be used to create Tornado charts using a variety of different measures.
A cost risk model example is shown above. The lengths of the tornado chart bars indicate the relative influence that the model’s components are likely to have on the variation of overall cost. The longest bars identify the components that are the most significant.
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Editor’s note: This series of articles is by Martin Hopkinson, author of the books “The Project Risk Maturity Model” and “Net Present Value and Risk Modelling for Projects” and contributing author for Association for Project Management (APM) guides such as Directing Change and Sponsoring Change. These articles are based on a set of short risk management guides previously available on his company website, now retired. For an Introduction and context for this series, click here. Learn more about Martin Hopkinson in his author profile below.
How to cite this paper: Hopkinson, M. (2023). Cost & NPV Risk Analysis Tornado Charts: A brief guide, Practical Project Risk Management series, PM World Journal, Vol. XII, Issue XII, December. Available online at https://pmworldlibrary.net/wp-content/uploads/2023/12/pmwj136-Dec2023-Hopkinson-Cost-and-NPV-Risk-Model-Tornado-charts.pdf
About the Author
Martin Hopkinson
United Kingdom
Martin Hopkinson, recently retired as the Director of Risk Management Capability Limited in the UK, and has 30 years’ experience as a project manager and project risk management consultant. His experience has been gained across a wide variety of industries and engineering disciplines and includes multibillion-pound projects and programmes. He was the lead author on Tools and Techniques for the Association for Project Management’s (APM) guide to risk management (The PRAM Guide) and led the group that produced the APM guide Prioritising Project Risks.
Martin’s first book, The Project Risk Maturity Model, concerns the risk management process. His contributions to Association for Project Management (APM) guides such as Directing Change and Sponsoring Change reflect his belief in the importance of project governance and business case development.
In his second book Net Present Value and Risk Modelling for Projects he brought these subjects together by showing how NPV and risk modelling techniques can be used to optimise projects and support project approval decisions. (To learn more about the book, click here.)
To view other works by Martin Hopkinson, visit his author showcase in the PM World Library at https://pmworldlibrary.net/authors/martin-hopkinson/
