Practical Project Risk Management
SERIES ARTICLE
By Martin Hopkinson
United Kingdom
Purposes
- Identify risk combinations that produce multiplicative (or partly multiplicative) effects.
- Structure risk models e.g. cost or NPV risk models accordingly.
A Simplistic Example to Explain the Principle
Suppose that, in a building project, there is a risk that the price of bricks could double and another risk that twice as many bricks could be required than planned. If both of these risks occur, the cost of purchasing bricks would be 2 X 2 = 4 times the planned cost.
Risk combinations that produce multiplicative effects are not uncommon, but are often not identified. As a result, models constructed by summing risk effects can underestimate the overall level of risk involved.
A Simplified Software Development Example
A software cost estimate is built using a software size estimate (e.g. the number of software lines of code – SLOC), and a productivity estimate (e.g. SLOC per man-day). These estimates are multiplied and combined with an engineering labor rate to estimate the overall cost for the software team. When software development risks are identified, it becomes clear that:
Some risks affect the software size estimate: e.g. risk of emergent software requirements.
Some risks affect the productivity estimate: e.g. risk of staff turnover in software team.
Given the multiplicative way in which the base estimate is calculated it is illogical to sum the cost-related effects of these risks. Hence, the project’s cost risk model structure should reflect that the combined effects of one group of risks will have a multiplicative effect with those of another group. Identifying this insight would typically flow from a top-down multicycle approach to developing the model (see Top-down Multicycle Approach guidance sheet).
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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. (2022). Multiplicative Risk Effects: A brief guide, Practical Project Risk Management series, PM World Journal, Vol. XI, Issue X, October. Available online at https://pmworldlibrary.net/wp-content/uploads/2022/10/pmwj122-Oct2022-Hopkinson-multiplicative-risk-effects-risk-management-article.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/
