1.

0 Risk analysis
There are many techniques available for analysis risks. The term risk analysis has come to have
different meanings for different people. In many case, the perception of the term risk analysis has
been shaped by the techniques to which they have been exposed. One explanation of the term
analysis is the estimation of what will happen if an alternative course of action is selected. The
process of analyzing risks is important because it gives an understanding and awareness of the
impact of risks on problem.
In this case, risk analysis is being applied to the base case model to establish the
implications of risk on a standard model. This pilot operation of risk management prior to the
application of value management helps to tune the future options desired, as it provides the team
with an understanding of how risk are generated through the completion of the current objective
of the project. Therefore, the team becomes aware of solutions that would help to reduce,
mitigate or transfer the risk while safety protecting the value achieved from the project.
Due to the many different types of projects and the large spectrum of variables to
analysis, there are wide ranges of risk analysis techniques available. It is important to choose the
techniques appropriate for particular situations. Use of the same risk analysis technique for every
project can be wasteful of time and money by being too detailed for some situations and too
superficial for others.
Each project requires a risk analysis technique that suits the needs of the stakeholders.
There are a number of factors that should be considered when choosing the appropriate technique
for a project or situation. The principal factors on which the choice of risk analysis technique
should depend are the type and size of the project, the information available, the cost of the
analysis and the time available to carry it out and the experience and expertise of the analysis.
Another factor in this choice is the purpose of the analysis. By carrying out a risk, the
possible effects of risk occurring can be seen in terms of the project’s outcome. Prior to this,
decisions must be made about the main priorities of the project. An example of the way in which
this could happen would be, if the result of a risk analysis showed that, a project was likely to be
delayed, but that if sufficient money were spent during the construction phase the chances of a
delay would be dramatically reduced. This situation would then require a review to be made
about the priorities of the project, whether it would be more important to finish the project within
budget or on time.

1 |Page
2.0 Sensitivity Analysis

The purpose of the sensitivity analysis technique is to answer the what if question by isolating
the key variable(s) and evaluating the effects of incremental changes in the value assigned to the
key variable(s). Sensitivity analysis is a quantitative technique, which allows the effect of
economic changes in a project to the explored that is one of the best known non-probabilistic risk
analysis techniques. A sensitivity analysis is carried out by identifying a project variable and
giving that variable limits within which it is likely to vary. A number of points or steps are
examined around the deterministic value for the economic parameters. At each step, the values of
the project economic parameters are calculated using the value of the variable at that step. This
type of analysis can pinpoint the most critical areas of a project, in term of the risk, and indicates
where confidence in estimates is vital. The output from this analysis can be represented by a
sensitivity plot or spider diagram, see figure 2.

Figure 2 (a) sensitivity diagram for major risks.

2 |Page
 Figure 2 (b) sensitivity diagram with probability contours.
The spider diagram presents the information produced from a sensitivity analysis and
clearly shows the variables to which the project is sensitive, assumed to be most and shows
changes in the sensitivity of each variable. As an example, the outcome of a project may not be
sensitive to a delay in the construction activities until the float in the project has been used, and
after that point, the project outcome may then be very sensitive to any delay in the construction
activities. This technique emphasizes the point that variables can only be known within a certain
range, which is defined by the person carrying out the analysis.
There are a number of limitations to the sensitivity analysis technique. The main
limitation of this technique is that when changing a variable it assumes ceteris paribus (i.e. that
all other things remaining the same), when in reality this is not likely to be the case. It assumes
that only one variable changes at any one time and that there will be no corrective or
preventative measures taken in response to any change in that variable. However, in reality if a

3 |Page
variable was seen to be changing and affecting the project outcome then it is likely that some
action would be taken to stop the change in that variable. A sensitivity analysis gives no
indication of the likely range of change in the variable. The probability of occurrence associated
with both the variable and the project outcome is not considered in a sensitivity analysis.
Although, some practitioners have suggested the use of probability contours (see figure 3(b)), to
provide more information about the risk. To carry out sensitivity analysis requires the project to
have been modelled, usually on a computer, prior to the analysis and so this technique requires
the use of an experienced project modeler. The analysis does not take much time when using a
computer, but the modeling of the project takes considerably longer than the actual analysis and
this should not be overlooked.
Sensitivity analysis is very useful for indentifying the variable to which the project is
sensitive and those to which it is not initially sensitive but at a certain point does become
sensitive to. A sensitivity analysis carried out in the initial stages of a project can provide useful
information about where management attention should be focused during the project.
This technique is especially useful for new and novel projects where the risks have not
been previously analyzed, and there are no previous projects to study. It is also useful to carry
out a sensitivity analysis before carrying out a probability analysis, so that the possible effects of
the variables on the project can be identified. This information can go some way to explaining
the result produced by a probability analysis, particularly if the probability analysis has any
unusual series of result.
Sensitivity analysis supports the value management process by focusing the attention of
stakeholders on the variables that could jeopardize the value attained from the project. This
support the value management process by analyzing various project options that may all fulfil the
project objectives. As some options may be more sensitive than others, the stakeholders can
make an informed decision of the strongest option.

3.0 Reference

4 |Page
HM Treasury (2003) The Green Book: Appraisal And Evaluation In Central Government,
HMSO, London

HM Treasury (2004a) Value For Money Assessment Guidance, HMSO, Norwich.

HM Treasury (2004b) Quantitative Assessment, User Guide, HMSO, Norwich.

Merna, A. and Lamb, D.J (2004) Project Finance: The Guide To Value And Risk Management
In Public-Private Partnerships, Euromoney PLC, London.

National Audit Office (2004) Refinancing The Public Private Partnership For National Air
Traffic Service, The Stationary Office, London.

Smith N.J., Merna T., & Jobling P. (2006). Managing Risk: In Construction Project. 2nd Ed.
Blackwell Publishing Company: Australia.

5 |Page