Demystifying Risk Assessment Using PERT  

Introduction

The other day, I was wondering how likely I was to pass my driver’s license renewal eye exam test. I don’t wear glasses but now must use them to read the newspaper. So, there was a risk that I would not be able to renew my license. Did I need to go to the eye doctor and get glasses, or should I take the risk of not being able to renew? 

Well, I took the risk and went as I was, with no glasses. It was an adventure, as my left eye vision had to be rechecked. However, I got my license renewed. This is what got me thinking about the risk assessment process. I remembered I had started writing a short article on risk assessment some years ago. Now is the time to demystify it. 

Understanding how to use the Risk Assessment process is a basic leadership task. Managers are expected to protect organisational assets when deciding which risks to mitigate or monitor. Risk Assessment differs from Risk Management in that it identifies and analyses threats, whereas Risk Management determines how to handle them. 

There is so much risk information available that you will never be able to read it all. This is intended to be a short guide that tells the story of how the Program Evaluation and Review Technique (PERT) time-estimation element relates to Risk Assessment.

Key Concepts:

Let’s start by defining some key terms: 

1. Risk Assessment: The process of examining risks or danger involved in planned activities (Ref. Cambridge English Dictionary): 1) What can go wrong? 2) How likely and severe is it? 3) What can we do to stop it 
2. Risk Tolerance: Your psychological and comfort level and financial ability to handle unexpected results. 
3. PERT: Program Evaluation and Review Technique: A statistical tool used to coordinate project resources and provide time estimates. It was developed by the U.S. Navy in the 1950s. PERT assumes a Beta distribution and can sometimes underestimate total risks 
4. Confidence Interval (CI): Is used to estimate an unknown population value by providing a range of probable values. Example: We are 95 % confident the project’s true average completion date will fall between 80 and 124 days.  
5. Standard Deviation (SD): A statistical measure of the percentage of results that can be expected to fall within a specific range. A +/- 1 SD contains 68.3 % of the data, a +/- 2 SD contains 95.5 % % of the data, while a +/- 3 SD contains 99.7 % of the data. Key conditions: Relies strictly on the Empirical Rule (or 68, 95, 99 rule); applies to a normal distribution 

Applying PERT

There is much more information available about the above terms. I’m not going to try to explain the mathematical rules that apply here.  If you want to learn more about the Empirical Rule, Monte Carlo Simulation, Delphi technique, or other elements, go for it.  

PERT has many complex parts and is still prominently used in today’s Project Management activities. My focus is limited to further explaining the use of its expected time application.  

You will need to have established estimated time intervals. These need to be determined as you feel necessary, but should be based on more than a casual subjective thought. They are used in a calculation to find your planned project estimated completion time (TE). Here are definitions of key terms: 

• O: Optimistic time – Best, the shortest time a project should take  
• ML: Most Likely time – Normal, the time a project usually takes under typical conditions 
• P: Pessimistic time – Worst, the longest time a project could take 
• TE: Estimated time to complete – A weighted-average calculation used to predict the duration of a project when there is uncertainty 

Practical implication

Formula:  

TE= O+4*ML+P/6 

Example:  

The time estimates are: O = 70 days, ML = 100 days, P = 142 days. 

• Step 1: 70+4*100+142/6 
• Step 2: 612/6 = 102 

The estimated time (TE) until completion is 102 days. This means 102 days are needed to complete the project. After verification, TE is used to make a real-world decision on project duration. 

Confidence Interval

How confident do you need to be in the 102-day estimate to move forward? The choice is yours if there is no mandate. This is often validated by applying engineering safety factors and/or peer review. Here is how to calculate the Confidence Interval using the total PERT Standard Deviation: 

Example:

Formula: SD -P-O/6     Time estimates are P =142 and O =70 TE = 102 

• Step 1: 142-70/6 
• Step 2: 72/6 = 11 
• Step 3: 102 days +/- 22 days  

The Standard Deviation is 11 days. Using a 95 % Confidence Interval means 11 must be multiplied by 2, which equals 22 days. This project has an estimated completion time of 80 to 124 days.  

Finally, the Risk Assessment using PERT time estimation has been demystified. 

Conclusion

We only covered PERT’s time estimation element here, but the full framework includes much more detail. Deeper examination of Standard Deviation is omitted to keep the guide concise and highly focused. Remember, when using a 95% Confidence Interval, you are statistically highly likely to achieve the expected results. Thanks for reading. May the wind always be at your back!