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P3-VALUE: Risk Assessment Tool User Manual

December 30, 2013

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Chapter 5. Risk Assessment

This stage of the risk assessment process involves a qualitative risk assessment followed by a quantitative risk assessment.


The risk assessment process for a transportation project can be very complex. Risks can affect projects directly by raising costs and causing schedule delays and indirectly by forcing additional planning, review, and management oversight activity. Risks are often interrelated and decisionmakers should seek to account for the correlations and dependencies among risks as they assess the probability and consequences of individual risks. While, for the purposes of simplicity, the Risk Tool does not account for correlation among risks, it is important for users to be aware of and to document potential correlations where they may occur.

Qualitative Risk Assessment

At the onset of the risk assessment process a qualitative risk assessment can help decisionmakers determine the amount of detailed consideration that a risk warrants in the quantitative risk assessment. The identification phase may result in hundreds of potential risks being identified with varying degrees of likelihood and consequences. It may not be an efficient use of resources to quantify the values of each risk; thus, many agencies utilize a preliminary or qualitative risk assessment to determine the risks to be quantified.

For a qualitative risk assessment, decisionmakers consider both the likelihood of a risk occurring and the consequences of it occurring at a gross level (e.g., very high, high, medium, low, or very low). These qualitative judgments are entered into a risk impact matrix to determine the risk rating. A separate assessment may be conducted for the cost and schedule impacts of the risk.

Using the Risk Assessment Tool

The 'Risk Assessment Matrix' table supports the qualitative risk assessment process. It contains the Cost Impact Assessment Matrix and the Schedule Impact Assessment Matrix. These matrices provide guidance for assessing the risk severity rating based on the probability of a risk occurring and the impact or consequence of the risk occurring on project cost and schedule. Figure 3 below shows representative matrices.

After analyzing the risk probability and consequences, users should go to the "Qualitative Assessment" section of the 'Risk Register' table, where they may select the probability rating, cost consequence and schedule consequence on a scale of one to five from the drop-down menus (refer to Figure 3 to determine the appropriate rating). Once the risk probability and the cost consequence are selected, these ratings determine the overall cost impact rating based on the Cost Impact Assessment Matrix. Similarly, the risk probability and schedule consequence determines the overall schedule impact rating based on the Schedule Impact Assessment Matrix.

Once a risk has been identified and assessed according to representative assessment matrices, a color rating will be automatically calculated and populated for that particular risk in the 'Risk Rating' column. The following colors are significant:

  • Light green indicates a very low risk rating
  • Green indicates a low risk rating
  • Amber indicates a medium risk rating
  • Red indicates a high risk rating
  • Light red indicates a very high risk rating

The Risk Assessment Tool only prompts users to quantify those risks that have a medium, high, or very high risk rating. The simulation outputs will not account for lower-rated risks if the user does not enter values in the greyed out cells.

Figure 3: Representative Cost and Schedule Impact Assessment Matrices

Representative Cost Impact Assessment Matrix
Cost Consequence
  5 4 3 2 1
Probability Scale >25% 10%-25% 3%-10% 1%-3% <1%
5 - >70% Very High High High Medium Low
4- 40% - 70% High High Medium Medium Low
3- 20% - 40% High Medium Medium Low Low
2- 5% - 20% Medium Medium Low Low Low
1- 0% - 5% Low Low Low Low Very Low
Representative Schedule Impact Assessment Matrix
Schedule Consequence
  5 4 3 2 1
Probability Scale >365 days 120-365 days 30-120 days 7-30 days < 7 days
5 - >70% Very High High High Medium Low
4- 40% - 70% High High Medium Medium Low
3- 20% - 40% High Medium Medium Low Low 
2- 5% - 20% Medium Medium Low Low Low
1- 0% - 5% Low Low Low Low Very Low
Quantitative Risk Assessment

The outcomes of the qualitative risk assessment can help in identifying the risks to be quantified. An agency may decide that the qualitative assessment indicates that all risks need to be quantified, or that some risks will not be quantified because their overall impact on the project is negligible or their chance of occurrence is highly unlikely. An example of this may be the risk of a power outage prior to construction. Other risks may be significant, but may be difficult to quantify, such as changes to relevant laws or occurrence of uninsurable natural disasters. It is important for public agencies to track these risks and to establish mitigation plans where possible.

Quantifiable risks are events or conditions that have impacts on either the project's cost or schedule that can be predicted and estimated. Examples of clearly quantifiable risks include potential site issues, logistical constraints, market conditions, and right-of-way (ROW) issues, with these types of risks being quantified through professional knowledge, lessons learned from prior projects, or various studies. The risks quantified in the Risk Tool provide some examples of the types of risks that are typically quantified.

A risk may be classified as an opportunity rather than a threat, to include the benefit of this potential event to the project's schedule and budget. When entering an opportunity, or upside risk, users select "opportunity" from the risk type drop-down menu and enter the remaining assumptions normally (Note: Do not enter cost impacts as negative dollars, the tool will automatically invert the cost impact value into a cost savings).

Using the Risk Assessment Tool

The 'Definitions' table describes triangular and uniform distributions. Once an agency determines the appropriate distribution, the user may input or select the appropriate information to quantify risks under the "Quantitative Risk Assessment" section of the 'Risk Register' table:

  • Probability Percentage: The probability percentage can be input on a scale of 0 percent to 100 percent to reflect the probability percentage of a risk occurring. The user should refer to Figure 3 to ensure that the percentage is consistent with the probability rating assumed in the qualitative risk assessment. When the user clicks in the Probability Percentage cell, a message displays the probability rating scale to assist the user in entering a percentage that aligns with the rating. If the Probability Rating and the Probability Percentage are not consistent, the Probability Percentage cell will turn red and an error message will alert the user that the percentage entered does not match the probability rating.
  • Distribution: A triangular or uniform distribution for the schedule and cost impacts for each risk can be selected from a drop-down menu. The selection of the distribution type determines the schedule impact and cost impact fields to be completed (i.e. two-point or three-point estimate).
  • Schedule Impact: The schedule impact represents the implications for the project schedule if the risk occurs by inputting the two- or three-point estimates for each risk in terms of days. The 'Schedule Impact' field automatically calculates based on the data inputted into these fields and the selected distribution type.
  • Cost Impact: The cost impact is completed by inputting the two- or three-point estimates for each risk in terms of dollars. The 'Cost Impact' field automatically calculates based on the data inputted into these fields and the selected distribution type. For any risks identified as an opportunity, users are able to enter their assumptions normally and the tool accounts for the potential benefit of the opportunity by reducing the overall cost and schedule risk impacts.

In the "Quantitative Risk Assessment," users are not able to input counterintuitive numbers in the Minimum, Most Likely, and Maximum fields under Schedule Impact and Cost Impact. In both the Cost and Schedule Impact sections of the Risk Register, a message will be displayed with a restriction if the following conditions are not met and the cell will turn red:

  • Minimum value must be greater than or equal to 0 and less than Most Likely and Maximum Values; or
  • Most Likely value cannot be less than the Minimum value or greater than the Maximum Value; or
  • Maximum Value must be greater than the Minimum Value and the Most Likely Value.

While lower-rated risks may not be quantified, the lower-rated risks may be aggregated into a higher-level, catch-all risk that can be quantified. Aggregated risks may include risks such as miscellaneous design issues, construction productivity issues, or other general concerns. It is important to note that while aggregated risks are general in nature, the assumptions behind the quantitative assessment of the risk need to be well defined and understood.

Using the Risk Assessment Tool

The Risk Assessment Tool only prompts users to quantify risks that have medium, high, or very high risk ratings. Consequently, the outputs only reflect the potential impacts of the quantified risks occurring. To quantify lower-rated risks, users may aggregate the lower-rated risks off sheet (users cannot calculate an aggregated risk within the Risk Tool) and estimate the quantitative impacts of those risks if they cumulatively represent a more significant (medium, high, or very high) risk.

The same project team members responsible for qualitative assessment are usually responsible for the quantitative assessment. The quantitative assessment follows the qualitative assessment by determining actual values based on the scale ranges selected for the qualitative assessment (i.e., if the probability rating is a 3 in the qualitative assessment, this rating is first reviewed in the quantitative assessment and a probability percentage within the scale range of 20 percent to 40 percent is selected). Figure 3 provides example scales and Chapter 4 of the Primer explains common risk quantification techniques.

Probability Distribution

The Risk Tool employs the Monte Carlo simulation, which requires the user to estimate the probability distribution of a risk's impact. Two of the simplest and most commonly used distribution estimation techniques used in quantification of risks for P3 projects are triangular distribution and uniform distribution. Other types of distribution methods, such as normal, log normal and discrete distributions can be used and are described in FHWA's Risk Assessment and Allocation for Highway Construction Management Risk. [1]

Triangular distribution (see Figure 4) is applied to risks where a three-point estimate of the impact is possible. [2] Here, discrete values for the minimum, most likely, and maximum risk impacts are defined.

Figure 4: Triangular Distribution

Figure 4: Triangular Distribution

Uniform distribution (see Figure 5) is used for two-point estimates. Any value between the low point estimate and the high point estimate will have an equally likely chance of occurring. It implies that the impact of the risk has an equal chance of being any value within the specified range.

Figure 5: Uniform Distribution

Figure 5: Uniform Distribution

Assessing Efficiencies of Private Sector Risk Management

In some instances, the private sector may have a greater capacity to manage certain project risks than the public sector. The public sector may assess those private sector efficiencies through two separate approaches. First, the agency may conduct separate risk assessment processes for the public and private delivery structures, with each process utilizing probabilities, likelihoods, cost and schedule impacts, and allocations that reflect the specific delivery structure. Alternatively, an agency may conduct the risk assessment process once based on either the public or private delivery (though the agency typically bases its assessment on public delivery, as that is more familiar to the project team) and make adjustments for the other delivery method through applying efficiency factors or general percentage reductions.

Assessing Revenue Risks

In conducting a VfM analysis for a revenue-based project, it is important to consider the potential impacts of revenue risks (e.g., due to lower-than-projected traffic volume on a tolled highway). The Risk Assessment Tool does not directly accommodate revenue risks; instead, P3-VALUE users may follow the first or third approach below to address revenue risks:

  1. Select a discount rate that reflects the revenue risk premium to discount the PSC and Shadow Bid (Note: This is the most preferred approach; however, since the same discount rate will also be applied to costs, users should verify whether discounting of cost estimates at the same rate is appropriate, given that cost risks may already be accounted for in the cost estimates) ;
  2. Apply different discount rates to project revenues and project costs; or
  3. Quantify revenue risk in the risk assessment process to measure revenue risk cost impacts (or loss of revenue). This is the preferred approach if the first approach is deemed to underestimate the present value of costs.

Using the Risk Assessment Tool

The P3-VALUE suite accommodates both approaches for assessing the potential efficiencies of private sector risk management as described above. To follow the first approach, users may complete the Risk Assessment Tool twice (once for a public delivery and once for a private delivery) to generate risk values for the PSC and Shadow Bid Tools, respectively. If users follow this approach, it is recommended that they save a separate version of the tool for each delivery structure for easy reference to the results. Alternatively, users may complete the risk register once (for public delivery) and make a general assumption about the percent difference between public and private risk management and adjust the risk value assumptions for the Shadow Bid accordingly. For example, the pre-populated "Example Scenario" in the Shadow Bid Tool is based on risk value assumptions that are 25 percent lower than the risk value assumptions in the pre-populated "Example Scenario" in the PSC Tool.


1. FHWA, Risk Assessment and Allocation for Highway Construction Management

2. Ibid


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