Monte Carlo Simulation for Understanding Risk in Project Management

Abstract

This article develops an algorithm for assessing the risk in project management. The main risk considered here is the risk of a project not finishing on time. This algorithm can be considered as an extension of the classical methods like Critical Path Method (CPM) and Project Evaluation and Review Technique (PERT). This extension can provide a richer understanding of risk inherent in any project planning. Specifically, the present article discusses the classical project management tools such as CPM and PERT by pointing out to their applications as well as shortcomings in the context of risk management. It then shows the steps to conduct a Monte Carlo simulation of CPM using EXCEL spreadsheet. To conduct the simulation, first CPM is recast as a couple of optimization (linear programming) problems. And then the scripts written in Visual Basic for Applications (VBA) in Excel is used to run the CPM for one hundred times. The simulation gives a range of project completion times as well as the probability for each activity becoming a part of critical path.