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109 When to use it? likelihood. In either case, specific directed management ac- tion is warranted to reduce the probability of occurrence Risk priority ranking should be employed prior to per- or reduce the risk's negative impact. forming analysis, planning for risks or developing mitigation YELLOW: Indicates that the activity is moderate risk. Mod- strategies. erate risk events are either high likelihood/low consequence events, or they are low likelihood/high consequence events. How to use it? An individual high likelihood/low consequence event by it- self would have little impact on project cost or schedule out- Use prioritization as a team exercise to rank risks. This can comes. However, most projects contain a myriad of such employ the use of other tools such as the probability and im- risks (material prices, schedule durations, installation rates, pact (PxI) matrix or risk map. etc.); the combined effect of numerous high likelihood/low consequence risks can significantly alter project outcomes. Tips Commonly, risk management procedures accommodate these high likelihood/low consequence risks by determining Choose the appropriate risk ranking tool for the complex- their combined effect and developing cost and/or schedule ity of the project and the point in project development. Do contingency allowances to manage their influence. Low not choose overly complicated risk ranking tools for non- likelihood/high consequence events, on the other hand, complex projects. If the goal of a ranking exercise is only to usually warrant individualized attention and management. help narrow the list of potential risks in a red flag list, a sim- At a minimum, low likelihood/high consequence events ple discussion among team members may suffice. If the goal should be periodically monitored for changes in either their is to allocate scarce resources, a PxI matrix approach may be probability of occurrence or in their potential impacts. Some more applicable. If the goal is to rank risks for contingency events with very large, albeit unlikely, impacts may be actively management and resolution, a Monte Carlo analysis may be managed to mitigate the negative consequences should the warranted. unlikely event occur. GREEN: Indicates that the activity is low risk. Risks that are Resources characterized as low risk can usually be disregarded and elim- National Highway Institute (2006). Risk Management Instructor Guide, inated from further assessment. As risk is periodically re- NHI Course 134065, National Highway Institute, Washington, DC. assessed in the future, these low risks are resolved with min- imal effort, retained, or elevated to a higher risk category. R3.8 Probability Impact Matrix The assessment guide in Figure R3.8-2 illustrates the key (P I) elements of a probability and impact analysis. A P I matrix is used for qualitative analysis of risks on a project. It is formed by combining each risk's probability of Why use it? occurrence (frequency) with its impact (severity) on project objectives to rank risks or determine the level of priority to be Each risk is likely to have a different probability of occur- assigned to that risk on the project (e.g., high, medium, low, rence and a corresponding impact on the project. Therefore, etc.). These assessments can be used as a first step in a quan- the project team members need to consider the interaction titative analysis. between the probability and the impact when evaluating the risks. The PxI matrix facilitates such evaluation. What is it? What does it do? The P I matrix is formed using each project risk's prob- ability and its corresponding impact. These matrices can take The P I matrix helps a project team rank the myriad of many forms, but a simple illustration is shown in Figure 3.8-1. project risks so that the project manager can direct the ma- For each of the project objectives, the combinations could fall jority of the available resources to the high and medium im- into one of these three categories: pact items. RED: Indicates that the activity is high risk. High risk When to use it? events are so classified either because they have a high like- lihood of occurrence coupled with, at least, a moderate im- A P I matrix can be used when evaluating project risks in pact, or they have a high impact with, at least, moderate any phase of the project. It is typically used in conjunction