What is Project Sensitivity?
Project sensitivity is a holistic evaluation of how likely it is that a project will succeed through data-driven forecasting. It also identifies risks, quantifies their impact, and separates high-risk tasks from low ones. Project sensitivity is defined by both a written analysis and a mathematical formula that includes average task durations based on past data, simulated durations based on hypothetical models, and an average task duration for both of those projections.
Project sensitivity refers to the project as a whole however key phases or components of the project (like scheduling) can also have their own sensitivity analysis. Project sensitivity is primarily used to choose the right approach or solution to the project’s main problems.
What is sensitivity analysis in project management?
Sensitivity analysis in project management (also known as a risk and sensitivity analysis in project management) is a method for modeling risk in any given assignment. Project sensitivity looks at the big picture to see what, out of all the elements involved, could potentially prevent you from achieving your goal or goals.
It also ranks these threats by order of importance from most to least impactful. Then, it’s up to you and your team to prevent these issues from either coming up or derailing progress.
What’s the difference between a cost-benefits analysis and a sensitivity analysis?
A cost-benefits analysis is used to estimate the pros and cons of alternative solutions for a project. A sensitivity analysis determines which of these solutions is the most viable given what we know about the rest of the project. A sensitivity analysis is often used to support a cost-benefits analysis, but can also be done independently.
How to conduct a project sensitivity analysis
There are a number of key steps involved in making your own project sensitivity analysis. These include:
- List project elements that impact net present value (NPV) or internal rate of return (IRR): Include the material costs, freelancer project estimates, overhead costs, and any other major area susceptible to change once the project is up and running. You should also include fixed expenses in case they go out of stock, cost more than what was originally agreed on, or are subject to market demand. For example, in a construction project, you may need twice as many building materials as you originally thought once contractors have begun working on the foundation.
- Write an analysis of all project element dependencies: Project elements might cost more, become obsolete, or become redundant if one or more of the other elements change. List out all the elements then compare the list to one individual element at a time to see what happens to its duration, cost, and effectiveness whenever another element is affected.
- Determine how each of your dependencies affect the NPV: Compare each detailed dependency against your NPV to determine which will make the most significant difference.
What is a project sensitivity analysis example?
If Company A manufactures dolls, a newly-added 2% processing fee from their third-party stuffing wholesaler may create a 5% change in NPV to accommodate the increased expense. Although you can’t plan for every possible scenario, a project sensitivity analysis can help you navigate the foreseeable future and develop contingency plans for these and other issues before they come up.