2.

12 Sensitivity Analysis

What It Is
A sensitivity analysis is a modeling technique used to determine how different values of an input
impact the values of specific outputs. Sensitivity analysis is used in many different industries for
many different purposes. For example, sensitivity models are used to model climate change, invest-
ment decisions, economic forecasts, and so on. Most projects don’t use big, robust sensitivity
analysis models. For the most part, on projects we are looking to identify the variables that have
the biggest impact on cost variability and schedule variability. Therefore, you will likely see it used in
larger projects when developing schedules and budgets and quantifying risk.
There are different outputs from a sensitivity analysis. Projects that conduct sensitivity analyses
will often use a tornado diagram, so this section will present information with the assumption that
the preferred output is a tornado diagram.
There are several potential uses for a sensitivity analysis. Among them:

• Identify the variables that result in the greatest schedule variation.

• Identify the variables that result in the greatest cost variation.
• Identify the variables that result in the greatest technical performance variation.
• Identify the variables that result in the greatest defect variation.
• Gain a greater understanding of the relationship between environmental conditions or inputs,
and results or outcomes.

As mentioned above, there are many ways to develop a sensitivity analysis; the focus here is
on a simple method that looks at systematically assessing the impact of variation in one factor at a
time (known as OFAT in the world of sensitivity analysis), while keeping all other variables stable. By
conducting an OFAT analysis, you will be able to identify those factors that create the most variation
in the outcome (aka the most uncertainty), and identify ways to reduce or eliminate the uncertainty.

How to Use It
Use the steps below as a guideline. Tailor the steps as necessary to work within your environment.

1. Select the output you want to study (schedule, costs, technical performance, defects, and so on).
2. Identify the drivers (aka inputs) that you think have the most impact on the variable.
 2.12 Sensitivity Analysis   59  

3. Determine the high and low values for each input.

a. You can use the extremes, or you can use a range of 10 to 90 percent. In other words,
in normal circumstances you would expect the outcome to be between the 10 and
90 percent limits.
b. Some models also include the expected value (aka base or nominal value).
4. Determine the likely outcome of the output based on the variation of one selected input, hold-
ing all other variables stable.
5. Return the first input to its nominal state, select the next variable, and repeat the process until
all variables have been evaluated.
6. Graph the results using horizontal bars that show those variables that have the greatest
degree of variation from the nominal value on the output at the top of the chart, and those
with the lowest impact on the bottom of the chart. The outcome is shaped a bit like a tornado,
hence the name tornado diagram.

Scenario: Your organization is updating its current PMO information

system infrastructure with all new software, cloud computing,
collaboration sites, and real-time reporting software.
The expectation is that you will market this platform for a monthly subscription fee to use all
the features. The project will take one year to complete, so the income will not be realized until
next year.
The decision to launch this capability was based on several assumptions. You have been
asked to determine which assumptions have the greatest impact on the projected first-year
profit. Thus, the profit is the output you want to study.
Assumptions
1. 40 percent of existing 12,500 clients will add the new service in the first year.
2. The company will add another 40 percent more in sales to new customers in the first year.
3. The subscription rate is $250 per month.
4. The interest rate is 5 percent.
5. Maintenance costs are $45,000 per year.

Based on these assumptions the gross sales would be $2,500,000, with a net profit of
$2,338,095.

( (12, 500 × 40%) + (12, 500 × 40%)) × $250 = $2, 500, 000
( $2, 500, 000 − $45, 000 ) / 1.05 = $2, 338, 095
You believe these assumptions are the largest drivers of variability for the profit. If these
assumptions are not valid, you may not meet the target profit.
You use the assumptions as the baseline. From there you interview sales and marketing,
financial analysts, and the IT department to derive the lowest and highest expected values for
each variable.
(continued)
60    2.12 Sensitivity Analysis

(continued)

We will assume for this example you are only using a spreadsheet without any macros or
fancy calculations. Your initial table showing the assumption and the low value, high value, and
baseline value is below.

Low High Baseline

Adoption rate existing 2,500 7,500 5,000
New clients 3,750 6,250 5,000
Subscription rate 200 350 250
Interest rate 1.04 1.06 1.05
Maintenance costs 40,000 60,000 45,000

Note the far-right column contains all the baseline assumptions.

Your first iteration holds the value for new clients, subscription rate, interest rate, and main-
tenance at their baseline. Then you calculate the gross sales and net profit assuming a higher
adoption rate and a lower adoption rate. The results are below.

Adoption Rate from Existing Clients

Gross Sales Net Profit
Base $2,500,000.00 $2,338,095.24
High $3,125,000.00 $3,082,142.86
Low $1,875,000.00 $1,742,857.14

You return the adoption rate to the baseline number. Next you calculate the gross sales and
net profit assuming more sales from new clients and less sales from new clients. You return the
new sales to the baseline number and repeat the process with the subscription rate, interest
rate, and maintenance costs. After running all those calculations you end up with the following
ranges in outcomes for each variable.

High Low
Adoption rate existing $3,082,143 $1,742,857
New clients $2,635,714 $2,040,476
Subscription rate $3,290,476 $1,861,905
Interest rate $2,316,038 $2,360,577
Maintenance costs $2,323,810 $2,342,857

This is good information, but to make it easier to analyze you start with the baseline net
profit and find the difference (variance) between each outcome.
 2.12 Sensitivity Analysis   61  

Positive Negative
Adoption rate existing $744,048 $(595,238)
New clients $297,619 $(297,619)
Subscription rate $952,381 $(476,190)
Interest rate $22,482 $(22,057)
Maintenance costs $4,762 $(14,285)

This information is what you turn into a tornado diagram. First you sort the data from low to
high. Then you insert a bar chart. The end result is the following diagram:

PMO Sensitivity Analysis

$(476,190)
Subscription rate $952,381

$(595,238)
Adoption rate existing $744,048

$(297,619)
New clients $297,619

$(22,057)
Interest rate $22,482

$(14,285)
Maintenance costs $4,762

It is obvious that the biggest driver of profit is the subscription price, followed by the adop-
tion of rate of existing clients and then the acquisition of new subscribers. The interest rate and
maintenance costs have minimal impact.
This sensitivity analysis does not show the interaction that the impact of raising or lowering
the subscription rate would have on adoption rates or new subscriptions. More sophisticated
software is needed to conduct an analysis where multiple variables are correlated.

Additional Information
A sensitivity analysis is listed in the PMBOK® Guide as a technique to identify those activities or cost
items that have the most influence on the end result. The length of the bar indicates the relative
influence. The longer the bar, the more influence.
62    2.12 Sensitivity Analysis

Task $274,800 $275,000 $275,200 $275,400 $275,600 $275,800 $276,000 $276,200

Task or Resource Name
or
Resource
Ta... Install 2nd - 10th floor sheathing
Ta... Complete communications wiring - ph...
Ta... Rough-in plumbing
Ta... Complete plumbing
Ta... Rough-in electrical
Ta... Complete circuits to service panel
Ta... Install kitchen cabinets
Ta... Install trim
Ta... Linoleum entry, kitchen and baths
Ta... Rough-in HVAC
Ta... Install bath cabinets
Ta... Install 2nd - 10th floor windows
Ta... Install drywall

This screenshot shows an excerpt on cost sensitivity for project activities. The bars on the right
show the possible amount of a budget overrun; and those on the left, the possible amount of bud-
get underrun.
The information derived from a sensitivity analysis can be used in working with a what-if sce-
nario (see Section 2.17).
There are several issues to keep in mind when working with a sensitivity analysis:

• Often the variables are correlated, which means that it is unrealistic to think that you can
change one variable and all others will remain stable. The interactions among the variables
means that only looking at one variable at a time can lead to unrealistic results. There is soft-
ware that can model more complex models that show the interaction of multiple variables.
Unless you are working on a mega-project, it is unlikely that you will need to employ that
degree of rigor in your analysis.
• If assumptions that are used to determine the high and low values for the variables are based
on past data, the data may not be reliable for the current situation.
• Estimates are inherently subjective, thus the data for the model may not be factual, but sub-
ject to human bias.

PMBOK® Guide – Sixth Edition References

11.4 Perform Quantitative Risk Analysis

2.13 Stakeholder Analysis

What It Is
Stakeholder analysis is used to gather and assess information about stakeholders, the people or
groups that can influence or are influenced by the project outcomes, to determine how to best
engage with them. This technique is used throughout the project as stakeholders and their engage-
ment needs change and evolve. Stakeholder analysis is the underlying foundation for an iterative
five-step process used in stakeholder communication and engagement:1

Identify

Monitor Prioritize

Engage Map

1. Identify your project’s stakeholders and understand their needs.

2. Prioritize the stakeholders.
3. Map the key stakeholders.
4. Engage with the stakeholders.
5. Monitor changes over time to assess the effectiveness of your engagement.

How to Use It
Use the steps below as a guideline. Tailor the steps as necessary to work within your environment.

1. Identify stakeholders and gather information about them. Information you can assess in a
stakeholder analysis includes:2
○○ Attitude: Will the person help or hinder the work?

○○ Hierarchy: Where is the person in the organization’s structure compared to the activity

manager: higher or lower, internal or external, colleague or competitor?

1
Based on work by Lynda Bourne and Patrick Weaver, Mosaic Projects. https://stakeholder-management.com/
2
Bourne, L. (2015). Making Projects Work: Effective Stakeholder and Communication Management. Boca Raton, FL: Young
and Francis.
64    2.13 Stakeholder Analysis

○○ Interest: Does the person have an active interest, passive interest, or no interest?
○○ Power: What is the person’s ability to cause change on the project?
○○ Proximity: How involved is the person in the work?

○○ Urgency: Does the person perceive the work to be very important?

For projects that have a complex and influential stakeholder community, you may want to collect
all this information. For smaller projects, you can focus on the nature of each stakeholder’s influence
(upward, downward, outward, and sideways), and his or her interest in the project.

2. Prioritize your stakeholders. There are various models you can use to prioritize your stake-
holders. One method is by assessing the power, proximity, and urgency of each stakeholder.
a. Power is the ability to change or stop the project.
b. Proximity is the degree of involvement a stakeholder has in the project.
c. Urgency is the relative importance of the project and its outcomes to a stakeholder and his
or her business needs.
3. Map the data. It is a good practice to develop a graphic or tabular representation of the stake-
holder information to help illustrate the stakeholder landscape. This is a tabular representation
based on power, proximity, and urgency.

Stakeholder Power Proximity Urgency

Stakeholder 1 High High Medium
Stakeholder 2 Medium Low Medium
Stakeholder 3 Medium High High
Stakeholder 4 Low Medium Medium

Another methodology uses a stakeholder cube3 to map data using the categories of attitude,
power, and interest.
Sleeping Giant Saviour
Influential Influential
Passive Active
Acquaintance Backer Backer
Insignificant
Passive
+
ER

Backer
Friend
W
O

Insignificant
– ATTITUDE + – P

Active
Time Bomb Backer
Influential
Passive Terrorist
Blocker Influential
Active
Blocker

Trip Wire – INTEREST +

Insignificant Irritant
Passive Insignificant
Blocker Active
Blocker

The analysis is used to help develop a stakeholder engagement strategy and to monitor the
effectiveness of the strategy throughout the life of the project.
3
Hillson, D. A., and Simon, P. W. (2012). “Practical Project Risk Management: The ATOM Methodology” (2nd edition),
Management Concepts.
 2.13 Stakeholder Analysis   65  

Scenario: You are the project manager for a project to implement a

childcare facility for your organization’s employees.
At the very beginning of the project you start a stakeholder analysis by identifying the following
stakeholders:

• Sponsor
• Facilities department
• Project manager
• Project team
• Parents
• Children
• Contractors
• Company employees
• Childcare staff

Based on your knowledge of each stakeholder and on interviews and discussions with all
parties, you determine each individual’s power over the project, his or her proximity (degree of
involvement), and his or her urgency (how important the project is).
You then create a table to illustrate the stakeholder landscape.

Stakeholder Power Proximity Urgency

Sponsor High Medium Medium
Facilities department Medium High Medium
Project manager Medium High High
Project team Low High High
Parents High Medium High
Children Low High High
Contractors Low High Low
Company employees Low Low Low
Childcare staff Medium Low High

This information will guide how you communicate and engage with each stakeholder and
stakeholder group. As new stakeholders arise, you will add them to your matrix and update
your analysis. If your engagement strategy is not working as well as you would like it to, you
may evaluate your analysis to see if you assessed someone’s involvement incorrectly.
66    2.13 Stakeholder Analysis

Additional Information
For a more robust stakeholder analysis you can consider these ways of categorizing stakeholders
as well:4

• Receptiveness: How easy is it to communicate with this person?

• Supportiveness: Does the person support or oppose the work?
• Influence: How well connected is the person?
• Legitimacy: Does the person have some level of entitlement to be consulted?

PMBOK® Guide – Sixth Edition References

11.1 Plan Risk Management

13.1 Identify Stakeholders
13.4 Monitor Stakeholder Engagement

4
Bourne, L. (2015). Making Projects Work: Effective Stakeholder and Communication Management. Boca Raton, FL: Young
and Francis.
2.15 Technical Performance Analysis

What It Is
Technical performance analysis compares planned technical achievement to actual technical
achievement. This analysis technique is often used in system engineering, information technology,
and defense projects. The technique requires you to identify capabilities that have quantifiable mea-
surements as targets, so that you can measure progress against those targets.
Examples of capabilities or requirements include, but are not limited to:

• Weight
• Size
• Transaction time
• Errors or defects
• Availability
• Capacity

How to Use It
Use the steps below as a guideline. Tailor the steps as necessary to work within your environment.

1. Identify the capabilities you need to meet the project objectives.

2. Determine the technical and operational specifications or metrics needed to achieve the
capabilities.
3. Determine when you need to achieve each technical and operational specification or
metric.
4. Define periodic measures of performance you use to track progress against the requirements.
5. Take measures.
6. Determine if any variances represent a threat or opportunity to the project.
 2.15 Technical Performance Analysis   71  

Scenario: You are managing a project to develop a new company intranet site.
The technical capabilities and measurements you have defined are:

Capability Measure
Site hits per minute 2,500
Load time per page .001 seconds
Availability 99%

You decide to build up the ability to accept more site hits on a weekly basis. Every week you
should have the capacity to receive more site hits per minute without crashing. You set your
measurement time as every Friday afternoon at 4 PM. This chart shows progress against the
requirement.

Site Hits Per Minute

SITE HITS PER MINUTE

2500

2000
1827
1500
1365
1000
921

524
500

Mon Tues Wed Thur Fri

Planned Actual

Based on this information you can see that your technical performance is behind. Likely you
will be around 2,300 by the end of Week 5. You will need to determine if that performance vari-
ance presents a risk to the scope or schedule objectives of the project, and if so, determine an
appropriate response.

Additional Information
This technique is often used with burnup or burndown charts to show performance against expec-
tations. When used in risk monitoring, one should determine if the technical performance variance
will lead to a scope, schedule, or cost risk.

PMBOK® Guide – Sixth Edition Reference

11.7 Monitor Risks

2.16 Variance Analysis

What It Is
Variance analysis measures the amount of variance between a planned outcome (often a baseline)
and actual performance.
You can use variance analysis to measure variance in:

• Schedule dates
• Expenditures
• Resource utilization
• Quality metrics
• Technical performance

Basically, if you can measure it, you can perform a variance analysis.

How to Use It
Use the steps below as a guideline. Tailor the steps as necessary to work within your environment.

1. Establish your planned or target measure (such as a date or dollar amount).

2. Measure your actual result.
3. Identify the cause of the variance (if it isn’t already obvious).
4. Determine if the variance warrants preventive or corrective action.

Scenario: You have been asked to meet the physical growth needs of
Top Dog Project Services.
You work for the Idaho Falls location of Top Dog Project Services. You are remodeling an old
downtown building as part of an urban renewal program. Part of the building remodel is to
put in steel framing in the interior. You are tracking the cost and schedule performance for the
steel frame.
 2.16 Variance Analysis   73  

You budgeted $200,000 for the frame. The work is now complete. You review your invoices
for labor and materials and you see that the frame actually cost $206,032. In looking at your
invoices for the labor, you see that the rates were higher than estimated and the hours were
greater than estimated. The estimated rates and hours and the actual rates and hours are below:

Estimated hourly rate $28

Actual hourly rate $30.25
Estimated hours 960
Actual hours 1,088

To understand the impact of the rate variance you subtract the actual rate from the esti-
mated rate, and multiply that by the actual hours worked.

(Estimated rate − Actual rate ) × Actual hours

( $28 − $30.25 ) × 1088 = $ − 2, 448
To understand the impact of the variance in the hours worked, you subtract the actual hours
worked from the estimated hours worked, and multiply that by the estimated rate.

(Estimated hours − Actual hours ) × $28

( 960 − 1, 088 ) × $28 = $ −3, 584
Therefore, you determine that the $2,448 of our variance is due to a difference in the hourly
rate and $3,584 is due to the difference in the number of hours worked. At this point the steel
framing is complete. You have enough reserve to cover the $6,032 variance, so no further
action is required.

Additional Information
You can calculate the same information with materials variance as well. You can compare the dif-
ference in the cost per unit and in the number of units used. This is sometimes called a cost/usage
variance.
Variance analysis is also used in earned value management. The three most common earned
value variance measurements are:
Schedule variance (SV): SV = EV – PV
Cost variance (CV): CV = EV – AC
Variance at completion (VAC): VAC = BAC – EAC

PMBOK® Guide – Sixth Edition References

4.5 Monitor and Control Project Work

4.7 Close Project or Phase
5.6 Control Scope
6.6 Control Schedule
7.4 Control Cost
2.17 What-If Analysis

What It Is
What-if scenario analysis evaluates various scenarios, risk events, or conditions to determine the
impact on a stated objective. It is used primarily to determine the impact of events or conditions on
the project schedule or budget.
Some uses of the what-if scenario for the schedule are:

• Evaluating the impact of adding, subtracting, or changing resources

• Evaluating the impact of scope changes
• Assessing the feasibility of the existing schedule if a risk event or condition occurs
• Identifying the amount of schedule reserve needed to account for uncertainty
• Evaluating the impact of fast-tracking the work
• Evaluating the impact of reducing scope

Some of the uses of a what-if scenario for the budget are:

• Evaluating the impact of a change in labor or material rates

• Evaluating the impact of a change in labor or material amounts
• Evaluating the impact of scope changes
• Identifying the impact of currency fluctuations

What-if scenario analysis is also used in risk management to either understand the impact of
risk events or to help determine the amount of reserve needed for the schedule or budget.

How to Use It
Use the steps below as a guideline. Tailor the steps as necessary to work within your environment.

1. Start with a copy of your baseline schedule or budget.

a. You can use additional columns in a schedule to enter fields such as Start 1, Start 2, and
so forth to show different start dates instead of using a copy of the schedule.
b. Many spreadsheets give you the ability to identify specific fields to enter in alternative
numbers. This is part of the software’s “what-if analysis” function that allows you to model
scenarios.
 2.17 What-If Analysis   75  

2. Identify and document the scenario you want to model, including the corresponding assump-
tions and basis of estimates if you have them.
3. Make the changes to the schedule or budget to reflect your documented scenario.
4. Compare the scenario to the baseline.
a. For the schedule, you can determine the impact on the critical path, resource utilization,
start and end dates, and durations.
b. For the budget, you can evaluate the impact on labor costs, material costs, funding require-
ments, or other variables.

Modeling Techniques
So much uncertainty is associated with projects that it’s nearly impossible to determine actual dura-
tions, future risks, stakeholder issues, actual resource availability, and so on. One way to account
for the uncertainty is to think through different scenarios that could impact the project and see what
happens to the schedule based on those scenarios.
For example, what if a critical resource is available only one-half of the time, as opposed to
full time? Or, what if a key component is delivered late? Or design issues cause rework? These
are common occurrences on projects. Building several schedule scenarios helps you to identify the
impact of these scenarios up front when you can still adjust the schedule to account for them, and
update the Risk Register to take actions to minimize their impact on the schedule.

Scenario: Your organization is updating its current PMO information

system infrastructure with all new software, cloud computing,
collaboration sites, and real-time reporting software.
The expectation is that you will market this platform for a monthly subscription fee to use all the
features. The project will take one year to complete, so the income will not be realized until next
year.
The decision to launch this capability was based on the following assumptions.

Assumptions:
1. Forty percent of the existing 12,500 clients will add the new service in the first year.
2. The company will add another 40 percent due to new sales in the first year.
3. The subscription rate is $250 per month.
4. The interest rate is 5 percent.
5. Maintenance costs are $45,000 per year.

Based on these assumptions, the gross sales for Year 2 would be $2,500,000, with a net
profit of $2,338,095.

( (12, 500 × 40%) + (12, 500 × 40%)) × $250 = $2, 500, 000
( $2, 500, 000 − $45, 000 ) / 1.05 = $2, 338, 095
(continued)
76    2.17 What-If Analysis

You have been asked to look at the impact to the profit if the existing client adoption and
new client acquisition are less than expected. You decide to run two sets of budget scenarios:

1. Option 1 assumes 20, 25, 30, and 35 percent adoption rates for existing clients, and maintains
the 40 percent for new sales.
2. Option 2 assumes 20, 25, 30, and 35 percent adoption rates for both existing clients and new
sales.

You think the range of outcomes will provide sufficient information for financial risk analysis
based on the adoption and new sales rates. Your calculations give you the following information:

Existing Clients and

Adoption Rate Existing Clients New Customers
40% $2,338,095 $2,338,095
35% $2,189,286 $2,040,476
30% $2,083,333 $1,785,714
25% $1,891,667 $1,445,238
20% $1,832,143 $1,207,143

You chart the data to see the information graphically to model expected revenue based on a
specific adoption rate.
What-If Scenario Analysis
What-If Scenario Analysis
$2,500,000

$2,000,000

$1,500,000

$1,000,000

$500,000

$-
40% 35% 30% 25% 20%
Adoption Adoption and New

Additional Information
What-if scenarios are similar to sensitivity analyses (Section 2.12), but with a what-if scenario analy-
sis you can model the impacts of more than one variable at a time. You can also develop scenarios
based on a single event, rather than a range of outcomes.

PMBOK® Guide – Sixth Edition References

6.5 Develop Schedule

6.6 Control Schedule