Monte Carlo Simulation
DE: Monte-Carlo-Simulation
A statistical technique using random sampling to model project risk outcomes.
Detailed Explanation
Monte Carlo simulation is a quantitative risk analysis technique that uses random sampling and statistical modeling to estimate the probability of different outcomes. It runs thousands of simulations using probability distributions for uncertain variables to produce a range of possible results.
In project management, Monte Carlo is most commonly applied to schedule and cost risk analysis. Instead of single-point estimates, each activity gets a probability distribution (e.g., triangular: optimistic, most likely, pessimistic). The simulation runs thousands of scenarios to produce a probability distribution of total project cost or completion date.
The output typically shows confidence levels: for example, there is a 50% probability the project finishes by March 15, 80% by March 29, and 95% by April 12. This enables informed decision-making about contingency reserves, deadlines, and risk response strategies.
Key Points
- Uses thousands of random simulations to model uncertainty
- Replaces single-point estimates with probability distributions
- Applied to schedule risk and cost risk analysis
- Output shows confidence levels (e.g., 80% chance of finishing by date X)
- Requires three-point estimates as inputs
- Enables data-driven contingency reserve sizing
Practical Example
A PM runs Monte Carlo on a 12-month construction project with 50 activities. Each activity has optimistic, most likely, and pessimistic duration estimates. After 10,000 simulations, the results show: 10% chance of finishing in 11 months, 50% in 12.5 months, 80% in 13.5 months. The PM recommends a 13.5-month timeline to the sponsor for 80% confidence.
Tips for Learning and Applying
Gather honest three-point estimates — garbage in, garbage out
Run at least 5,000 iterations for statistically reliable results
Focus on the confidence level that matches stakeholder risk appetite
Use Monte Carlo for both schedule and cost analysis simultaneously
Want to Master These Concepts?
Our courses cover all these terms in depth with practical examples and exercises.