Cost risk is the risk that the project costs more than budgeted. It can lead to performance risk if cost overruns lead to reductions in scope or quality. Cost risk can also lead to schedule risk if the schedule is extended because not enough funds are available to complete the project on time.
The main technique used for cost analysis of complex projects is based on the Work Breakdown Structure (WBS) which organises project tasks into hierarchical stages or phases.
WBS is a project management technique for defining and organising the total scope of a project using a hierarchical tree structure. The first two levels, known as the root node and Level 2, define a set of planned outcomes representing the entire project scope. At each subsequent level, the children of a parent node represent the entire scope of their parent node.
A well-designed WBS describes planned outcomes instead of planned actions. Outcomes are the desired ends of the project and can be predicted accurately, whereas actions make up the project plan and may be difficult to predict accurately. A well-designed WBS makes it easy to assign any project activity to one and only one terminal element of the WBS.
WBS cost estimation attaches a cost to each component and sums these to obtain a total. Experts in relevant areas are asked to specify a probability distribution for each part of the WBS and then Monte Carlo simulation is used to estimate a probability distribution for the total project cost.