MANAGING RISK
CHAPTER 7
WHERE ARE WE NOW RISK MANAGEMENT DEFINED
● An attempt to recognize and manage potential
and unforeseen trouble spots that may occur
when the project is implemented.
○ What can go wrong (risk event)
○ How to minimize the risk event’s impact
(consequences)
○ What can be done before an event occurs
(anticipation)
○ What to do when an event occurs
(contingency plans)
RISK EVENT GRAPH
LEARNING OBJECTIVES
● Describe the risk management process.
● Understand how to identify project risks.
● Assess the significance of different project
risks.
● Describe the five responses to managing
risks.
● Understand the role contingency plans play in
the risk management process.
● Understand opportunity management and
describe the five approaches to
responding to opportunities in a project.
● Understand how contingency funds and time
buffers are used to manage risks on a project.
● Recognize the need for risk management BENEFITS OF RISK MANAGEMENT
being an ongoing activity.
● Describe the change control process. ● A proactive rather than reactive approach
● Reduces surprises and negative consequences
● Prepares the project manager to take
CHAPTER OUTLINE
appropriate action
● Provides better control over the future
7.1. Risk Management Process ● Improves chances of reaching project
7.2. Step 1: Risk Identification objectives on time, within budget, and of
7.3. Step 2: Risk Assessment meeting required performance.
7.4. Step 3: Risk Response Development
7.5. Contingency Planning THE RISK MANAGEMENT PROCESS
7.6. Opportunity Management
7.7 Contingency Funding and Time Buffers
7.8 Step 4: Risk Response Control
7.9 Change Control Management
7.1. RISK MANAGEMENT PROCESS
RISK DEFINED
● An uncertain event or condition that if it
occurs, has a positive or negative effect on
project objectives.
● No amount of planning can overcome or
control risk.
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Chapter 7: Managing Risk
● evaluates the severity, probability of risk
7.2. STEP 1: RISK IDENTIFICATION
events and its detection difficulty.
● Generate a list of all the possible risks that
could affect the project through brainstorming RISK SEVERITY MATRIX
and other problem identifying techniques. ● prioritizes which risks to address.
● Focus on the events that could produce
consequences, not on project objectives. FAILURE MODE AND EFFECT ANALYSIS
● Use risk breakdown structure (RBS) in
● extends the risk severity matrix by including
conjunction with work breakdown structure
ease of detection in the equation:
(WBS) to identify and analyze risks.
● Identify the macro risks first then specific
areas can be checked. 𝑅𝑖𝑠𝑘 𝑉𝑎𝑙𝑢𝑒 = 𝐼𝑚𝑝𝑎𝑐𝑡 × 𝑃𝑟𝑜𝑏𝑎𝑏𝑖𝑙𝑖𝑡𝑦 × 𝐷𝑒𝑡𝑒𝑐𝑡𝑖𝑜𝑛
● Use risk profile (a list of questions) to address
traditional areas of uncertainty on a project. PROBABILITY ANALYSIS
● uses statistical techniques in assessing project
risk.
THE RISK BREAKDOWN STRUCTURE (RBS)
● Decision trees, net present value (NPV),
program evaluation and review technique
(PERT), PERT simulation
DEFINED CONDITIONS FOR IMPACT SCALES
OF A RISK ON MAJOR PROJECT OBJECTIVES
(EXAMPLES FOR NEGATIVE IMPACTS ONLY)
PARTIAL RISK PROFILE FOR PRODUCT
DEVELOPMENT PROJECT
RISK ASSESSMENT FORM
RISK SEVERITY MATRIX
7.3. STEP 2: RISK ASSESSMENT
SCENARIO ANALYSIS
● assesses the significance of each risk event in
terms of probability and impact.
RISK ASSESSMENT FORM
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RISKS OF THE ABSENCE OF A CONTINGENCY
PLAN
● Cause a manager to delay or postpone the
decision to implement a remedy
● Lead to panic and acceptance of the first
remedy suggested
● Make the decision making under pressure
which can be dangerous and costly
RISK RESPONSE MATRIX
7.4. STEP 3: RISK RESPONSE DEVELOPMENT
MITIGATING RISK
● Reducing the likelihood that the event will RISK AND CONTINGENCY PLANNING
occur
● Reducing the impact that the adverse event TECHNICAL RISKS
would have on the project
● Backup strategies if chosen technology fails
● Assess whether technical uncertainties can be
AVOIDING RISK
resolved
● Changing the project plan to eliminate the risk
or condition SCHEDULE RISKS
● Expedite or “crash” the project to get it back
TRANSFERRING RISK
on track
● Passing risk to another party ● Schedule activities in parallel or use
● Examples: Fixed-price contracts, insurance, start-to-start lag relationships
Build-Own-Operate-Transfer (BOOT) provisions ● Use the best people for high-risk tasks
ESCALATING RISK COST RISKS
● Notifying the appropriate people within the ● Review price to avoid the trap of using one
organization of the threat lump sum to cover price risks
RETAINING RISK FUNDING RISKS
● Making a conscious decision to accept the risk ● Evaluate the risk of reductions in funding—a
of an event occurring cut in the project
7.6. OPPORTUNITY MANAGEMENT
7.5 CONTINGENCY PLANNING
OPPORTUNITY
CONTINGENCY PLAN DEFINED
● An event that can have positive impact on
● Is an alternative plan that will be used if a project objectives
possible foreseen risk event becomes a reality.
● Is a plan of action that will reduce or mitigate EXPLOIT
the negative impact of the risk event.
● Seek to eliminate the uncertainty associated
● Is not a part of the initial implementation plan
with an opportunity to ensure that it definitely
and only goes into effect after the risk is
happens
recognized.
SHARE
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Chapter 7: Managing Risk
● Allocate some or all of the ownership of an
7.8. STEP 4: RISK RESPONSE CONTROL
opportunity to another party who is best able
to capture the opportunity for the benefit of
the project RISK REGISTER
● Details all identified risks, including
ENHANCE descriptions, category, probability of
● Take action to increase the probability and/or occurring, impact, responses, contingency
the positive impact of an opportunity plans, owners, and current status
ESCALATE RISK CONTROL INVOLVES
● Notify the appropriate people within the ● Executing the risk response strategy
organization of the opportunity ● Monitoring triggering events
● Initiating contingency plans
ACCEPT ● Watching for new risks
● Be willing to take advantage of the
opportunity if it occurs, but not taking action ESTABLISHING A CHANGE MANAGEMENT
to pursue it SYSTEM
● Monitoring, tracking, and reporting risk
● Fostering an open organization environment
7.7 CONTINGENCY FUNDING AND TIME
● Repeating risk identification/assessment
BUFFERS
exercises
● Assigning and documenting responsibility for
CONTINGENCY FUNDS managing risk
● Are funds to cover project risks—identified and
unknown 7.9 CHANGE CONTROL MANAGEMENT
● For control purposes, contingency funds are
divided into
○ Contingency reserves — cover identified SOURCES OF CHANGE
risks and allocated to specific segments or ● Project scope changes
deliverables of the project ● Implementation of contingency plans
○ Management reserves — cover ● Improvement changes
unidentified risks and are allocated to
risks associated with the total project CHANGE MANAGEMENT SYSTEMS
1. Identify proposed changes
TIME BUFFERS 2. List expected effects of proposed change(s)
● Are amounts of time used to cushion against on schedule and budget
potential delays in the project 3. Review, evaluate, and approve or
- Add to activities with severe risks disapprove of changes formally
- Add to merge activities that are prone to 4. Negotiate and resolve conflicts of change,
delays condition, and cost
- Add to noncritical activities to reduce the 5. Communicate changes to parties affected
likelihood that they will create another 6. Assign responsibility for implementing
critical path change
- Add to activities that require scare 7. Adjust master schedule and budget
resources 8. Track all changes that are to be
implemented
BUDGET ESTIMATE
CHANGE CONTROL PROCESS
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CHANGE REQUEST LOG
KEY TERMS
● Avoiding risk
● Change management system
● Contingency plan
BENEFITS OF CHANGE CONTROL SYSTEMS ● Contingency reserves
● Escalating risk
1. Inconsequential changes are discouraged by
● Management reserves
the formal process.
● Mitigating risk
2. Costs of changes are maintained in a log.
● Opportunity
3. Integrity of the WBS and performance
● Retaining risk
measures is maintained.
● Risk
4. Allocation and use of contingency and
● Risk breakdown structure (RBS)
management reserves are tracked.
● Risk profile
5. Responsibility for implementation is clarified.
● Risk register
6. Effect of changes is visible to all parties
● Risk severity matrix
involved.
● Scenario analysis
7. Implementation of change is monitored.
● Time buffer
8. Scope changes will be quickly reflected in
● Transferring risk
baseline and performance measures.
SAMPLE CHANGE REQUEST
APPENDIX 7.1 PERT AND PERT SIMULATION
PERT — PROGRAM EVALUATION REVIEW
TECHNIQUES
● Assumes each activity duration has a range
that statistically follows a beta distribution
● Uses three time estimates for each activity:
optimistic, pessimistic, and a most likely time
estimate to represent activity durations
○ From these three time estimates, a
weighted average time estimate and a
variance is calculated
○ Knowing the weighted average and
variances for each activity allows the
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Chapter 7: Managing Risk
project planner to compute the probability
of meeting different project durations
○ The longer the project duration is, the
ACTIVITY TIME AND VARIANCES
higher is the probability of meeting that
duration
ACTIVITY AND PROJECT FREQUENCY
DISTRIBUTIONS
PROBABILITY OF COMPLETING THE PROJECT
The equation below is used to compute the “Z”
value found in statistical tables (Z = number of
standard deviations from the mean), which, in turn,
ACTIVITY TIME CALCULATIONS tells the probability of completing the project in the
The weighted average activity time is computed by time specified.
the following formula: (7.1)
𝑎 + 4𝑚 + 𝑏
𝑡𝑒 = 6
where: where:
𝑡𝑒 = weighted average activity time 𝑇𝐸 = critical path duration
𝑎 = optimistic activity time (1 chance in 100 of 𝑇𝑆 = scheduled project duration
completing the activity earlier under normal 𝑍 = probability (of meeting scheduled duration (see
conditions) statistical Table A7.2)
𝑏 = pessimistic activity time (1 chance in 100 of
completing the activity later under normal
conditions) HYPOTHETICAL NETWORK
𝑚 = most likely activity time
ACTIVITY TIME CALCULATIONS
(CONTINUED)
The variability in the activity time estimates is
approximated by the following equations:
The standard deviation for the activity: (7.2)
The standard deviation for the project: (7.3)
POSSIBLE PROJECT DURATIONS
The above formula is just the square-root of the
sum of the variances of all critical tasks
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Z VALUES AND PROBABILITIES
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