Académique Documents
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Culture Documents
August 2017
Session 7:
Project Risk Management
What is a Risk?
May not
happen
Difference between
Business Risks and Project Risk
Requirements,
Potential
Assumptions,
RISKS positive or
Constraints or
negative
Conditions
outcomes
can cause
Causes Event -Consequences
(Continuation):
(Continuation):
Project
Project
Technical Organizational
Management
Limited Design
Funding Estimates
Time
Specifications
Prioritization Scheduling
Adherence
Resource
Communication
Availability
Probability and Impact Matrix
Things to remember:
0 2 4 6 8 10 12 14 NPV, $ Mln
High
Low
Perform Quantitative Risk Analysis: T & T
What are the risks that are most likely to cause trouble?
Can they affect the critical path? Which of them needs the
most contingency reserve?
The project requires another $50 000 and two months of
time to accommodate the risks on the project
We are 95 % confident that we can complete this project
on May 25th for $989 000 budget
We only have a 75 %chance of completing the project
within the $800 000 budget.
Plan Risk Responses
RISK
Opportunities Threats
Accept Avoid
Exploit
Transfer
Enhance
Contingency
Fallback Plan Workaround
Plan
Strategies for Negative Risks or
Threats
Avoidance
Risk prevention
Changing the plan to eliminate a risk by avoiding the
cause/source of risk
Protect project from impact of risk
Examples:
Change the supplier / engineer
Do it ourselves (do not subcontract)
Reduce scope to avoid high risk deliverables
Adopt a familiar technology or product
Mitigation
Examples:
Staging - More testing - Prototype
Redundancy planning
Use more qualified resources
Transfer
Examples:
Buy/subcontract: move liabilities
Selecting type of procurement contracts: Fixed Price
Insurance: liabilities + bonds + warranties
Strategies for Positive Risks or
Opportunities
Strategies for Opportunities
Active Acceptance
Develop a contingency plan to execute if the risk occur
Contingency plan - means be ready with Plan B
Fallback plan - means to have Plan C if Plan B fails
Passive Acceptance
Workarounds means to deal with the risks as they
occur. Usually is applied for low ranked risks.
Risk Response Matrix
Residual Risks risks that are left over after Plan Risk
Response.
Contingency Plans plans of action in case the risk
does occur.
Risk Response Owners the person on the team
responsible for monitoring the risk, risk triggers,
developing a response strategy, and implementing the
strategy should the risk occur.
Secondary Risks new risks that result from the
implementation of the contingency plans for the primary
risks.
Some Terms related to
Risk Response Planning (continued)
Risk Triggers early warning signs that there is a high
probability the risk will occur
Fallback Plans a secondary contingency plan, in case
the contingency plan does not work or is not effective
Reserves
Contingency reserves - covers the cost for known
unknowns discovered during risk management; covers
the residual risks. The contingency reserve is calculated
and made part of the baseline.
Management reserves these are estimated and
made part of the project budget, not the baseline.
Management approval is needed to use the
management reserve.
Some important points:
Root Node
Chance Branch
Decision Branch
End Point
Outcome
Exercise No. 1
EXPECTED PROBABILITY
RETURN
BEST CASE
MOST LIKELY
CASE
WORST CASE
What are the Expected Return and Probability
for each outcome?
WEIGHTED
RETURN
$50K
$80 750 = $30K
$750
Best Case
$200K
25%
Project
A Most Likely Case
EMV:
$50K
$80.75 60%
Worst Case
$5K
15%
Besides the project A we have another project B
with the following parameters:
Worst Case
$70K
20%
Decision Tree Analysis
Project Best Case
$200K
25%
A
Worst Case
20% $70K
Exercise No. 2
Company 1
(contract cost
50%
$ 110K) 90 days delay:
Penalty $90K
$ 110K + 0.5 * $ 90K = $155K
Company 2
is
preferable 90%
$ 140K + 0.1 * $ 30K = $143K In time: no penalty
Company 2
(contract cost
$ 140K) 10%
30 days delay:
Penalty $30K
Exercise No. 4: Build or Upgrade
You have to make decision between two options: to build a new plant or
reconstruct the existing one. Cost of new plant is $120Mln, cost of
reconstruction is $50 Mln.
Marketing department forecasted 60% probability high demand for
your product and 40% probability low demand.
The new plant will give you $200Mln profit in case of high demand and
only $90Mln in case of low demand.
The upgraded plant will give you $120Mln profit in case of high
demand and only $60Mln in case of low demand.
Use decision tree and EMV calculation define which option has to be
selected for your project. Draw decision tree diagram and calculate
EMV.
60% High Demand
$200M
Build
or
Upgrade 60% High Demand
$120M
Upgrade plant
(invest $ 50M)
40%
Low Demand
$60M
Chance node
Decision node
60% Strong Demand
$200M $80
Decision node
Exercise No. 5: New or Old Farm
Buy
or 50%
Upgrade
Best case: $45K
Upgrade existing
farm
50%
Chance node
Decision node
60%
- $33K
Best case (- $55K)
0.5*(-$65K) = - $ 32.5K
Chance node
Decision node
Exercise No. 6: Law case
Win $ 50 000
0.25*($50K) = $ 12.5K
Court
$ 5K = $12.5 K - $ 7.5 K
Loss $ 10 000
Lawsuit
Take settlement
$ 5K
100%
Response strategy 2
Gain $5K
Chance node
Decision node
Exercise No. 8: Project Risks
(0.5) Success
$900 000
- $100 000
EMV = $400 000
Raspberries (0.5) Failure
- $100 000
(0.8) Success
$390 000
- $10 000
EMV = $310 000
Strawberries (0.2) Failure
- $10 000
EMV = $0 (1.0)
$0
Neither
(0.3) 1st grade
$895 000
EMV = $268 500
(0.6) 2nd grade
$695 000
EMV = $417 000
- $5 000
EMV = $675 000
(0.5) Success Submit (0.1) No certification
application - $105 000
EMV = - $10 500
- $100 000
- $100 000
EMV = $287 500 Dont submit application
Raspberries
(0.5) Failure
- $100 000
(0.8) Success
$390 000
- $10 000
EMV = $310 000
Strawberries (0.2) Failure
- $10 000
EMV =$0
$0
Neither