SESSION H

11- RISK
MANAGEMENT

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 RISK
An uncertain event or condition
that, if it occurs, has a positive or
negative effect on a project's
objectives.

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 RISK

Threat Opportunity
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 Threat
A condition or situation
unfavorable to the project, a
negative set of circumstances, a
negative set of events, a risk that
will have a negative impact on a
project objective if it occurs, or a
possibility for negative changes.
Contrast with opportunity.
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 Opportunity
A condition or situation favorable
to the project, a positive set of
circumstances, a positive set of
events, a risk that will have a
positive impact on project

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 RISK MANAGEMENT PROCESS

Analyze
How?

Identify

Qualitative

Quantitative

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 RISK MANAGEMENT PROCESS

Response Planning Monitor & Control

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 11 - Project Risk Management
The processes concerned with
conducting risk management
planning, identification, analysis,
responses, and monitoring & control
on a project to
increase the probability and impact of
positive events,
and
decrease those adverse to the project.
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 SWOT ANALYSIS
INTERNAL STRENGTH WEAKNESS

EXTERNAL
~~~~~~~~ ~~~~~~~~
OPPORTUNITY ~~~~~~~~ ~~~~~~~~
~~~~~~~~ ~~~~~~~~
~~~~~~~~ ~~~~~~~~
THREAT ~~~~~~~~ ~~~~~~~~
~~~~~~~~ ~~~~~~~~
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 Reserve
A provision in the project
management plan to mitigate cost
and/or schedule risk. Often used
with a modifier (e.g., management
reserve, contingency reserve) to
provide further detail on what types
of risk are meant to be mitigated.
The specific meaning of the
modified term varies by application
area.
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 Reserve Analysis
An analytical technique to determine
the essential features and
relationships of components in the
project management plan to
establish a reserve for the schedule
duration, budget, estimated cost, or
funds for a project

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 RESERVE

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 Project Risk Management

Plan Risk Management

deciding how to approach,

plan, and execute the risk
management activities for a
project.

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 Risk Management Plan

The risk management plan describes

how risk management will be
structured and performed on the
project.

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 Contents of The Risk Management Plan
1. Methodology
2. Roles and responsibilities
3. Budgeting
4. Timing
5. Risk categories
6. Definitions of risk probability and impact
7. Probability and impact matrix
8. Revised stakeholders’ tolerances
9. Reporting formats
10.Tracking
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 Project Risk Management

Identify Risks

• Determining which risks

might affect the project
and documenting their
characteristics

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 Project Risk Management
Perform Qualitative Risk
Analysis
Prioritizing risks for
subsequent further analysis or
action by assessing and
combining their probability of
occurrence and impact
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 Project Risk Management
Perform Quantitative Risk
Analysis

Numerically analyzing the

effect on overall project
objectives of identified risks

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 Expected Monetary Value
Calculate the EMV for the following risks:
• Opportunity of probability = 30% and
Impact of $10,000.
• Threat of probability = 10% and Impact of
$5,000.
• Threat of probability = 5% and Impact of
$100,000.
EMV = 30% x 10,000 – 10% x 5,000 – 5% x 100,000

EMV = 3,000 – 500 – 5,000 = - 2,500 or 2,500 (Threat)

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 DECISION TREE – Example 1

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 ANSWER – Example 1
Initial Failure EMV
Cost Cost
200 35% x 242
k$ 120 k$ k$
- 70% x 315
450 k$ k$

•The decision should be the one with less cost

•The decision is to prototype
•The monetary value = 242,000 $
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 DECISION TREE – Example 2

A : 900 + 10% * 4000 = 1300

B : 300 + 30% * 4000 = 1500

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 PMBOK Example
• It will cost you 120 M$ to build a new plant
• It will cost you 50 M$ to upgrade the
existing one
• Given the following Decision Tree, what is
your decision and what is the monetary
value of it?

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 Cost

Revenue

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 Monte Carlo Analysis
A simulation uses a project model that
translates the uncertainties specified at a
detailed level into their potential impact
on objectives that are expressed at the
level of the total project . Project
simulations use computer models and
estimates of risk , usually expressed as a
probability distribution of possible costs
or durations at a detailed work level, and
are typically performed using Monte
Carlo
page 30 analysis .
 Monte Carlo Analysis

A technique that computes, or

iterates, the project cost or
project schedule many times
using input values selected at
random from probability
distributions of possible costs or
durations, to calculate a
distribution of possible total
project cost or completion dates.
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 EXAMPLE

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 Project Risk Management
Plan Risk Response
Developing
options and
actions to
enhance
opportunities, and
to reduce threats
to project
objectives.
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 Importing Material
• The risk is that material may sink
• Avoidance : Decide to deliver locally
• Transfer : Insurance
• Mitigate : Use more reliable shipping
company
• Active Acceptance : Import and prepare a
contingency plan such as local delivery
• Passive Acceptance : Do nothing , just
import the material
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 Risk Response Strategies

THREATS OPPORTUNITIES
Avoid Exploit
Mitigate Enhance
Transfer Share
A C C E P T

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 Risk Acceptance
A risk response planning technique
that indicates that the project team
has decided not to change the
project management plan to deal
with a risk , or is unable to identify
any other suitable response strategy
.

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 Threshold
• A cost, time, quality, technical, or resource
value used as a parameter, and which
may be included in product specifications.
Crossing the threshold should trigger
some action, such as generating an
exception report

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 Triggers
• Indications that a risk has occurred or is
about to occur. Triggers may be
discovered in the risk identification
process and watched in the risk monitoring
and control process. Triggers are
sometimes called risk symptoms or
warning signs

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 Workaround
• A response to a negative risk that has
occurred. Distinguished from contingency
plan in that a workaround is not planned in
advance of the occurrence of the risk
event

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 Residual Risk

A risk that remains after risk

responses have been implemented

Secondary Risk
A risk that arises as a direct result of
implementing a risk response.

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 Project Risk Management
Monitor & Control Risk
Tracking identified risks,
monitoring residual risks,
identifying new risks,
executing risk response plans,
and evaluating their
effectiveness throughout the
project life cycle
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 Assess Risk Workaround is a
Identify response to a
Risks Risk Rating (Qualitative Risk Analysis)
(Rating matrix) negative risk that
has occurred
at any time

High Rated Low Rated

Accept
Quantitative Risk Analysis
Response Planning
Watch List
Opportunity Threat

Exploit Avoid Trigger

enhance Mitigate
Share Transfer
Contingency Plan

Secondary Fail
Risks Fallback plan

Change the Project Calculate the Reserve

Management Plan (Time / Cost)

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 PERT EXAMPLE
What is the chance of finishing the following project within 24 days?

i j Act O M P
5 10 A 5 7 10
5 15 B 4 6 8
10 20 C 4 6 7
10 25 E 3 5 10
15 25 d1 0 0 0
15 30 F 5 6 8
20 35 G 2 4 6
25 35 L 2 3 5
30 35 d2 0 0 0
30 40 M 4 5 7
35 45 N 5 6 10
40 45 P 4 7 9
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 Calculate mean and standard deviation for each activity.

i j Act O M P te sd var
5 10 A 5 7 10 7.17 0.83 0.69
5 15 B 4 6 8 6.00 0.67 0.45
10 20 C 4 6 7 5.83 0.50 0.25
10 25 E 3 5 10 5.50 1.17 1.37
15 25 d1 0 0 0 0.00 0.00 0
15 30 F 5 6 8 6.17 0.50 0.25
20 35 G 2 4 6 4.00 0.67 0.45
25 35 L 2 3 5 3.17 0.50 0.25
30 35 d2 0 0 0 0.00 0.00 0
30 40 M 4 5 7 5.17 0.50 0.25
35 45 N 5 6 10 6.50 0.83 0.69
40 45 P 4 7 9 6.83 0.83 0.69

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 Calculate forward pass and identify critical path.

Critical path is 5-15-30-40-45

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 Calculate mean and standard deviation for the critical path.

i j Act O M P te sd var
5 15 B 4 6 8 6.00 0.67 0.45
15 30 F 5 6 8 6.17 0.50 0.25
30 40 M 4 5 7 5.17 0.50 0.25
40 45 P 4 7 9 6.83 0.83 0.69

CP 24.17 1.28 1.64

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Calculate Z = (T - TE) / SD and get the probability from the normal distribution table.
You may use Excel NORMDIST (T , TE , SD , TRUE)
exit

T %
19 0%
20 0%
21 1%
22 5%
23 18%
24 45%
25 74%
26 92%
27 99%
28 100%
29 100%
The chance of finishing this project within 24 days is 45%.
Note: The chance of finishing the project later than 24 days is 100-45 = 55%.

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