7.risk mgt

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall

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INSTRUCTOR’S RESOURCE MANUAL

CHAPTER SEVENRisk Management

1.Do you agree with the following

statement: “With proper planning it is

possible to eliminate most/all risks from a

project.” Why or why not?

2.In evaluating projects across industries, it

is sometimes possible to detect patterns in

terms of the more common types of risks

they routinely face. Consider the

development of a new software product

and compare it to coordinating an event,

such as a school dance. What likely forms


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of risk would your project team face in

either of these circumstances?

3.Analyze Figure 7.2 (degree of risk over

the project life cycle). What is the

practical significance of this model?

What implications does it suggest for

managing risk?

4.What are the benefits and drawbacks of

using the various forms of risk

identification mentioned in the chapter

(e.g., brainstorming meetings, expert

opinion, etc.)?


using a qualitative risk assessment matrix

for classifying the various types of project

risk?


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using a quantitative risk assessment tool

such as the one shown in the chapter?

7.Give some examples of projects using

each of the risk mitigation strategies

(accept, minimize, share, or transfer).

How successful were these strategies? In

hindsight, would another approach have

been better?

8.Explain the difference between

managerial contingency and task

contingency?

9.What are the advantages of developing

and using a systematic risk management

approach, such as PRAMs methodology?

Do you perceive any disadvantages with

this approach?


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10. Consider the following statement: “The

problem with risk analysis is that it is

possible to imagine virtually anything going

wrong on a project. Where do you draw

the line; in other words, how far do you

take risk analysis before it becomes

overkill?” How would you respond to this

observation?

CHAPTER SEVEN

PROJECT PROFILE – Project Moses: Keeping Venice Above Water

INTRODUCTION

PROJECT MANAGERS IN PRACTICE – Mohammed Al-Sadiq, Aramco Oil Company

7.1 RISK MANAGEMENT: A FOUR-STAGE PROCESS

Risk Identification

Analysis of Probability and Consequences

Risk Mitigation Strategies

Use of Contingency Reserves

Other Mitigation Strategies

Control and Documentation

PROJECT PROFILE – Ferris Wheels: Bigger and Higher


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7.2 PROJECT RISK MANAGEMENT – AN INTEGRATED APPROACH

Summary

Key Terms

Solved Problems

Discussion Questions

Problems

Case Study 7.1: DeHavilland’s Falling Comet

Case Study 7.2: Tacoma Narrows Bridge

Integrated Project – Project Risk Assessment

Internet Exercises

PMP Certification Exam Questions

Bibliography


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TRANSPARENCIES

7.1 RISK VERSUS AMOUNT AT STAKE


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7.2 TYPICAL RISK FACTORS

1. FINANCIAL RISKS

2. TECHNICAL RISKS

3. COMMERCIAL RISKS

4. EXECUTION RISKS

5. CONTRACTUAL OR LEGAL RISKS


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7.3 QUALITATIVE RISK ASSESSMENT MATRIX


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7.4 QUANTITATIVE RISK ASSESSMENT

CALCULATIONS


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CALCULATIONS (CON’D)


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CALCULATIONS (CON’D)


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7.5 CONTINGENCY DOCUMENT FOR ADJUSTMENTS

TO PROJECT PLAN

ProbableEvent ADJUSTMENT TO PLANS

Absenteesim

Resignation

Pull-aways

UnavailableStaff/skills

Spec Change

Added work

Need moretraining

Vendors late


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DISCUSSION QUESTIONS

10. Do you agree with the following

statement: “With proper planning it is

possible to eliminate most/all risks from a

project.” Why or why not?

It is not possible to eliminate risk from a project

regardless of planning. The role of risk

management is to identify and analyze potential

risks associated with a project. Once risks have

been identified, preventative action or

contingency plans may be established to reduce

the impact of the risk on the success of the

project. While this presents a way to help

control the effects of risk, it does not eliminate

risk from the project management equation.


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11. In evaluating projects across industries,

it is sometimes possible to detect patterns in

terms of the more common types of risks

they routinely face. Consider the

development of a new software product and

compare it to coordinating an event, such as

a school dance. What likely forms of risk

would your project team face in either of

these circumstances?

A new software product would include a higher

amount of risk than a school dance. The

software project would be subject to risk related

to market volume/price, technical risk,

financing, scheduling, resignation,

organizational, and operating risk. Coordinating


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a school dance would run risks associated with

availability of staff and an appropriate facility as

well as adequate funding. Both projects would

involve risk variables such as cost estimate risk,

integration risk, “acts of God”, inadequate skills

availability, and absenteeism.

12. Analyze Figure 7.2 (degree of risk over

the project life cycle). What is the practical

significance of this model? What

implications does it suggest for managing

risk?

The diagram demonstrates the relationship

between level of opportunity and risk throughout

the project life cycle. This is helpful in


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determining points at which uncertainty is at its

highest and when the greatest amount of risk

may be realized. Project teams can focus their

risk analysis in these areas or use the diagram to

give weight or perspective to potential risk

variables. The diagram also depicts the risk-

reward (opportunity) trade off for various stages

of a project. Managers can use this information

to determine if risk at a certain point is worth the

potential payoffs.

13. What are the benefits and drawbacks of

using the various forms of risk identification

mentioned in the chapter (e.g.,

brainstorming meetings, expert opinion,

etc.)?


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Brainstorming, expert opinion and multiple

assessment approaches share similar benefits

and drawbacks. The benefits include a variety

of experience and multiple angles of analysis

due to different points of view and areas of

expertise. Synergy among group members may

also create a wider range of risk identification.

Although there are shortcomings to these

approaches. It may be difficult to come to an

agreement or consensus in such processes due to

conflicting opinions and personal issues.

Brainstorming, expert opinion (when performed

in a forum setting rather than through the Delphi

approach) and multiple assessments may also

have difficulty reaching consensus due to

egos/authority issues and functional biases


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(when members of different departments are

present). When the Delphi technique is

employed many of these issues are resolved

because members do not meet face-to-face. The

process becomes anonymous reducing

interference of egos and personal problems.

However, the Delphi approach can take

considerable time to complete successfully.

Past history is a unique approach to the other

three. It uses historical facts to reach

conclusions, which removes many obstacles that

the other techniques encounter. The benefits of

risk identification through past history is that, if

past projects were well documented, information

related to similar projects can easily be found

and project teams can avoid pitfalls by learning


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from the mistakes of others. Unfortunately, the

drawback is that past performance does not

always predict future performance. Project-

specific data (i.e. competitive environment,

economy, etc.) is unaccounted for. Thus, past

history may do little to forecast present risks.


using a qualitative risk assessment matrix

for classifying the various types of project

risk?

Qualitative risk assessment matrix is beneficial

in providing a visual depiction of potential risk

factors. The matrix enables the project team to

prioritize risk based on severity of consequences


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and likelihood of occurrence. For instance,

those that rest in the “high” portion of both

consequences and likelihood would be top

priorities during project planning. Drawbacks of

the matrix may revolve around differences in

opinion as to where risk variables should be

placed on the matrix. It may also create tunnel

vision where the team fails to acknowledge the

significance of tasks that fall outside of the high

priority areas.


using a quantitative risk assessment tool

such as the one shown in the chapter?


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One benefit of such tools is in the ability to set

thresholds based on calculations of probability

and consequence. A numerical point system

creates an easy way to compare different risk

variables. This point system also provides more

detail than a matrix in depicting the level of risk.

Additionally, once the point system is designed

it can be used over and over to compare risk

factors of future projects. Problems with these

tools may arise in disagreement over assigning

points and creating thresholds. Also, the point

system is not an exact science. It relies on rules

of thumb and may be subject to interpretation.

16. Give some examples of projects using

each of the risk mitigation strategies (accept,


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minimize, share, or transfer). How

successful were these strategies? In

hindsight, would another approach have

been better?

This question requires students to do some

online research, investigating projects and

analyzing them in terms of various risk

mitigation approaches. One suggestion is to

assign a specific project, such as the new Airbus

A-380 and have the students research it, address

relevant risks factors, and the mitigation

strategies the company employed.


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17. Explain the difference between

managerial contingency and task

contingency?

Contingency reserves are provisions set aside in

case of unforeseen problems. The primary

differences between task and managerial

contingency are that managerial contingency is

applied at the project level while task

contingency is applied at the individual task or

work package level. Managerial contingencies

are budgeting buffers that teams can fall back on

in case of natural disasters, severe divergence

from original process or technical plans or other

“acts of God.” Task contingencies are

established because estimates (made during

initial planning) for individual tasks may be


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unreliable. Reserves for these contingencies

may be adjusted as the project advances and

estimates become more accurate.

18. What are the advantages of developing

and using a systematic risk management

approach, such as PRAMs methodology?

Do you perceive any disadvantages with this

approach?

PRAMs and other similar systems are

advantageous because they provide a detailed

step-by-step approach to risk management. This

helps project teams work through each part of

risk management effectively before moving on

to subsequent tasks. This way the team does not


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get stalled at one stage or leave out a vital step

altogether. PRAMs adds an additional feature –

the feedback loop – that acts as a built-in

safeguard to overlooking risk associated with

project changes. The loop also keeps varying

levels of managers and team members up-to-

date on project and risk adjustments. The

disadvantage to the PRAMs model is that it may

be too involved for low-budget or otherwise

small projects. The amount of time required to

learn and institute the steps may be unreasonable

in a short-term, low-budget initiative. Also, it

may not be feasible for smaller companies who

do not have the resources or time to devote to

such a system.


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10. Consider the following statement: “The

problem with risk analysis is that it is possible

to imagine virtually anything going wrong on

a project. Where do you draw the line; in

other words, how far do you take risk analysis

before it becomes overkill?” How would you

respond to this observation?

The tools in this chapter address this very

problem. Looking for possible risks could be an

endless process, however, it is important (as

outlined in the text) to approach risk in a

systematic way. The early stages of risk

management may best answer this question.

The prioritization of risks makes the process

manageable, and when done properly, will

prevent a situation of overkill. After potential


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risks have been identified (using a supervised,

controlled method such as brainstorming, expert

opinion, etc.), managers can use qualitative and

quantitative tools to sift through scores of risks

to identify what is probable enough to worry

about. Once vital risk variables have been

identified, then mitigation and contingencies can

be established. This process does not ensure that

all risks will be identified or that the right

contingencies will be created. All the same, the

benefits of taking part in risk management far

outweigh the danger of not preparing for

potential problems.

CASE STUDIES

Case Study 7.1: DeHavilland’s Falling Comet


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The DeHavilland story is a fascinating example of a well-respected organization that

sought to be first to market with a radical new technology and cut some important safety

corners, with disastrous results. The story highlights the problems when innovations in

design are pushed too far, too quickly. With its unique design and all the additional

features that made it radical, the Comet should have been slowly integrated into

production and use, instead of being rushed to market. DeHavilland knew that Boeing

was at work on its own design, the 707, and felt the need to be first to market. In this

rush, they cut a number of safety corners with disastrous results.

Questions:

1) How could risk management have aided in the development of the Comet?

DeHavilland was producing an aircraft that was so revolutionary in so many ways that

they may have become overawed by the push in technology for its own sake. Certainly,

the original Comet included several radical design elements (embedded engines in the

wing root, square windows, pressurized cabin, and so forth) that any one of them could

have been a significant advance on its own. Putting them all together into the same new

aircraft design without adequate testing was a disaster. The question of how much testing

is enough is difficult to answer but certainly, with so many innovations in one design, it is

clear that they did not engage in sufficient risk assessment and design testing.

2) Discuss the various types of risk (technical, financial, commercial, etc.) in relation

to the Comet. Develop a qualitative risk matrix for these risk factors and assess

them in terms of probability and consequences.

This question asks students to identify the wide variety of risks that were present in this

aircraft. Commercially, DeHavilland had a huge investment in its success and perceived

that first-mover advantage would allow them to pick up a big piece of the commercial jet

aircraft market if they were first off the mark. Technically, the aircraft had so many new

and radical features that several of them could have been perceived as risky in their own


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right. All of them together were simply too much risk, too fast. Although in might be

difficult for students to reasonably comment on probability of failure, there is no question

that consequences would be catastrophic (as they were).

3) Given that a modified version of the Comet (the Comet IV) is still in use with the

British Government as an anti-submarine warfare aircraft, it is clear that the

design flaws could have been corrected given enough time. What, then, do you

see as DeHavilland’s critical error in the development of the Comet?

Over time, the fundamental aircraft design (minus the original square windows) has been

proven to be a success, though the company never again attempted to launch it in the

commercial jet market. DeHavilland tried to do too much too fast and created an unsafe

design due to inadequate testing. Students are quick to recognize this basic error on

DeHavilland’s part. It is often instructive to note that this foray into the commercial jet

aircraft market was DeHavilland’s last and they never returned to the level of technical or

commercial success they had enjoyed during and just after the Second World War.

4) Comment on the statement: “Failure is the price we pay for technological

advancement.”

This question can generate several opinions from students as evidence demonstrates

again and again that organizations continue to push the edges of the technological

envelope with new designs for buildings, aircraft, automobiles, etc. The issue that we

have to address is just how far one should be allowed to push this envelope and at what

point does some system of controls come into play. Clearly, the greater the consequences

of failure, the greater the oversight needed to ensure that sufficient risk analysis and

management has taken place prior to opening Pandora’s Box.

Case Study 7.2: Tacoma Narrows Bridge


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The famous story of the bridge that shook itself to pieces is familiar to many students.

The background of the story is not as well known and illustrates what happens when we

attempt to be too innovative without recognizing the full implications of our choices.

The Tacoma Narrows Bridge (TNB) was built at a sight with numerous design challenges

and difficulties, including physical location, size and length of the bridge, use of non-

optimal materials, and so forth. From a risk analysis perspective, the TNB represents

another example of journeying too far into the unknown and only belatedly recognizing

the implications of major design decisions.

Questions:

1) In what ways was the project’s planning and scope management appropriate and

when did they begin taking unknowing or unnecessary risks? Discuss the issue of

project constraints and other unique aspects of the bridge in the risk management

process. Did they take them sufficiently into consideration? Why or why not?

It is easy, in hindsight, for students to criticize several elements in the TNB development

and construction; however, it is important that instructors not allow them to take the easy

way out and focus on the result of the construction. Rather, it is useful to examine how

the development of this bridge actually led to the understanding of an entirely new field

of engineering – aerodynamics. It was thought, up to that point, that bridge-building was

simply a static engineering problem, concerned with downward loads. It took this failure

for engineers and scientists to understand the implications of entirely new forces. In

developing the answers to this question, it is useful to consider all the constraints (known

and discovered) that they were dealing with at the sight and with the design they had. In

those circumstances, ask student what they did correctly and where they ignored ample

warning signs of problems to come.


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2) Conduct either a qualitative or quantitative risk assessment on this project.

Identify the risk factors that you consider most important for the suspension

bridge construction. How would you assess the riskiness of this project? Why?

This exercise allows faculty to tease out the various risk factors that the TNB project

encountered. After listing them on the board develop a qualitative risk matrix and ask

students to help classify the various risk elements. Ask the question: Why was so little

risk analysis done at the time? The answer is that they did not recognize the risk in the

design, sighting of the bridge, or construction until after it had been constructed.

3) What forms of risk mitigation would you consider appropriate for this project?

Instructors can discuss various risk mitigation strategies in light of the TNB example

(share it, transfer it, etc.). It is useful to ask how each mitigation strategy might be used,

who it would be used with (which stakeholder parties), and how effective each strategy

might be.


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PROBLEMS

1. Assessing Risk Factors. Consider the planned construction of a new office building

in downtown Houston at a time when office space is in surplus demand (more office

space than users). Construct a risk analysis that examines the various forms of risk

(technical, commercial, financial, etc.) related to the creation of this office building.

How would your analysis change if office space was in high demand?

Solution:

This question can be answered by students in a number of ways. The key point is to get

them thinking in terms of potential risks that are bound to exist prior to initiating a new

project. Commercial risk is paramount here because office space is in low demand,

making any new office building project questionable from a financial perspective.

2. Qualitative Risk Assessment. Imagine that you are a member of a project team that

has been charged to develop a new product for the residential building industry. Using a

qualitative risk analysis matrix, develop a risk assessment for a project based on the

following information:

Identified risk factors Likelihood

1. Key team members pulled off project 1. High

2. Chance of economic downturn 2. Low

3. Project funding cut 3. Medium

4. Project scope changes 4. High

5. Poor spec. performance 5. Low


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Based on the above information, how would you rate the consequences of each of the

identified risk factors? Why? Construct the risk matrix and classify each of the risk

factors in the matrix.

Solution:

Student can draw a simple 3x3 risk matrix with Probability and Consequences as the two

axes. Depending upon how they view the consequences of each of the above risks, it is

possible to classify them into one of the quadrants of the qualitative risk matrix. The key

is that students justify their classification by giving a logical reason for the consequences

they perceive for each risk factor, should the problem actually occur.

3. Developing Risk Mitigation Strategies. Develop a preliminary risk mitigation

strategy for each of the risk factors identified in problem 2 above. If you were to

prioritize your efforts, which risk factors would you address first? Why?

Solution:

Students can construct a risk mitigation approach (accept it, transfer it, etc.) for each of

the risk factors identified. They must justify their mitigation strategy on the basis of how

severe the risk effect could be, the alternatives, and the reasons why they selected the

mitigation strategy they chose.

4. Quantitative Risk Assessment. Assume the following information:

Probability of Failure Consequences of Failure

Maturity = .3 Cost = .1Complexity = .3 Schedule = .7Dependency = .5 Performance = .5


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Please calculate the Overall risk factor for this project. Would you assess this level of

risk as low, moderate, or high? Why?

Solution:

Using the formula from the chapter, the solution to this problem is:

Pf = (.3 + .3 + .5)/3 = .37

Cf = (.1 + .7 + .5)/3 = .43

Risk Factor = .37 + .43 – (.37 x .43) = .6409, or .64

According to the severity levels, this would be classified as medium risk.

5. Developing Risk Mitigation Strategies. Assume that you are a project team

member for a highly complex project, based on a new technology that has never been

directly proven in the marketplace. Further, you require the services of a number of sub-

contractors to complete the design and development of this project. Because you are

facing severe penalties in the event the project is late to market, your boss has asked you

and your project team to develop risk mitigation strategies to minimize your company’s

exposure on this project. Discuss the various types of risk that you are likely to

encounter. How should your company deal with them (accept them, share them, transfer

them, or minimize them)? Justify your answers.

Solution:

This question is not intended to elicit a specific answer, but to make students consider all

potential issues that could arise and begin to formulate strategies for mitigating those

risks. The more interesting discussion typically emerge around the question of which

mitigation strategies are best for different risks. Some creative thinking of the part of


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students can often identify alternatives to standard approaches for risk mitigation,

although it is also useful to have them recognize that for certain low impact risks, simply

accepting them is often the best (least expensive and fastest) solution.

6. Assessing Risk and Benefits. Suppose you are a member of a project team that is

evaluating the bids of potential contractors for developing some sub-assemblies for your

project. Your boss makes it clear that any successful bid must demonstrate a balance

between risk and price. Explain how this is so; specifically, why are price and risk seen

as equally important but opposite issues in determining the winner of the contract? Is a

low price/high risk bid acceptable? Is a high price/low risk bid acceptable? Why or why

not?

Solution:

The issue of price and risk and critical for understanding the thought process that often

goes on with clients when deciding which contractor to award the project. At times, a

higher price bid can win a contract, provided that the client recognizes a lower risk level

with a certain contractor. For example, in cases where an older, well established firm

bids a contract, they may offer a higher bid but it is attractive because their obvious

project management expertise lower concomitant risk. On the other hand, an untested or

problematic contractor’s low bid may be refused because they bring unacceptable levels

of risk to the project. Price and risk thus serve as the weights on two opposite scale pans.

Too much risk requires exceptionally lower prices, whereas a higher bid can be offset

with significant reductions in risk.

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