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Project Management from Simple to Complex

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Chapter 11Managing Project Risk

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Learning Objectives

• Define project risk

• Define the difference between known and unknown risks

• Describe the difference between the business risk of the organization and project risk

• Identify the major elements in managing project risk

• Describe the processes for identifying project risk

• Describe the processes for evaluating risk

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Learning Objectives

• Describe the processes for mitigating risk

• Describe the elements of risk management during the initiation phase

• Describe the elements of risk management during the planning phase

• Describe the elements of risk management during the execution phase

• Describe the elements of risk management during the closeout phase

• Identify the relationship between project risk for external, internal, technical, and environmental complexity

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Defining Risk

• Risk: Possibility of loss or injury

• Project risk: An uncertain event or condition that, if it occurs, has an effect on at least one project objective

• Risk management: Identification, evaluation, and mitigation of risk

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Defining Risk

• Known risk: Risks that can be anticipated, such as exceptionally bad weather

• Other risks are unknown or unforeseen

• Organizational risk: Possible loss that is associated with the business purpose of the project

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Risk Management Process

• Elements in managing project risk:

– Risk assessment: Identification of the possibility for loss due to an event and an estimate of its effect

– Risk mitigation plan: Plan to reduce or eliminate loss from unexpected events

– Risk event: Possible occurrence that may have a negative impact o the project

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Risk Identification

• Checklists can be helpful in:

– Identifying specific risks

– Expanding the thinking of the team

• Valuable sources for identifying potential risk on a project:

– Past experience of the project team

– Project experience within the company

– Experts in the industry

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Risk Identification

• Identifying risks by category is another method for exploring potential project risks

• Some examples of categories for potential risks include:

– Technical

– Cost

– Schedule

– Client

– Contractual

Risk Identification

• Risk breakdown structure (RBS): Organization of risks associated with each activity in the work breakdown structure using a similar graphical approach

– Helps identify known risks

– Restrictive in identifying unknown risks and risks not easily found inside the work breakdown structure

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Figure 11.1 - Risk Breakdown Structure (RBS)

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Rbs.png

Click below toview full-size

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Risk Evaluation

• Evaluation of risk based on the probability that the risk event will occur and the potential loss associated with the event

• A positive correlation exists between project risk and project complexity

• There are barriers to identifying risks

– Low understanding of the tools and benefits of a structured analysis of risk

– Lack of formal risk management tools

– Managerial psychological dimensions

Figure 11.2 - Risk and Impact

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Risk and Impact.PNG

Click below toview full-size

Risk and Impact — Exercise

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High Impact/High Likelihood

High Impact/High Likelihood

Low Impact/High Likelihood

Low Impact/High Likelihood

Low Impact/Low Likelihood

Low Impact/Low Likelihood

High Impact/Low Likelihood

High Impact/Low Likelihood

Can IgnoreCan Ignore

Reduce the likelihoodReduce the likelihood

Reduce the Impact; Have a Contingency Plan

Reduce the Impact; Have a Contingency Plan

Pay Close AttentionPay Close Attention

Match the Type of

Risks to the Action Plan to be Taken

Risk and Impact — Exercise

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High Impact/High Likelihood

High Impact/High Likelihood

Low Impact/High Likelihood

Low Impact/High Likelihood

Low Impact/Low Likelihood

Low Impact/Low Likelihood

High Impact/Low Likelihood

High Impact/Low Likelihood

Can IgnoreCan Ignore

Reduce the likelihoodReduce the likelihood

Reduce the Impact; Have a Contingency Plan

Reduce the Impact; Have a Contingency Plan

Pay Close AttentionPay Close Attention

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Risk Evaluation

• Proactive: Making decisions and taking action to anticipate an expected difficulty

• Reactive: Making decisions and taking action in response to events

• Risk averse: A project manager or decision maker who avoids taking risks

Risk Evaluation

• Depending on the complexity of the project:

– Items considered risk items may be tracked informally

– Items perceived to be higher risk may be tracked during project reviews

– Risk assessment meeting(s) may be held to assess risks at different phases of the project

– An outside expert may be included in the risk assessment process

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Risk Evaluation

• On complex projects, statistical models may be used to evaluate risk

• Monte Carlo simulation

– Simulates a possible range of outcomes by trying different combinations of risks based on their likelihood

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Risk Mitigation

Risk avoidance Changing of the project planto eliminate a risk

Risk sharing Partnering with others to share responsibility for the risk activities

Risk reduction Investment of funds toreduce the risk on a project

Risk transfer Shifting the possible negative impact of an event to a party outside the project

Contingency Plan

• An alternative method for accomplishing a project goal when a risk event has been identified that may frustrate the accomplishment of that goal

• Contingency funds are set aside to address unforeseen events

– Typically managed as one line item in the project budget

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Project Risk by Phases

• Initiation phase

– Risks are identified that could threaten the viability of the project

– Mitigation options are considered to see if they can protect the project

• Planning phase

– Risks are identified for each activity group in a risk breakdown structure

– Mitigation is planned for each risk

• Execution phase

– Risks are checked off as activities are completed or mitigation is performed

– New risks are identified and added to the plan

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Project Risk by Phases

• Closeout phase

– Insurance contracts are cancelled and partnerships terminated

– Actual costs associated with risks are compared with initial estimates

– Successes and failures of the risk management plan are saved with the project documentation to add to the company’s corporate knowledge

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Project Risk And The Project ComplexityProfile

• High scores for external complexity

– High risks to the schedule, budget, and quality due to unknown factors and limited resources

• High scores for internal complexity

– High risks to the budget, schedule, and quality due to organizational complexity

– Changes of scope due to lack of clarity in project and scope statements

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Project Risk And The Project ComplexityProfile

• High scores for technological complexity

– High risks to the budget, schedule, and quality due to unknown flaws in the technology and lack of familiarity with it

• High scores for environmental complexity

– High risks for delay and expensive resolution to lawsuits, public opposition, changes for political considerations, and unforeseen ecological impacts