RISKS IN PROJECT

Prepared byAnanya P. P (2015-31-030)Deepa C.S. (2015-31-031)

PRESENTED BY,DEEPA C SMBA ABM

2015-31-031

Different types of risks in project management

CONTENTS WHAT IS RISK DIFFERENT TYPES OF RISKS IN PROJECT

MANAGEMENT ROLE OF RISK MANAGEMENT

INTRODUCTION

Complex projects are always fraught with a variety of risks ranging from scope risk to cost overruns.

One of the main duties of a project manager is to manage these risks and prevent them from ruining the project.

RISKA dictionary definition of risk is “the possibility of loss or injury”

PROJECT RISK:Project risk involves understanding potential problems that might

occur on the project and how they might impede project success.Project risk is an uncertain event or condition that, if it occurs, has

an effect on at least one project objective. Project risks are factors that could cause the project to fail.

Project risk management is the art and science of identifying, assigning, and responding to risk throughout the life of a project and in the best interests of meeting project objectives.

Risk management is often overlooked on projects, but it can help improve project success by helping select good projects, determining project scope, and developing realistic estimates

To better understand risks, it is essential that we understand that risks fall into categories. The major categories of risk are as follows:

Stakeholder Risk: Stakeholders are people who have any kind of vested interest in the performance of the project. Common examples of stakeholders are as regulators, customers, suppliers, managers, customers etc. Stakeholder risk arises from the fact that stakeholders may not have the inclination or the capabilities required to execute the project.

Regulatory Risk: An organization faces several kinds of regulations. It faces rules from the local and state government where they operate. It faces rules of the national government where it operates. It also faces rules of international trade bodies. To add to all this there are internal regulations which have been put into place for better internal governance and avoiding fraud.

External Risk: The execution of a project requires help and support from several outside vendors as well. The dependence on these vendors poses obvious risk to the execution of the project. These vendors lie outside the direct control of any organization. The organization may have very little ways to predict issues arising from external sources.

Execution Risk: The project also faces risk of not receiving continued support from the organization. This is because the organization may discover better use of their resources in the additional time. It is also likely that the project may be poorly scoped causing it to spill over leading to wastage of resources prompting the management to abandon the project.

Scope RiskThis risk includes changes in scope caused by the following factors:• Scope creep – the project grows in complexity as clients add to

the requirements and developers start gold plating.• Integration issues• Hardware & Software defects• Change in dependencies

Scope risks can be minimized and managed with savvy planning. Defining the project clearly, managing the changes in scope throughout the duration of the project, making use of risk registers to better manage risks, identifying the causative factors, and the appropriate responses to risky situations and developing greater risk tolerance in collaboration with the customer, would pay great dividends in the long run.

Scheduling Risk

• There are a number of reasons why the project might not proceed in the way you scheduled. These include unexpected delays at an external vendor, natural factors, errors in estimation and delays in acquisition of parts.

• To reduce scheduling risks use tools such as a Work Breakdown Structure (WBS) and RACI matrix (Responsibilities, Accountabilities, Consulting and Information) and Gantt charts to help you in scheduling.

Bringing in a new worker at a later stage in the project can significantly slow down the project.

Apart from attrition, there is a skill related risk too.

Another source of the risk includes lack of availability of funds. This could happen if you are relying on an external source of funding (such as a client who pays per milestone) and the client suddenly faces a cash crunch.

Resource RiskThis risk mainly arises from outsourcing and personnel related issues. A big project might involve dozens or even hundreds of employees and it is essential to manage the attrition issues and leaving of key personnel.

Technology Risk

This risk includes delays arising out of software & hardware defects or the failure of an underlying service or a platform.

The risk that components of your technology stack will be low quality. There are dozens of quality factors for technical components (e.g. stability, availability, scalability, usability, security, extensibility).

Many times the solution proposed by the project requires implementation of a new technology. However the organization may not be in a position to acquire these technologies due to financial or operational constraints. This poses obvious risks to the project as it can adversely affect the implementation of the proposed solution.

PROJECT RISK MANAGEMENT

Project risk management is a project management activity that involves identifying, assessing, measuring, documenting, communicating, avoiding, mitigating, transferring, accepting, controlling and managing risk.

Project risk management is the art and science of identifying, assigning, and responding to risk throughout the life of a project and in the best interests of meeting project objectives.

Risk management is often overlooked on projects, but it can help improve project success by helping select good projects, determining project scope, and developing realistic estimates.

The goal of project risk management is to minimize potential risks while maximizing potential opportunities. Major processes include:-

Risk management planning: deciding how to approach and plan the risk management activities for the project

Risk identification: determining which risks are likely to affect a project and documenting their characteristics

Qualitative risk analysis: characterizing and analyzing risks and prioritizing their effects on project objectives

Quantitative risk analysis: measuring the probability and consequences of risks

Risk response planning: taking steps to enhance opportunities and reduce threats to meeting project objectives

Risk monitoring and control: monitoring known risks, identifying new risks, reducing risks, and evaluating the effectiveness of risk reduction

INCORPOARTING RISK FACTORS

SENSITIVITY ANALYSIS

Prepared byAnanya P. P.2015-31-030MBA-ABM

INCORPORATING RISK FACTORS

General techniques applied for incorporating risk factors in projects are:

1) General techniques2) Quantitative techniques

General techniques

1)Risk Adjusted Discount Rate

2) Certainty Equivalent Coefficient

Risk Adjusted Discount Rate

Based on the presumption that investors

expects a higher rate of return on risky

projects as compared to less risky projects.

The rate requires determination of

Risk free rate

Risk premium rate

Risk free rate- rate at which the future cash inflows

should be discounted assuming there to be no risk.

Risk premium rate- is the extra return expected by the

investors over the normal rate (the risk free-rate) on

account of the project being risky.

Risk adjusted discount rate is a composite discount rate

that takes into account both the time and risk factors.

A higher discount rate will be used for more risky

projects and lower rate for less risky projects

Certainty Equivalent Coefficient Estimated cash flow are reduced to

conservative level by applying a correction factor termed as certainty equivalent coefficient.

The correction factor is the ratio of riskless or certain cash flow to risky cash flow

Certainty equivalent coefficient(CEC)= Riskless cash flow Risky cash flow X 100

Riskless cash flow- cash flow which the management is prepared to accept in case there is no risk involved. This will be lower than the cash flow which will be there in case the project is risky.

CEC focuses on the minimum returns out of the total expected returns

CEC are computed for estimating cash flows of each year

CEC are then multiplied with the cash flows to ascertain cash flows which may be used for the purpose of determining the IRR or NPV for capital investment decisions.

Quantitative techniques

Sensitivity analysis

Probability assignment

Standard deviation

Coefficient of variation

Decision tree analysis

Sensitivity analysis Analysis of the effects of changes in sales,

costs, etc. on a project.

The technique of sensitivity analysis helps in

studying the impact of crucial variables like raw

material, sales volume, sales price, degree of

capacity utilization etc. over the economic

viability of an enterprise.

Under this approach the value of different key

variables is changed in a systematic manner.

In other words, change is effected in one

variable and the other variables are assumed

constant and the results are analysed to find

out sensitivity of various variables with respect

to their impact on profit margin

When the analyst has discovered the variables to

which the outcomes is most sensitive , he should:

Scrutinise estimates of these with the greatest

care.

Discuss the estimated values in the report, and

suggest possible range of error;

Present the sensitivity analysis for the use in

decision making

Sensitivity analysis is used at the earlier stages

of the project investigation, to pick out those

variables, to the estimation of which the most

resources and thought should be devoted

It helps in deciding the viability of the project

It gives an idea of change in the present value

which results from wrong and inappropriate

estimates.

Probability assignment The project analyst might present by applying a

probability distribution method a range of

present values of each project with a probability

estimate attached to each value.

By multiplying the outcomes by the probabilities

and summing, one can then produce the

actuarial present values.

Standard deviation Standard deviation is the measure of dispersion

It is the square root of squared deviations calculated from

the mean

In case of capital budgeting, S.D is used to compare the

variability of possible cash flows of different projects from

their respective mean or expected values

A project having a larger SD will be more risky than a project

having a smaller one

Coefficient of variation SD is unfit for comparison particularly where

projects involve different cash outlays or different expected values ( mean value)

In such cases relative measure of dispersion should be calculated

Coefficient of variation is one such measure Coefficient of Variation=

• Standard Deviation

Expected Cash flow

Decision Tree analysis This is the graphical relationship between a

present decision and possible future events, future decisions and their consequences.

The sequence of events is mapped out over time in a format resembling branches of a tree

It links events chronologically with forecasted probabilities