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Unformatted text preview: ternal corporate initiative. We have something to say about that kind of undertaking in Chapter 10. But, for the most part, the focus of this book has not been on how to design something or how to write a specification for some initiative but rather on how to develop a project plan, given that the specification for the project has already been decided upon. Similarly, we do not focus on how to do risk assessment. A whole book could be written about how to do risk assessment for various project types, just as whole books can be and have been written on how to design or specify the work content of a project. What we do is show how to develop a risk management plan, similar to the project management plan, and how to manage the risk based on this plan. The process is very similar to that for developing a project management plan. To begin with, we need a WBS for the risk. This is easy to produce because we can essentially use the WBS for the project, with some modifications. The fundamental question that is essential for a good risk management plan is, What level of the WBS is appropriate for risk management? Before we can answer this question, we need to understand the concept of contingency as used by project managers. Contingency can be thought of as yet another budget that is allocated to cover the risk that has been assessed. Why is another budget necessary to cover risk? Risk is normally measured probabilistically. We might say, for instance, "There is a 50% chance of a 10% overrun on the project." But, if this is the case, then it is not the whole story. If there is a 50% chance of a 10% overrun, then there probably is a greater probability of a smaller overrun and a smaller probability of a larger overrun. The statement that there is a 50% chance of a 10% overrun may just be the guess of the project manager or someone on the project management staff. But, if a detailed risk assessment has been done, we should have a graph in the form of Figure 9-1 that quantifies the risk for the total project. Page 233 Figure 9-1. Probability of finishing on time graph. Figure 9-1 shows the graph of total planned project expenditure plotted against time as a solid line. This graph shows the project completing at time tF. Superimposed upon this graph is another graph, plotted as a dotted line. This graph is the probability density function (in different units) of the project finishing at some other time (earlier or later). The vertical line at time t R denotes the mean of this probability density function. In other words there is about 50% probability that the project will finish before time tR and about 50% probability that it will finish after time tR. If the project finishes later, it will probably cost more, and if it finishes earlier, it will probably cost less. Consequently, there is a corresponding probability density function associated with the differential cost of the project. If we take the mean of this second probability density function and add it to the total planned cost of the project, we might say that we now have the "...
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