6. Project Risk Mgmt - PM ASP1001H v2009-1

6. Project Risk Mgmt - PM ASP1001H v2009-1 - Module Module...

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Unformatted text preview: Module Module 6 – Project Risk Management Risk Management v2009 Project Risk Management: Outline Plan risk management Identify risks Perform qualitative risk analysis qualitative risk analysis Perform quantitative risk analysis Plan risk responses Initiating Planning Monitoring & Controlling Monitor & control risks Executing Closing • But first, an analogy ... 3 APS1001H Module 6: Project Risk Management Definition: Project Risk • An uncertain event or condition that, if it occurs, has a positive or negative impact on a project objective PMBOK Guide Ch. 11 Introduction 5 Low Risk Event Risk Probability Impact Detectability (FMEA) Urgency Tolerance PROBABILITY • • • • • • High Components of Risk Low IMPACT High 6 2 v2009 © Procept Associates Ltd. APS1001H Module 6: Project Risk Management Variation through the Project Life Cycle? RISK EVENT PROBABILITY? AMOUNT AT STAKE? COST TO MAKE CHANGES? TIME ALONG PROJECT LIFE CYCLE 7 Risk Management Planning • Start with existing… • Risk management approaches, templates, roles, authority levels? • Stakeholder risk tolerances? • Requirements and scope documents PMBOK Guide 11.1 9 v2009 © Procept Associates Ltd. 3 APS1001H Module 6: Project Risk Management Output from Risk Management Planning • Output is a Risk Management Plan • A very thorough example is attached • Including… • Methodology, roles and responsibilities • Budget and schedule for risk management • Categories for risk identification, such as risk breakdown structure • Probability & Impact Matrix (later) • Reporting formats, tracking of risks PMBOK Guide 11.1 10 4 v2009 © Procept Associates Ltd. APS1001H Module 6: Project Risk Management EXAMPLE - A VERY THOROUGH RISK MANAGEMENT PLAN 1 Table of Contents 3.3.1 3.3.2 1. Description 1.1 Mission 1.2 System 1.2.1 System Description 1.2.2 Key Functions 1.3 Required Operational Characteristics 1.4 Required Technical Characteristics Techniques Applied Implementation 4. Application 4.1 Risk Assessment 4.1.1 Risk Identification 4.1.2 Risk Quantification 4.1.3 Identification Summary 4.2 Risk Analysis 4.3 Risk Management (Handling) 4.3.1 Risk Reduction Milestones 4.3.2 Risk Quantification 4.3.3 Risk Budgeting 4.3.4 Contingency Planning 2. Programme Summary 2.1 Summary Requirements 2.2 Management 2.3 Integrated Schedule 3. Approach to Risk Management 3.1 Definitions 3.1.1 Technical Risk 3.1.2 Programmatic Risk 3.1.3 Supportability Risk 3.1.4 Cost Risk 3.1.5 Schedule Risk 3.2 Structure 3.3 Methods Overview 5. Summary 5.1 Risk Process Summary 5.2 Technical Risk Summary 5.3 Programmatic Risk Summary 5.4 Supportability Risk Summary 5.5 Schedule Risk Summary 5.6 Cost Risk Summary 5.7 Conclusion Note that this Risk Management Plan describes “how to approach and conduct the risk management activities”.2 This is NOT the Risk Register, produced later, which identifies the actual risks and responses. 1 Risk Management: Concepts and Guidance, DSMC, 1989, p 4-4. PMBOK Guide 11.1 2 v2009 © Procept Associates Ltd. 5 APS1001H Module 6: Project Risk Management A New Concept: Risk Breakdown Structure Project Technical External Requirements Project Management Organizational Subcontractors And Suppliers Project Dependencies Regulatory Resources Market Funding Customer Prioritization Technology Estimating Planning Complexity and and Interfaces Controlling Communication Performances And Reliability Weather Quality PMBOK Guide 11.1.3 11 Risk Identification • Brainstorming • Interviewing • SWOT analysis (Strengths Weaknesses Opportunities and Threats) • Analyze assumptions • Review documentation • We can use: Scope Statement or WBS can use: Scope Statement or WBS • Consider each element • Root cause analysis • Template checklists (such as RBS) PMBOK Guide 11.2.2 12 6 v2009 © Procept Associates Ltd. APS1001H Module 6: Project Risk Management BRAINSTORMING First developed by Alex Osborn in 1953, it has been widely publicized and used since then. A single brainstorming session should not last more than an hour. 1. The objective of the brainstorming session is clearly stated 2. Each person in the team has the opportunity to identify at least one idea 3. Each person has the option to "pass" when it is their turn to contribute if they do not have an idea. 4. All ideas are good ideas. Seemingly "wild" ideas are welcomed without comment, as are conservative ideas. 5. A recorder can ask for clarification of an idea in order to correctly record the suggestion. 6. The recorder writes down each idea on a flip chart, Mylar, or chalk board so everyone can see the accumulation. 7. After the brainstorming session (but not before), the list is reviewed to identify those ideas most worth further analysis. v2009 © Procept Associates Ltd. 7 APS1001H Module 6: Project Risk Management Customer Priorities? SCOPE 13 Stakeholders’ Expectations Are A Huge Source of Risk! EXTERNAL LABOUR UNIONS INTERNAL EXTERNAL CUSTOMERS TEAM MEMBERS EMPLOYEES INTERNAL CUSTOMERS GOVERNMENT FINANCIAL INSTITUTIONS SPECIAL INTEREST GROUPS COMPETITORS SUPPLIERS POSITIVE? PMO NEGATIVE? SPONSORS PMBOK Guide 2.2 CONSUMER GROUPS FUNCTIONAL MANAGERS 14 8 v2009 © Procept Associates Ltd. APS1001H Module 6: Project Risk Management Risk Identification Statement • “As a result of a <definite cause>, an <uncertain event> may occur, which could lead to an <effect on the objectives>” Not in PMBOK Guide 15 Risk Identification Statement • Cause: Definite events or sets of circumstances that exist in the th th project and its environment, and which give rise to uncertainty • Risks: Uncertain events or sets of circumstances that, if they occur, would affect the project objectives • Effect: Unplanned variations from project objectives, either positive or negative, which arise as a result of risks occurring Not in PMBOK Guide 16 v2009 © Procept Associates Ltd. 9 APS1001H Module 6: Project Risk Management RISK IDENTIFICATION STATEMENTS As a result of <a definite cause>, an <uncertain event> may occur, which could lead to an <effect on the objectives>. Although this concept has not yet reached the PMBOK Guide, it is a very useful way to express the risks. <definite cause> <uncertain event> <effect on the objectives> using novel hardware overspending on project we have never done a project like this before we might misunderstand the customer’s requirements a solution which does not meet performance specs the plan states a team size of 10 but we may be limited to 6 staff not being able to complete the work working outdoors in the summer 10 systems integration errors a thunderstorm may appear with rain and wind washing away the landscaping v2009 © Procept Associates Ltd. APS1001H Module 6: Project Risk Management Trigger • “Indication 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” PMBOK Guide glossary 17 Opportunity • Just a risk with a favourable outcome, instead of a “th “threat” • We will ask... What can we do to influence the positive outcome to happen, or to take advantage if it occurs? PMBOK Guide glossary 18 v2009 © Procept Associates Ltd. 11 APS1001H Module 6: Project Risk Management Risk Workshop # 1: Risk Identification • Form small groups, appoint a spokeperson • Read the Request for Proposal • You are the vendor • Think of 3-4 threats (negative risks) • Express as Risk Identification Statements • Identify a “trigger” for each one • Do not solve these risks • And think of one opportunity (positive risks) 19 12 v2009 © Procept Associates Ltd. APS1001H Module 6: Project Risk Management PROJECT RISK MANAGEMENT EXERCISE Issued in 1907, this is the RFP to which the Wright Brothers responded, and which was largely responsible for lifting the airplane out of the milieu of dreamers and isolated inventors into fullscale production. SIGNAL CORPS SPECIFICATION NO. 486 ADVERTISEMENT AND SPECIFICATION FOR A HEAVIER-THAN-AIR FLYING MACHINE TO THE PUBLIC: A) Sealed proposals, in duplicate, will be received at this office until 12 o’clock noon on February 1, 1908, on behalf of the Board of Ordinance and Fortification for furnishing the Signal Corps with a heavier-than-air flying machine. All proposals received will be turned over to the Board of Ordinance and Fortification at its first meeting after February 1 for its official action. B) Persons wishing to submit proposals under this specification can obtain the necessary forms and envelopes by application to the Chief Signal Officer, United States Army, War Department, Washington, D.C. The United States reserves the right to reject any and all proposals. C) Unless the bidders are also the manufacturers of the flying machine they must state the name and place of the maker. D) Preliminary. – This specification covers the construction of a flying machine supported entirely by the dynamic reaction of the atmosphere and having no gasbag. Acceptance. – The flying machine will be accepted only after a successful trial flight, during which it will comply with all the requirements of this specification. No payments on account will be made until after the trial flight and acceptance. Inspection. – The Government reserves the right to inspect any and all processes of manufacture. GENERAL REQUIREMENTS The manufacturer, subject to the following conditions, will determine the general dimensions of the flying machine: 1. Bidders must submit with their proposals the following: a. Drawings to scale showing the general dimensions and shape of the flying machine which they propose to build under this specification. b. Statement of the speed for which it is designed. c. Statement of the total surface area of the supporting planes. d. Statement of the total weight. e. Description of the engine, which will be used for motive power. f. The material of which the frame, planes, and propellers will be constructed. Plans received will not be shown to other bidders. 2. 3. It is desirable that the flying machine should be designed so that it may be quickly and easily assembled and taken apart and packed for transportation in army wagons. It should be capable of being assembled and put in operating condition in about one hour. The flying machine must be designed to carry two persons having a combined weight of about 350 pounds, also sufficient fuel for a flight of 125 miles. The flying machine should be designed to have a speed of at least forty miles per hour in still air, but bidders must submit quotations in their proposals for cost depending upon the speed attained during the trial flight, according to the following scale: 40 miles per hour, 100 percent v2009 © Procept Associates Ltd. 13 APS1001H Module 6: Project Risk Management 39 miles per hour, 90 percent 38 miles per hour, 80 percent 37 miles per hour, 70 percent 36 miles per hour, 60 percent Less than 36 miles per hour rejected 41 miles per hour, 110 percent 42 miles per hour, 120 percent (**the actual flight speed achieved was 42.5 miles per hour 43 miles per hour, 130 percent and a bonus of $5,000 (25 percent) was paid in addition to 44 miles per hour, 140 percent the contract fee of $25,000) 4. The speed accomplished during the trial flight will be determined by taking an average of the time over a measured course of more than five miles, against and with the wind. The time will be taken by a flying start, passing the starting point at full speed at both ends of the course. This test subject to such additional details as the Chief Signal Officer of the Army may prescribe at the time. 5. Before acceptance a trial endurance flight will be required of at least one hour during which time the flying machine must remain continuously in the air without landing. It shall return to the starting point and land without any damage that would prevent it immediately starting upon another flight. During this trial flight of one hour it must be steered in all directions without difficulty and at all times under perfect control and equilibrium. 6. Three trials will be allowed for speed as provided for in paragraphs 4 and 5. Three trials for endurance as provided for in paragraph 6, and both tests must be completed within a period of thirty days from the date of delivery. The expense of the tests to be borne by the manufacturer. The place of delivery to the Government and trial flights will be Fort Myer, Virginia. 7. It should be so designed as to ascend in any country, which may be encountered in field service. The starting device must be simple and transportable. It should also land in a field without requiring a specially prepared spot and without damaging its structure. 8. It should be provided with some device to permit of a safe descent in case of an accident to the propelling machinery. 9. It should be sufficiently simple in its construction and operation to permit an intelligent man to become proficient in its use within a reasonable length of time. 10. Bidders must furnish evidence that the Government of the United States has the lawful right to use all patented devices or appurtenances which may be a part of the flying machine, and that the manufacturers of the flying machine are authorized to convey the same to the Government. This refers to the unrestricted right to use the flying machine sold to the Government, but does not contemplate the exclusive purchase of patent rights for duplicating the flying machine. 11. Bidders will be required to furnish with their proposal a certified check amounting to ten per cent of the price stated for the 40-mile speed. Upon making the award for this flying machine these certified checks will be returned to the bidders, and the successful bidder will be required to furnish a bond, according to Army Regulations, of the amount equal to the price stated for the 40-mile speed. 14 v2009 © Procept Associates Ltd. APS1001H Module 6: Project Risk Management 12. The price quoted in proposals must be understood to include the instruction of two men in the handling and operation of this flying machine. No extra charge for this service will be allowed. 13. Bidders must state the time that will be required for delivery after receipt of order. JAMES ALLEN Brigadier General, Chef Signal Officer of the Army SIGNAL OFFICE, WASHINGTON, D.C., December 23, 1907 v2009 © Procept Associates Ltd. 15 APS1001H Module 6: Project Risk Management Output from Risk Identification • Risk Register PMBOK Guide 11.2.3 20 Qualitative Risk Analysis • Probability and impact matrix • See the attached methodology • Helps us prioritize 21 16 v2009 © Procept Associates Ltd. APS1001H Module 6: Project Risk Management PROBABILITY OF OCCURRENCE HIGH Probability and Impact Matrix MEDIUM HIGH MEDIUM LOW LOW LOW MEDIUM HIGH IMPACT PMBOK Guide 11.3.2.2 22 Probability and Impact Matrix PROBABILITY >> NEAR CERTAIN L M H H HIGH HIGHLY LIKELY L M M H H LIKELY L L MEDIUM M H LOW LIKELIHOOD L L M M M LOW L L L M NOT LIKELY LOW PMBOK Guide 11.3.2.2 MINOR MODER- SIGNIFI- HIGH ATE CANT IMPACT >> 23 v2009 © Procept Associates Ltd. 17 APS1001H Module 6: Project Risk Management QUALITATIVE RISK ASSESSMENT3 Example Impact Scale 1 2 3 4 5 Very Low Low Medium High Very High Cost Insignificant cost increase < 5% cost increase 5 - 10% cost increase 10 - 20% cost increase > 20% cost increase Schedule Insignificant schedule slippage Overall project slippage < 5% Overall project slippage 5 – 10% Overall project slippage 10 20% Overall project slippage > 20 % Functionality Functionality decrease barely noticeable Minor areas of functionality are affected Major areas of functionality are affected Functionality reduction unacceptable to client Project end item is effectively useless Quality Quality degradation barely noticeable Only very demanding applications are affected Quality reduction requires client approval Quality reduction unacceptable to client Project end item is effectively useless Project Objective Example Likelihood Scale Level Prob. 1 0.1 You would be surprised if this happened. 2 0.3 Less likely to happen than not. 3 0.5 Just as likely to happen as not. 4 0.7 More likely to happen than not. 5 0.9 You would be surprised if this did not happen. 3 Probability of Occurrence Adapted from “Qualitative Risk Assessment” by Roger Graves, PMNetwork October 2000. 18 v2009 © Procept Associates Ltd. APS1001H Module 6: Project Risk Management An Example Project Risk Profiling Questionnaire • There are tools to calculate the relative riskiness of a project • Usually based on a questionnaire • See extract attached, from IBM 24 v2009 © Procept Associates Ltd. 19 APS1001H Module 6: Project Risk Management EXTRACT FROM "PROJECT RISK PROFILE", IBM Identify the relative likelihood (Low - Medium- High) and relative impact (Low - Medium- High) from each of 123 “factors” or sources of risk. The result is a "Project Risk Matrix". An extract with 15 sources only is shown below. Training, Documentation and Support Risk Factors: • Likelihood (L,M,H), Impact (L,M,H) • No-one is responsible for user training • No one is responsible for documentation • No one is responsible for support or help desk • Users are not available for training User Expectation Risk Factors: • Likelihood (L,M,H), Impact (L,M,H) • Is being installed in an area of the company where Information Technology is not valued • Have unrealistically high expectations • Have unrealistically low expectations User Impact Risk Factors: • Likelihood (L,M,H), Impact (L,M,H) • Is being delivered to than one user community, for example, department or function • Is being delivered to users illiterate in Information Technology • Is being delivered to a large diverse user base with varying needs • Involves users learning new skills or ways of working • Is being delivered to users who do not understand the Implications on their work • Involves reorganization of the company • Has users who will not agree to changes in working patterns required by new system • Is being delivered to users who do not realize extent of training required to use solution Example Resulting Project Risk Profile Impact High 3 8 0 0 Medium 4 13 4 0 Low 19 14 3 2 None 31 12 6 8 None Low Medium High Likelihood 20 v2009 © Procept Associates Ltd. APS1001H Module 6: Project Risk Management Workshop # 2: Analysis For each risk event from Workshop #1: • Estimate relative probability and impact H high high low med high low M med low med L • Do not decide a response to the risk to the risk PROBABILITY • Plot each risk event on the grid below L M IMPACT H 25 Quantitative Risk Analysis • Probability distributions • Sensitivity analysis • Expected monetary value • Decision trees • 3-point estimates of cost or duration • Simulations, such as Monte Carlo • Watch out: “garbage in, gospel out” PMBOK Guide 11.4 26 v2009 © Procept Associates Ltd. 21 APS1001H Module 6: Project Risk Management A Quantitative P&I Matrix L M H H HIGH 60 – 79% L M M H H 40 – 59% L L MEDIUM M H 20 – 39% L L M M M 0 – 19% PROBABILITY 80 – 99% LOW L L L M 0– 200K 201 – 400K 401 – 600K 601 – 800K 801 – 1M IMPACT 27 Scenario • You have the opportunity to buy a Tim Horton’s coffee shop franchise You have choice of city locations shop franchise. You have a choice of 5 city locations. You have looked at the possible first year’s profit or loss for each location. The best case, most likely, and worst case for each location is as follows: Downtown Calgary $120k, $65k, $50k; Vancouver airport $80k, $80k, $80k; Halifax suburb $160k, $120k, -$20k; Scarborough $40k, $30k, $20k; Rochester NY $200k, $40k $30k $20k NY $200k $45k, -$50k. (For each location, the best case has a 25% likelihood, the most likely has a 50% likelihood, and the worst case has a 25% likelihood.) Which do you prefer? 28 22 v2009 © Procept Associates Ltd. APS1001H Module 6: Project Risk Management Expected Monetary Value • Expected Value = the probability-weighted average value of several possible outcomes • x = possible outcome • PV(x) = present value of outcome • p(x) = probability of outcome • EMV(x) =SUM [PV(x) * p(x)] 29 Use a Payoff Table news likely LOCATION Good news Most likely (25%) #2 (50%) Bad news news #3 (25%) Downtown Calgary $120 $65 $50 Vancouver Airport $80 $80 $80 Halifax suburb $160 $120 - $20 SW Scarborough $40 $30 $20 Rochester NY $200 $45 EMV - $50 • Which do you prefer? 30 v2009 © Procept Associates Ltd. 23 APS1001H Module 6: Project Risk Management Exercise • What is the rational value? • What is the “opportunity” worth to you ? • What affects your decision ? 32 Risk Tolerance • Risk averse, or • Risk neutral, or • Risk seeking (hopefully not!) 33 24 v2009 © Procept Associates Ltd. APS1001H Module 6: Project Risk Management HIGH Risk Attitude RISK ACCEPTABILITY RISK - SEEKER (GAMBLER) RISK - NEUTRAL LOW RISK AVERSE LOW AMOUNT OF RISK HIGH Adapted from Wideman, Project and Program Risk Management, PMI, 1992 34 Risk Tolerance • Which do you prefer? LIKELIHOOD • Apply the risk tolerance of the organization, not the risk tolerance of the individual ! PROJECT CHOICE B PROJECT CHOICE A CHOICE << UNFAVOURABLE OUTCOME FAVOURABLE >> 35 v2009 © Procept Associates Ltd. 25 APS1001H Module 6: Project Risk Management Developing a Decision Tree • Define choice events and risk events • Multiply the probabilities along the path • Add the outcomes along the path CHOICE EVENT RISK EVENT OUTCOME RISK EVENT -$1M -$5M (investment) +$2M -$4M 0.8 0.6 0.48 36 26 v2009 © Procept Associates Ltd. APS1001H Module 6: Project Risk Management DECISION TREES4 A decision tree is a graphical representation of expected value calculations. The tree consists of choice events, risk events, and terminal calculations connected by branches. This acts as a blackboard to develop and document our understanding of the problem and facilitates team collaboration and communication. Conceptually, any decision, no matter how complex, can be analyzed with a decision tree analysis. Other alternatives, especially Monte Carlo simulation, have advantages and disadvantages for certain problems. Decision tree analysis is especially suited to everyday problems where one wants to quickly pick the best alternative and proceed. Node Types: There are three types of nodes in a decision tree: • Choice event nodes, represented by squares, are variables or actions the decision maker controls. • Risk event nodes, represented by circles, are variables or events that cannot be controlled by the decision maker. • Terminal nodes, represented in the diagram by unconnected branches, are endpoints where outcome values are attached. By convention, the tree is drawn chronologically from left to right. Tree Annotations: The decision tree is annotated with these numbers: • Probabilities for each outcome branch emanating from risk event nodes. • Outcome values, representing present values (PV's) of the resulting cash flow stream, discounted to the date of the root decision. Sometimes, benefits and costs are placed along branches as they are realized. More commonly, all the outcome value is assigned to the terminal nodes. • Node expected values, calculated during the process of solving the tree. Many practitioners believe that insights gained into decision problems are more important than the numerical results. 4 Adapted from Schuler, Decision Analysis in Projects, PMI, 1996, pp. 25-26, 31. v2009 © Procept Associates Ltd. 27 APS1001H Module 6: Project Risk Management Developing a Decision Tree RISK EVENT 2 OUTCOMES .90 DECISION YES .50 .10 5% .90 RISK .50 EVENT 1 45 % 45 % 5% .10 100 % NO .70 .50 35 % 35 % .50 .80 24 % .20 .30 6% 100 % 37 Exercise #1: Decision Tree • Choice: accept an FP for $100,000 • Or an FP contract for $115,000 with a liquidated damages clause • Liquidated damages will be $50,000 if schedule not met • 5% chance of missing the schedule chance of missing the schedule • 60% chance your cost will be $90,000 • 40% chance your cost will be $80,000 38 28 v2009 © Procept Associates Ltd. Module 6: Project Risk Management v2009 © Procept Associates Ltd. Choose With Clause Choose Without Clause Clause Exercise #1: Decision Tree 39 APS1001H 29 APS1001H Module 6: Project Risk Management EXERCISE #2 - DECISION TREES5 You are planning an activity which requires the use of a crane. You can rent either a small crane or a large crane The large crane will be quicker and will cost a total of $16,000 including the crew. The small crane will take longer but will only cost a total of $10,000. If the project goes as planned, the activity will not be on the critical path. In that case, a delay in the activity will not delay the project completion. But a Monte Carlo analysis has indicated that there is a 30% possibility that the activity will become critical. In this case, each day's delay in completion will cost the project $5,000. The following table indicates the possibilities of the small and the large cranes creating a relatively long, medium, or short delay, IF the activity becomes critical. SMALL CRANE LARGE CRANE Delay Probability Delay in days Probability Delay in days Long 0.2 10 0.2 3 Medium 0.5 5 0.5 2 Short 0.3 2 0.3 1 For example, if the activity becomes critical because of preceding activities being behind schedule, and if the small crane has been selected, and the delay in the crane activity is 10 days, then the delay cost is 10 days x $5,000 per day = $50,000. Q1. Using expected monetary values with a risk-neutral attitude, which crane should the project manager choose? Q2. Are there possibly considerations other than the expected monetary value? 5 Adapted from Schuler, Decision Analysis in Projects, PMI, 1996, pp 20-23. 30 v2009 © Procept Associates Ltd. Module 6: Project Risk Management v2009 © Procept Associates Ltd. Choose Large Crane Choose Small Crane Exercise #2: Decision Tree 47 APS1001H 31 APS1001H Module 6: Project Risk Management Monte Carlo Simulation • Used for cost or schedule risks • Construct a good math model of the situation / project • Use “random numbers” to “run” the model many times • Express results as probability distributions results as probability distributions 53 Estimated Frequency Three-Point Estimates - Triangular Most Likely Estimate Low Estimate High Estimate Estimated Cost or Duration PMBOK Guide 6.4.2.4 54 32 v2009 © Procept Associates Ltd. APS1001H Module 6: Project Risk Management Three-Point Estimates – “Beta” Shape FREQUENCY Optimistic Most Likely Pessimistic Estimated Cost or Duration 55 Monte Carlo Situation: Example 56 v2009 © Procept Associates Ltd. 33 APS1001H Module 6: Project Risk Management Monte Carlo: Outcome as a Cumulative Probability Curve CUMULATIVE PROBABILITY 100 % 75 % 50 % 25 % COST OR DURATION 57 Weaknesses of Monte Carlo ? 58 34 v2009 © Procept Associates Ltd. APS1001H Module 6: Project Risk Management Reducing Risk When…? • Technical risk is high… • Cost risk is high… • Schedule risk is high... risk is high Couillard, Project Management Journal, Dec. 1995 59 Risk Response Planning • Strategies for negative risks (threats) • Avoid • Mitigate • Transfer • Strategies for opportunities • Exploit • Share • Enhance • Accept • Contingency plan PMBOK Guide 11.5.2 61 v2009 © Procept Associates Ltd. 35 APS1001H Module 6: Project Risk Management Avoid (for Threat) • “Eliminate the threat or condition, or isolate the project objectives from its impact”... it • Decline the project? • Relax the scope / requirements? • Change technology? PMBOK Guide 11.5.2.1 62 Mitigate (for Threat) • Reduce the expected monetary value of a risk event by: • • • • • • • Lowering the probability of occurrence, or Reducing its effect e.g. More experienced PM / team / vendors Tighter project controls project controls Regular formal risk reviews More testing Further investigation PMBOK Guide 11.5.2.1 63 36 v2009 © Procept Associates Ltd. APS1001H Module 6: Project Risk Management Transfer (for Threat) • By contract types ... • Fixed price vs. cost-reimbursable • By contract clauses ... • Liquidated damages • Warrantees, guarantees, etc. • By insurance or bonds • In all cases, you will pay a “risk premium” • Does not usually make it go away entirely PMBOK Guide 11.5.2.1 64 v2009 © Procept Associates Ltd. 37 APS1001H Module 6: Project Risk Management SOME FORMS OF RISK TRANSFER There are several types of standard contract clauses which essentially transfer risk between the parties to the contract: • Representations… “Here are the facts” • Warranties… “Here are the promises” • Remedies… “If the contract is breached” • Hold Harmless… “You protect me from your liabilities” • Indemnification… “And you’ll reimburse my expenses if we are sued” The most complete forms of risk transfer are for financial risk, such as for insurance. Some relevant insurance types are: • Liability insurance • General business, professional, directors and officers, others • Property insurance • Fire, business interruption, others • Automobile insurance Bonds differ from insurance, in that bonding companies have the right to collect the payout from the defaulting contractor. Bonds are more common in construction than in other kinds of projects. Types of bonds include... • Bid bond • Labour and material payment bond • Performance bond 38 v2009 © Procept Associates Ltd. APS1001H Module 6: Project Risk Management If Transfer...Ask Ourselves... • Who is the source of the risk? • Who can best manage it? • Does customer want to retain involvement in managing the work? • Can recipient withstand consequences? • Is the risk premium reasonable? 65 Strategies for Opportunities • Exploit (opposite of avoid) • Make it happen ! • Share (similar to transfer) • Bring in a partner • Enhance (similar to mitigate) • Increase the probability, ... • Or increase the positive impact PMBOK Guide 11.5.2.2 66 v2009 © Procept Associates Ltd. 39 APS1001H Module 6: Project Risk Management Accept (for Threat or Opportunity) • Passively ignoring, or... • Actively recognizing and accepting the consequences • Could have “contingency reserves” in the budget and schedule, or • “Allowances” for specific risks for specific risks PMBOK Guide 11.5.2.3 67 Contingency Plan (for Threat or Opportunity) • A predetermined response plan • Only do it if the “trigger”, or the threat itself, occurs PMBOK Guide 11.5.2.4 68 40 v2009 © Procept Associates Ltd. APS1001H Module 6: Project Risk Management Output: Add to Risk Register • Mitigation plans • Contingency plans • Contingency reserves • Risk owners • Residual risks are those that remain • Secondary risks are those that arise as a result of our risk responses • Contractual agreements PMBOK Guide 11.5.3.1 69 A Risk Communication Sheet PROJECT NAME: PROJECT ID: Risk Item Control #: Revision: WBS Impacted: Risk Description: Risk Impact: Risk Probability 1 Minimal 1 Likely 2 Moderate 2 Risk Factor PROBABILITY Risk Consequences Low Risk Class 3 Major 3 Med High High 2 Low Med High 3 Low Low Med 1 Very Likely 1 2 Low 3 Medium High CONSEQUENCE Risk Solution: Solution(s) Impact: ORIGINATOR: Organization: Name: Date: 70 v2009 © Procept Associates Ltd. 41 APS1001H Module 6: Project Risk Management Risk Workshop #3: Response Planning • Using specific threats already identified • Estimate % probability and $ negative impact • How will you respond to each threat? • In detail, and ... • By category (Avoid, Mitigate, Transfer, Accept, Contingency Plan) • Estimate the cost of the response cost • Estimate the new probability and impact • Compare the new and old EMV. Is it a rational response? • For your “opportunity”, just tell us the response strategy 71 42 v2009 © Procept Associates Ltd. APS1001H Module 6: Project Risk Management INTRODUCTION TO RISK WORKSHOP #3 "EVALUATE RESPONSE STRATEGIES" As you read this, also refer to the spreadsheet on the next page. For example, I am performing a risk identification and response exercise on my project. From previous projects, I realize that users may have requirements which don't become evident until the project is almost complete. And some of these requirements cannot be refused. For this project, I am estimating that such a risk event has a probability of 50% and an impact of 2,000 labour hours at a fully burdened rate of $100 per hour. The potential delay in schedule will have little or no monetary impact. Expected Monetary Value of risk event = (0.50)(2000hrs)($100/hr) = $100,000. Let's assume I can mitigate this risk by spending an extra 200 labour hours in requirements definition and in subsequent reviews with the users. Now there is still a risk event, but it has a reduced probability of 25% and also a reduced impact of 1,000 labour hours. EMV of risk event after mitigation = (0.25)(1000hrs)($100/hr) = $25,000. Therefore we have mitigated the EMV of the risk event by $75,000. Is the cost of the mitigation effort well spent? Let's see: Cost of mitigation = (200 labour hours)($100 per hour) = $20,000. YES IT IS! v2009 © Procept Associates Ltd. 43 44 50% Prob. % Risk Event User requirements arriving late B A 200,000 Impact $ C 100,000 Risk Event E.M.V. $ D (BxC) 200hrs more reqirement definition Mitigation Strategy E G H 20,000 25% 100,000 Mitigation New Cost New Prb. Impact $ % $ F 25,000 New E.M.V. $ I (GxH) 75,000 55,000 Do the mitigation K L (J-F) Net Improve Improve ment ment Conclusion $ $ J (D-I) Evaluating Risk Responses APS1001H Module 6: Project Risk Management v2009 © Procept Associates Ltd. APS1001H Module 6: Project Risk Management Risk Monitoring & Control • By “risk owner” • Keep track of the identified risks • Carry out the risk responses • Look for triggers • Analyze contingency reserves • Respond to actual risk events as they occur • Identify and respond to potential new risks as they arise PMBOK Guide 11.6 74 End of Module 6 v2009 © Procept Associates Ltd. 45 APS1001H Module 6: Project Risk Management Use a Payoff Table news LOCATION Good news (25%) Most likely likely #2 (50%) Bad news news #3 (25%) EMV Downtown Calgary $120 $65 $50 $75 Vancouver Airport $80 $80 $80 $80 Halifax suburb $160 $120 - $20 $95 SW Scarborough $40 $30 $20 $30 Rochester NY $200 $45 - $50 $60 • Which do you prefer? 76 Exercise #1: Decision Tree Schedule Outcome Prob’y Risk Cost Risk Choose Without Clause Expected Outcome Monetary Value Value 60% $10,000 = $6,000 40% .6 x x $20,000 = $8,000 100 % $14,000 .4 .95 Choose With Clause .6 .4 .05 .95 .05 57% x 3% x 38% x x 2% x $25,000 = $14,250 -$25,000 = -$750 $35,000 = $13,300 -$15,000 = 100 % -$300 $26,500 77 46 v2009 © Procept Associates Ltd. APS1001H Module 6: Project Risk Management Exercise #2: Decision Tree On Critical Path? Outcome Outcome Prob’y Cost Delay Time? 0.2 0.5 0.3 Choose Small Crane 0.06 * $60,000 = $3,600 0.15 * $35,000 = $5,250 0.09 * $20,000 = $1,800 0.70 * $10,000 = $7,000 Expected Monetary Value = $17,650 0.2 Choose Large Crane 0.5 0.3 0.06 * $31,000 = $1,860 $31 $1 0.15 * $26,000 = $3,900 0.09 * $21,000 = $1,890 0.70 * $16,000 = $11,200 Expected Monetary Value = $18,850 78 Reducing Risk When... • Technical risk is high… - emphasize team support team support - increase project manager authority project manager authority - improve problem handling - communication - more frequent monitoring - use WBS, CPM, earned value - avoid stand-alone project structure • Cost risk is high… - more frequent monitoring - improve communication - team support - use WBS, CPM, earned value - project goals understanding • Schedule risk is high... - more frequent monitoring - select the most experienced project manager Couillard, Project Management Journal, Dec. 1995 79 v2009 © Procept Associates Ltd. 47 ...
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