Project Risk Management Introduction Unit 1 Unit 2 Unit 3 PMP Exam Preparation Project Integration Management Project Scope Management Project Time Management Unit 4 Unit 5 Unit 6 Unit 7 Project Cost Management Project Quality Management Project Human Resource Management Project Communications Management Unit 8 Unit 9 Unit 10 Project Risk Management Project Procurement Management Project Professional Stakeholder and Social Responsibility Management 8-1
Project Risk Management Overview Plan Risk Management Identify Risks Perform Qualitative Risk Analysis Perform Quantitative Risk Analysis Project Risk Management Plan Risk Responses Monitor and Control Risks 8-2
Knowledge Areas and Process Groups Initiating Planning Executing Monitoring and Controlling Closing Integration X X X X X Scope X X Time X X Cost X X Quality X X X Human Resources X X Communications X X X X Risk X X Procurement X X X X Stakeholders X X X X Source: PMBOK Guide, p. 61 8-3
Definition of Project Risk Management Risk: An uncertain event or condition that, if it occurs, has a positive or negative effect on a project s objectives * Event Probability Impact Risk Factors Precisely what might happen Likelihood that the event will occur Extent of loss or gain should that event occur, often referred to as the amount at stake *Source: PMBOK Guide, p. 483 8-4
Risk Categories and Types Categories of risk Known risks Have been identified Have been analyzed Can be managed Unknown risks May be addressed through a general contingency based on experience with similar projects Threats (negative) Opportunities (positive) Types of risk Business risk Normal risks of doing business May be positive (gains) or negative (losses) Pure, or insurable, risks Present only as an opportunity for loss Four categories Direct property damage Indirect consequential loss Legal liability Personnel 8-5
I. Plan Risk Management Purpose Decide how to approach and plan the risk management activities Key Outputs Risk management plan Risk management methodology Roles and responsibilities of team members Risk budget Timing of risk management activities Risk tolerances Probability-impact matrix Risk categories (risk breakdown structure (RBS)) 8-6 Source: PMBOK Guide, p. 277
Risk Breakdown Structure (RBS) Project Internal External Cultural Technical Management Political Language Customer needs Infrastructure Competition Customs Internal capabilities Process Acts of nature Schedules Integration 8-7
8-8 II. Identify Risks Purpose Determine which risks might affect the project and document their characteristics Key Inputs Cost and activity duration estimates Scope baseline and risk, quality, schedule, and cost management plans Organizational process assets and enterprise environmental factors Other sources of risk identification Key Tools and Techniques Information gathering techniques Checklist analysis, assumptions analysis, diagramming techniques, and SWOT analysis Key Outputs Risk register Source: PMBOK Guide, p. 282
Information Gathering Techniques Diagramming techniques Brainstorming Assumptions analysis Delphi technique Checklists Interviewing Root cause identification 8-9
Risk Register An evolutionary document that serves to capture risk information and becomes a component of the project management plan At the end of identification, the register includes List of risks List of potential (early) responses Root causes of risks Risk breakdown structure (RBS) updates 8-10
III. Perform Qualitative Risk Analysis Purpose Prioritize identified risks for further action Key Inputs Risk management plan Tools and Techniques Risk probability and impact assessment Probability-impact risk rating matrix Data quality assessment Risk categorization Urgency assessment Key Outputs Risk register (updates) 8-11 Source: PMBOK Guide, p. 290
Risk Probability and Impact: Impact Analysis 8-12
IV. Perform Quantitative Risk Analysis 8-13 Purpose Measure the probability and consequences of risk events and estimate the impact on the project as a whole Tools and Techniques Data gathering and representation techniques Interviewing Probability distributions Sensitivity analysis and decision tree analysis Quantitative risk analysis and modeling techniques Key Outputs Risk register updates Source: PMBOK Guide, p. 295
Decision Tree Analysis Breaks down a series of events into smaller, simpler, and more manageable segments Uses the concepts of Expected monetary value (EMV) analysis Statistical independence 8-14
Statistical Independence A necessary condition for the use of various tools, such as decision trees and EMV Two events are independent if the occurrence of one event is not related to the occurrence of the other event If both events are random, then independence exists If both events are not random, then independence does not exist Examples of statistical independence Roll of dice Toss of a coin 8-15
Expected Monetary Value (EMV) A statistical assessment of project value, but not a prediction of final revenue or cost Amount Value Probability of Winning EMV $50 0.01 0.50 2 0.10 0.20 0 0.89 0.00 Total 1.00 0.70 The expected value of winnings is the sum of the winning amounts multiplied by their respective probability of occurrence For example: = ($50 x 0.01) + ($2 x 0.10) + ($0 x 0.89) = $0.50 + $0.20 + $0.00 = $0.70 8-16
Decision Tree Analysis Guidelines Boxes are decision points Circles are events with multiple possible outcomes Act Event E 1 Outcome O 1 Lines are the paths that show A 1 E 2 O 2 Probability Consequence A 2 E 1 O 1 E 2 O 2 8-17
Decision Tree Example # 1 Process 1 AC is (0.5) (0.7) = 0.35 AD is (0.5) (0.3) = 0.15 BC is (0.5) (0.4) = 0.20 BD is (0.5) (0.6) = 0.30 Sum of probabilities = 1.00 Process 2 8-18
Decision Tree Example #2 Probability Test Pass Fail Pass $0 Do not test Fail 8-19
Decision Tree Example #3 Probability and EMV Test = $5M + $960K + $460K = $6.42M Pass $5M Fail Pass $0 Do not test = $7M Fail 8-20
Comparison of Scheduling Tools and Their Risk Perspective Technique Principal Output Estimate Basis Estimate Type CPM Early and late start and finish activity for each activity, project duration, and float Deterministic Most optimistic PERT Activity duration estimates Weighed average Pessimistic (realistic) Monte Carlo Project duration estimates Simulation Most pessimistic (most realistic) 8-21
V. Plan Risk Responses Purpose Develop options to enhance opportunities and reduce threats Tools and Techniques Strategies for threats Avoid Transfer Mitigate Strategies for opportunities Exploit Share Enhance Strategy for threats and opportunities Accept Contingent response strategies 8-22 Source: PMBOK Guide, p. 302
8-23 Unit 8 V. Plan Risk Responses (continued) Key Outputs Risk register updates, including Identified risks Data from qualification and quantification Accepted responses Actions to produce the responses Triggers, symptoms, and warning signs of risks Budget and schedule actions required Contingencies (time and cost) assigned Contingency plans and fallback plans Residual and secondary risks Risk-related contract decisions Source: PMBOK Guide, p. 302
VI. Monitor and Control Risks Purpose Monitor residual risks Identify new and secondary risks Execute risk responses Evaluate risk process effectiveness Tools and Techniques Risk audits Risk reassessment Reserve analysis and variance and trend analysis Technical performance measurements Status meetings 8-24 Source: PMBOK Guide, p. 308
VI. Monitor and Control Risks (continued) Key Outputs Corrective actions Risk register updates Updates to the organizational process assets, the project management plan, and project documents Change requests Lessons learned 8-25 Source: PMBOK Guide, p. 308
Review 8-26