Project Risk Management

Risk Management Process

• An "uncertain event", if it occurs, will have a negative effect on project objectives
• No amount of planning can overcome or control all risk
• Attempt to recognize and manage potential trouble spots that may occur when the project is implemented

Risk Management Steps

• Identify as many risk events as possible
• Minimize their impact
• Manage responses to events that do materialize (contingency plans)
• Provide contingency funds to cover risk events that materialize

Risk Event Graph

• The risks are greatest at the beginning of a project when there are more unknowns such as supplier reliability and estimate accuracy
• Risks lessen as the project is better understood
• Earlier risk events are discovered, the less costly it is to fix or mitigate

Benefits of Risk Management

• A proactive approach that anticipates issues and creates plans
• Reduces surprises and negative consequences
• Improves chances of reaching project objectives on schedule and within budget

Risk Management - Step 1: Risk Identification

• Assemble a risk management team with core members and stakeholders
• Generate a list of possible risks via brainstorming
• Use a risk breakdown structure (RBS) with a work breakdown structure (WBS) to identify and analyze risks
• Macro risks will affect the entire project, while specific areas can be checked
• Risk profiles (question lists) can alert you to possible risks

Step 2: Risk Assessment

• Scenario analysis assesses the significance of each risk event in terms of probability or likelihood, impact, or consequence.
• Four approaches to risk assessment:
  • Risk assessment form evaluates impact, probability and detection difficulty.
  • Failure Mode and Effects Analysis (FMEA) (Risk Value = Impact x Probability x Ease of Detection)
  • Risk severity matrix prioritizes risks to address.
  • Probability analysis uses statistical techniques to assess project risk.

Step 3: Risk Response

• Mitigating, reducing the likelihood or chance of the event occurring
• Avoiding, changing the project plan to eliminate the risk
• Transferring; passing risk to another party that can better manage it, for example, fixed-price contracts, insurance, Build-Own-Operate-Transfer (BOOT)
• Escalating, notifying the appropriate people within the organization of the threat
• Retaining, making a conscious decision to accept the risk of an event occurring, developing a contingency plan in case the risk event occurs

Contingency Planning

• An alternative plan that will be used if a possible foreseen risk event becomes a reality
• A plan of action that will reduce or mitigate the negative impact of the risk event
• Risk response is part of the actual implementation plan, action is taken before the risk can materialize
• Contingency plan is not a part of the initial implementation plan, it goes into effect after the risk is recognized
• Absence of a contingency plan can lead to panic, poor decision making under pressure, and costly or dangerous outcomes
• Conditions for activating the plan should be documented & include a cost estimate
• Affected parties should agree to the plan, which must be communicated to team members

Types of Risk

• Technical risks - Back up strategies if chosen technology fails & assess whether technical uncertainties can be resolved
• Schedule Risks - Expedite or "crash” the project to get it back on track, schedule activities in parallel & use the best people for high-risk tasks
• Cost Risks - Risk of Inflation, so monitor prices of materials
• Funding Risks - Evaluate the risk of reductions in funding

Opportunity Management

• "Opportunity" refers to an event with a positive impact on project objectives; for example, favorable weather
• Identify the opportunity before assessing it in terms of likelihood and impact; plan responses
• Five types of response to opportunity:
  • Exploit: put in extra hours of work during good weather
  • Share: pay contractors a premium to get the work done during good weather
  • Enhance: bring in newer equipment to accelerate the work rate
  • Escalate: tell the CEO of the construction company of an opportunity to construct office buildings on land close to the project the company is working on
  • Accept: be willing to take advantage of the opportunity if it occurs, but not taking action to pursue it

Contingency Funding and Time Buffers

• Contingency funds are used to cover project risks and are divided into;
  • Contingency reserves, cover identified risks and allocated to specific segments
  • Management reserves, allocated to risks associated with the total project
• Time buffers: amounts of time used to cushion against potential delays in the project Add time to activities with severe risks, merge activities that are prone to delays, noncritical activities to reduce the likelihood that they will create another critical path & activities that require scare resources

Step 4: Risk Response Control

• Involves executing the risk response strategy
• Monitoring triggering events
• Initiating contingency plans
• Monitoring the risk response
• Monitor for new risks & establish a change control process
• Formal changes in the scope, budget, and schedule of the project

Monitoring Project Risks

• Project managers must monitor risks and must be part of status meeting and progress report system
• The project team needs to be on constant alert for new, unforeseen risks
• Readiness to respond to the unexpected is a critical element of risk management
• Management needs to be sensitive that others may not be forthright in acknowledging new risks and problems
• Project managers need to establish an environment in which participants feel comfortable raising concerns and admitting mistakes

Change Control Management

• Sources of change include; project scope changes, implementation of contingency plans & improvement changes
• Need a Change Management System for;
  • Identify proposed changes
  • List expected effects of proposed change(s) on schedule and budget
  • Review, evaluate, and approve or disapprove of changes formally
  • Negotiate and resolve conflicts of change, condition, and cost
  • Communicate changes to parties affected
  • Assign responsibility for implementing change
  • Adjust master schedule and budget
  • Track all changes that are to be implemented

Benefits of Change Control Systems

• Inconsequential changes are discouraged by the formal process & costs of changes are maintained in a log.
• Integrity of the WBS and performance measures is maintained while allocation and use of contingency and management reserves are tracked
• Responsibility for implementation is clarified & the effect of changes is visible to all parties involved.
• Implementation of change is monitored & scope changes will be quickly reflected in baseline and performance measures.