Risk Management Basics

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Questions and Answers

What is the main difference between known unknowns and unknown unknowns in risk management?

Known unknowns are anticipated, while unknown unknowns are not. (correct)

Known unknowns can be evaluated, while unknown unknowns do not require evaluation.

Known unknowns can be documented, while unknown unknowns cannot.

Known unknowns are minor risks, while unknown unknowns are major risks.

Who is primarily responsible for business risk in a project?

The project team

The project owner (correct)

The stakeholders

The project manager

Which step is NOT included in the risk management process?

Evaluate Impact

Document risks

Identify risk

Analyze project scope (correct)

What is the purpose of developing a response in risk management?

To create strategies for reducing risks Signup and view all the answers

When should the risk management actions be evaluated?

At weekly project meetings Signup and view all the answers

Which of the following is NOT a stage in the risk management framework?

Define budget adjustments Signup and view all the answers

What should be done for medium and high risks in the risk management process?

Define an action plan with dates Signup and view all the answers

What is the main objective of project risk management?

To meet project objectives within budget and time Signup and view all the answers

What is a primary purpose of the cost management plan?

To establish cost reporting formats Signup and view all the answers

Which cost estimation technique involves using costs from a previous similar project?

Analogous or top-down estimates Signup and view all the answers

What is the goal of cost budgeting in project management?

To produce a time-phased budget Signup and view all the answers

What does project cost control primarily focus on?

Monitoring cost performance Signup and view all the answers

What is the importance of the Work Breakdown Structure (WBS) in cost budgeting?

It defines the work items for cost allocation Signup and view all the answers

What kind of information does Earned Value provide in project management?

A method for measuring project performance Signup and view all the answers

Which of the following techniques is based on project characteristics to estimate costs?

Parametric modeling Signup and view all the answers

What is a common problem many organizations face related to cost?

Cost control issues Signup and view all the answers

What does establishing reserves involve?

Setting aside funding for both known and unknown risks Signup and view all the answers

Why is project cost management important?

It helps in completing the project within an approved budget Signup and view all the answers

Which principle defines profit margin?

Profits divided by revenues Signup and view all the answers

What are tangible costs?

Costs that can easily be quantified in dollars Signup and view all the answers

What does sunk cost refer to?

Money spent in the past that should influence future decisions Signup and view all the answers

What does life cycle costing encompass?

The total cost of ownership including development and support costs Signup and view all the answers

How is cash flow analysis best described?

Estimating annual costs and benefits to assess cash flow Signup and view all the answers

Which type of costs are considered indirect costs?

Costs not directly related to products or services but related to project performance Signup and view all the answers

What does a cost performance index (CPI) of less than 100% indicate?

The project is costing more than planned. Signup and view all the answers

What is the budget at completion (BAC)?

The original total budget for the project. Signup and view all the answers

If a project has a schedule performance index (SPI) less than 100%, what does that mean?

The project is extending beyond the original timeline. Signup and view all the answers

How can the CPI be utilized in project management?

To calculate the estimate at completion (EAC) for the project. Signup and view all the answers

In the provided example, what is the planned budget per mile of road constructed?

$50,000 per mile Signup and view all the answers

What does the planned value (PV) represent in Earned Value Management?

The portion of the total cost estimate planned for an activity in a period Signup and view all the answers

Which formula is correct for calculating the Cost Performance Index (CPI)?

CPI = EV/AC Signup and view all the answers

A CPI value less than 1.0 indicates what about a project's cost?

Cost overrun of the estimates Signup and view all the answers

Which of the following describes the earned value (EV) in project management?

The physical work actually completed, valued at planned costs Signup and view all the answers

What is the Estimate At Completion (EAC) formula that utilizes the Cost Performance Index (CPI)?

EAC = BAC/CPI Signup and view all the answers

How does the Schedule Performance Index (SPI) contribute to project management?

It helps predict the completion date and project timeline Signup and view all the answers

Which of these is a characteristic of Actual Cost (AC)?

It represents the total costs incurred during an activity Signup and view all the answers

What does the Estimate to Complete (ETC) specifically refer to in project management?

The remaining cost to complete the project Signup and view all the answers

Study Notes

Risk Basics

Project management involves managing risks to enhance the probability of achieving project goals.
Risks fall into two categories: known unknowns (identified potential issues) and unknown unknowns (unexpected problems).
Risk management distinguishes between project risk (responsibility of the project manager) and business risk (the project owner's responsibility).

Risk Management Process

Essential steps in risk management:
- Identify risks
- Evaluate probability and impact
- Document risks
- For medium/high risks, create action and contingency plans
- Manage actions and evaluate results regularly

Risk Management Framework

Five main steps for risk management:
- Identify Risks: Recognize factors threatening project objectives.
- Analyze and prioritize: Assess risks based on potential damage and likelihood.
- Develop a response: Create strategies to mitigate risks.
- Establish reserves: Allocate funds for known and unknown risks.
- Continuous management: Implement strategies and monitor changes.

Project Cost Management

Cost management ensures project completion within an approved budget.
Vital for maintaining performance that meets budget goals.

Basic Principles of Cost Management

Financial terms are crucial for effective communication with executive boards.
Key financial concepts include:
- Profit = Revenues - Expenditures
- Profit margin = Revenues / Profits
- Life cycle costing = Total cost of ownership including development and support costs.
- Cash flow analysis = Estimation of annual costs/benefits.

Types of Costs and Benefits

Tangible costs/benefits: Easily quantifiable in monetary terms.
Intangible costs/benefits: Difficult to measure financially.
Direct costs: Directly related to project products/services.
Indirect costs: Not directly tied to products/services but related to project execution.
Sunk cost: Past expenditures that should not influence future investment decisions.

Cost Management Planning

Involves expert judgment and analytical techniques to develop the cost management plan, which includes:
- Accuracy levels and units of measure
- Links to organizational procedures
- Control thresholds and performance measurement rules
- Reporting formats and process descriptions

Cost Estimation Techniques

Cost estimation is critical for projects to stay within budget.
Types of estimates include:
- Analogous/top-down estimates: Based on costs from similar past projects.
- Bottom-up estimates: Individual work items summed for total project costs.
- Parametric modeling: Uses project characteristics in mathematical models for cost estimation.

Budgeting and Cost Control

Cost budgeting allocates estimates to individual work items.
A critical goal is to create a cost baseline, used for monitoring cost performance.
Cost control involves tracking performance, ensuring appropriate changes are included in cost baselines, and communicating changes to stakeholders.

Performance Measurement in Cost Management

Earned Value Management (EVM) measures project performance by comparing planned work to actual work completed.
Key terms in EVM:
- Planned Value (PV): Budgeted cost of work scheduled.
- Actual Cost (AC): Total costs incurred for work performed.
- Earned Value (EV): Value of actual physical work completed.
Performance indices include Cost Performance Index (CPI) and Schedule Performance Index (SPI) for assessing project efficiency and forecasting completion.

Earned Value Calculations

CPI < 1.0 indicates cost overruns; CPI > 1.0 indicates savings.
SPI compares EV to PV for schedule forecasting and completion estimations.
Estimate At Completion (EAC) and Estimate to Complete (ETC) are calculated based on current performance and ongoing resource needs.

Common Issues and Interpretations

Negative cost/schedule variances indicate project issues.
EAC can guide future budgeting based on current expenditure and performance data.
The budget at completion (BAC) represents the original budget allocation for the project.

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Description

Explore the fundamentals of risk management in project management. This quiz covers key concepts such as known unknowns, unknown unknowns, and the essential steps involved in managing risks effectively. Test your understanding of both project and business risk distinctions.