Risk Management Basics

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.

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.