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© Graham M Winch 1 I compare fortune to one of those violent rivers which, when they are enraged, flood the plains, tear down trees and buildings wash soil from one place to another…… She shows her power where there is no force to hold her in check: and her impetus is felt where she knows there are no embankments and dykes built to restrain her Machiavelli. 13 : Managing Uncertainty and Risk on the Project
© Graham M Winch 2 Managing Uncertainty and Risk on the Project what is risk? project risk management risk management practice elicitation of subjective probabilities strategic management of project risks
© Graham M Winch 3 What is Risk? uncertainty and the absence of information regarding occurrence risk and the probability of an occurrence –understanding risk requires some information risk and reward –this includes safety
© Graham M Winch 4 Decision-Makers Risk Preferences risk-seeking risk-averse risk neutral –transaction cost adjusted risk neutrality factors affecting preferences risk preference profiles
© Graham M Winch 5 Risk Preference Profiles
© Graham M Winch 6 Project Risk Management the features of projects and their clients –project large proportion of clients total assets –projects tend to be one-off –clients tend to be bureaucracies –lack of managerial capabilities the uneven distribution of risk and reward –clients risk profile –project managers risk profile
© Graham M Winch 7 The Clients Risk Profile probability % tender price £10.5m expected 20% ROCE £12.6m negative ROCE income stream - variations + out-turn price expected ROCE positive ROCE
© Graham M Winch 8 The Construction Project Managers Risk Profile probability % out-turn price - variances + out-turn cost expected profit cost estimate = budget = £10m tender price £10.5m - variations + loss £ m profit
© Graham M Winch Riding the Project Life-cycle9 Risk Management Practice the risk management process –identify and classify the risk –analyse the risk –respond to the risk –monitor the risk the risk management process the probability/impact matrix
© Graham M Winch 10 The Risk Management Process identify & classify the risk analyse the risk respond to the risk monitor the risk
© Graham M Winch 11 The Probability / Impact Matrix probability impact insure / mitigate accept mitigate / cancel externalise high low high rare catastrophe probable disaster bad luck management challenge
© Graham M Winch 12 The Elicitation of Subjective Probabilities attempting to solve the problem of inadequate data mobilising expert judgement the importance of methodology the value is in the process, not the outputs
© Graham M Winch 13 Strategic Management of Project Risks the broad categories of risk –market risks –completion risks –institutional risks project shaping project governability
© Graham M Winch 14 Project Shaping information search network building incentives design influence
© Graham M Winch 15 Project Governability aligning incentive through equity participation incentive contracts flexibility and modularity deep pockets and project portfolios partnering arrangements
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