PROJECT MANAGEMENT week 8 Dr. Meryem Uluskan

Agenda Managing Risk Risk Management Process Step 1: Risk Identification Step 2: Risk Assessment Step 3: Risk Response Development Opportunity Management Contingency Planning Contingency Funding and Time Buffers Step 4: Risk Response Control Change Control Management PERT

Risk Management Process

Risk Management Process The chances of a risk event occurring are greatest in the concept, planning, and start- up phases of the project. The cost impact of a risk event in the project is less if the event occurs earlier rather than later. The early stages of the project represent the period when the opportunity for minimizing the impact or a potential risk exists. Conversely, as the project passes the halfway implementation mark, the cost of a risk event occurring increases rapidly.

Risk Management Process

The Risk Breakdown Structure (RBS) Organizations use risk breakdown structures (RBSs) to help management teams identify and analyze risks.

Managing Risk Step 1: Risk Identification Input from customers, sponsors, subcontractors, vendors, and other stakeholders should be included. Relevant stakeholders can be formally interviewed or included on the risk management team.

Managing Risk Step 2: Risk assessment Step 1 produces a list of potential risks. Some are trivial and can be ignored, while others pose serious threats to the success of the project. Techniques for analyzing risks: Scenario analysis Risk assessment matrix Failure Mode and Effects Analysis (FMEA) Probability analysis Decision trees, PERT Semiquantitative scenario analysis

Managing Risk Step 2: Risk assessment Team members assess the significance of each risk event in terms of: Probability of the event. Impact of the event.

Managing Risk Step 2: Risk assessment Defined Conditions for Impact Scales of a Risk on Major Project Objectives

Managing Risk Step 2: Risk assessment Risk Assessment Form In addition to evaluating the “severity” and “probability” of risk events; “Detection difficulty” is a measure of how easy it would be to detect that the event was going to occur How much warning would we have?

Managing Risk Step 2: Risk assessment Risk Severity Matrix provides a basis for prioritizing which risks to address

Managing Risk Step 2: Risk assessment - FMEA Failure Mode and Effects Analysis (FMEA) extends the risk severity matrix by including ease of detection in the equation: Each of the three dimensions is rated according to a five-point scale. Ex: 1- easy to detect 5 – very difficult to detect A risk with an impact 1, with a very low probability and an easy detection score might score a 1 (1 x 1 x 1=1). A high-impact risk with a high probability and impossible to detect would score 125 (5 x 5 x 5=125).

Managing Risk Step 2: Risk assessment - FMEA

Managing Risk Step 2: Risk assessment Probability Analysis PERT (program evaluation and review technique) can be used to review activity and project risk. PERT takes a more macro perspective by looking at overall cost and schedule risks. Here the focus is not on individual events but on the likelihood the project will be completed on time and within budget.

Managing Risk Step 3: Risk Response Development When a risk event is identified and assessed, a decision must be made concerning which response is appropriate for the specific event. Responses to risk can be classified as; Mitigating Risk Transferring Risk Avoiding Risk Sharing Risk Retaining Risk

Managing Risk Step 3: Risk Response Development Mitigating Risk Reducing the likelihood an adverse event will occur. Testing and prototyping are frequently used to prevent problems identifying the root causes of an event is useful Reducing impact of adverse event. Avoiding Risk Changing the project plan to eliminate the risk or condition. adopting proven technology instead of experimental technology can eliminate technical failure Transferring Risk Transfer does not change risk Paying a premium to pass the risk to another party. Fixed-price contracts are the classic example of transferring risk from an owner to a contractor Insurance

Managing Risk Step 3: Risk Response Development Retaining Risk Making a conscious decision to accept the risk. Some risks are so large it is not feasible to consider transferring or reducing the event (e.g., an earthquake or flood). The project owner assumes the risk because the chance of such an event occurring is small. Or risks identified can simply be absorbed if they materialize. Knowing that the response to a risk event will be retained, transferred, or mitigated greatly reduces stress and uncertainty.

Contingency Planning Contingency Plan An alternative plan that will be used if a possible foreseen risk event actually occurs. A plan of actions that will reduce or mitigate the negative impact (consequences) of a risk event. Answers the questions of what, where, when, and how much action will take place. Risks of Not Having a Contingency Plan Having no plan may slow managerial response. Decisions made under pressure can be potentially dangerous and costly. Postponement of remedy action can lead to panic, and acceptance of the first remedy suggested.

Risk Response Matrix

Risk and Contingency Planning Technical Risks Backup strategies if chosen technology fails. Assessing whether technical uncertainties can be resolved. Schedule Risks Use of slack increases the risk of a late project finish. Imposed duration dates (absolute project finish date) Compression of project schedules due to a shortened project duration date.

Risk and Contingency Planning Cost Risks Time/cost dependency links: costs increase when problems take longer to solve than expected. Price protection risks (a rise in input costs) increase if the duration of a project is increased. Funding Risks Changes in the supply of funds for the project can dramatically affect the likelihood of implementation or successful completion of a project.

Opportunity Management Exploit. eliminate the uncertainty associated with an opportunity to ensure that it definitely happens - assigning best personnel to a critical burst activity Share. allocating some of the ownership of an opportunity to another party who is best able to capture the opportunity for the benefit of the project. Enhance. action is taken to increase the probability and/or the positive impact of an opportunity - choosing raw materials that are likely to decline in price Accept. being willing to take advantage of it if it occurs

Contingency Funding and Time Buffers Contingency Funds Funds to cover project risks—identified and unknown. Size of funds reflects overall risk of a project Budget reserves Are linked to the identified risks of specific work packages. Management reserves Are large funds to be used to cover major unforeseen risks (e.g., change in project scope) of the total project. Time Buffers Amounts of time used to compensate for unplanned delays in the project schedule.

Managing Risk Step 4: Risk Response Control Risk control Execution of the risk response strategy Monitoring of triggering events Initiating contingency plans Watching for new risks Establishing a Change Management System Monitoring, tracking, and reporting risk Fostering an open organization environment Repeating risk identification/assessment exercises Assigning and documenting responsibility for managing risk

Change Control Management Sources of Change Project scope changes Implementation of contingency plans Improvement changes

Change Control Management Change management systems are designed to accomplish the following: 1. Identify proposed changes. 2. List expected effects of proposed change(s) on schedule and budget. 3. Review, evaluate, and approve or disapprove changes formally. 4. Negotiate and resolve conflicts of change, conditions, and cost. 5. Communicate changes to parties affected. 6. Assign responsibility for implementing change. 7. Adjust master schedule and budget. 8. Track all changes that are to be implemented.

Change Control Process

Change Request Example

Change Request Log

Benefits of a Change Control System 1. Inconsequential changes are discouraged by the formal process. 2. Costs of changes are maintained in a log. 3. Integrity of the WBS and performance measures is maintained. 4. Allocation and use of budget and management reserve funds are tracked. 5. Responsibility for implementation is clarified. 6. Effect of changes is visible to all parties involved. 7. Implementation of change is monitored. 8. Scope changes will be quickly reflected in baseline and performance measures.

PERT—PROGRAM EVALUATION REVIEW TECHNIQUE

PERT—PROGRAM EVALUATION REVIEW TECHNIQUE Assumes each activity duration has a range that statistically follows a beta distribution. PERT uses three time estimates for each activity: optimistic, pessimistic, and a weighted average to represent activity durations. Knowing the weighted average and variances for each activity allows the project planner to compute the probability of meeting different project durations.

Activity and Project Frequency Distributions Beta distribution for activity durations that is skewed toward the right and is representative of work that tends to stay late once it is behind. The distribution for the project duration is represented by a normal (symmetrical) distribution. The project distribution represents the sum of the weighted averages of the activities on the critical path(s).

Activity Time Calculations The weighted average activity time is computed by the following formula:

Activity Time Calculations The average (deterministic) value is placed on the project network as in the CPM method and the early, late, slack, and project completion times are computed as they are in the CPM method.

Activity Time Calculations The variability in the activity time estimates is approximated by the following equations: The standard deviation for the activity: The standard deviation for the project: Note the standard deviation of the activity is squared in this equation; this is also called variance. This sum includes only activities on the critical path(s) or path being reviewed.

Activity Times and Variances The equation below is used to compute the “Z” value found in statistical tables (Z=number of standard deviations from the mean), which, in turn, tells the probability of completing the project in the time specified.

EXAMPLE USING THE PERT TECHNIQUE Activity Times – Optimistic, Pessimistic and Most likely Activity Times of a project 1. Compute the weighted average time for each activity. 2. Compute the variance for each activity. 3. Draw AOA and AON networks with activity times (duration). 4. Determine the critical path. 5. Compute the expected project duration.

EXAMPLE USING THE PERT TECHNIQUE Weighted Average Activity Times and Variances for the Activities Calculated

EXAMPLE USING THE PERT TECHNIQUE The critical path is 1-2-3-5-6. The expected project duration (TE) is 64 time units.

EXAMPLE USING THE PERT TECHNIQUE What is the probability the project will be completed before a scheduled time of 67?

EXAMPLE USING THE PERT TECHNIQUE

EXAMPLE USING THE PERT TECHNIQUE Using the formula for the Z value, the probability can be computed as:

EXAMPLE USING THE PERT TECHNIQUE Using the formula for the Z value, the probability can be computed as: There is a 69 percent chance of completing the project on or before 67 time units.

EXAMPLE USING THE PERT TECHNIQUE Conversely, what is the probability of completing the project by time period 60 ?

EXAMPLE USING THE PERT TECHNIQUE Conversely, what is the probability of completing the project by time period 60 ?

EXAMPLE USING THE PERT TECHNIQUE What is the probability of completing the project by time period 60 ? There is about a 26 percent chance of completing the project on or before 60 time units. This same type of calculation can be made for any path or segment of a path in the network.

Next Week’s Deliverable PERT 1. Compute the weighted average time for each activity. 2. Compute the variance for each activity. 3. Draw AOA and AON networks with activity times (duration). 4. Determine the critical path. 5. Compute the expected project duration.