Lecture 7: Project Risk Management Murodullo Bazarov November 2, 2015

Lecture outline: Definition and categories of a project risk Risk management Risk identification Risk analysis Risk response plan (a.k.a. risk management plan) Concluding remarks

Definition of Project Risk PMBOK defines a project risk as “an uncertain event or condition that, if it occurs, has a positive or negative effect” on the project Risk is characterized by the following parameters: Likelihood (probability) Impact Detectability

Categories of Project Risk Downside/upside risks Internal/external risks Political/governance risks Economic/commercial risks Partner/contractor/supplier risks Social/cultural/relationship risks Infrastructure risks Environmental risks Technical risks Schedule/cost/quality risks

Stages of Risk Management Risk identification Risk analysis Development of a risk response (management) plan Implementation of the risk response plan Newly identified risks New information Newly identified risks

Risk Identification Techniques Review of Available project documents (e.g. the WBS and responsibility matrix) Risk checklists Historical information Breakdown of the project life Risk categorization Brainstorming Interviews

Partial Risk Checklist for Product Development Project Design:Does the design depend on unrealistic assumptions? Management: Do people know who has authority for what? Work Environment: Do people work cooperatively across functional boundaries? Staffing: Is the project understaffed? Does the staff have the necessary qualifications? Schedule:Is the project schedule dependent on the completion of other projects? Budget:How reliable are the cost estimates? Adapted from Gray, Clifford F. and Erik W. Larson. Project Management: The Managerial Process. McGraw Hill Higher Education

Risk Analysis Techniques Risk assessment matrix Failure Mode and Effect Analysis (FMEA) Sensitivity analysis PERT-based analysis Monte Carlo simulations

Risk Assessment Matrix Impact SmallMediumLarge Likelihood High Medium Low SignificantSomewhat significantInsignificant

Risk Assessment Form Based on FMEA Risk L (1-5) or (1-10) Consequences of materialization I (1-5) or (1-10) D (1-5) or (1-10) RPN=L*I*D (1-125) or (1-1000) L=Likelihood of materializationI=Impact on the project D=DetectabilityRPN=Risk Priority Number

Risk Response Plan Persons/units responsible for the implementation of the plan For each risk (including secondary risks): Response Persons/units responsible for the response Time, budget and other resources needed for the response Expected result of the risk response Contingency plans for remaining risks

Types of Responses to Risk Avoiding a risk Transferring a risk Sharing a risk Mitigating a risk Reducing the likelihood of the materialization of the risk Reducing the potential adverse impact of the risk on the project Accepting a risk

Contingency Plan Trigger What measures are to be taken and by whom if and when the risk materializes Time buffer (as appropriate) Contingency budget Cost estimates Sources of funding Other contingency resources

Implementation of Risk Response Plan Carrying out the responses to the identified risks Monitoring risks and assessing the results of the responses that have been carried out Watching out for the triggers and new risks Updating/revising the risk analysis and the risk response plan (as appropriate) Implementing contingency plans (if needed)

Concluding Remarks

Good risk management is essential to the success of a business project Project risk management should be proactive rather than reactive Poor project risk management may result in a major disaster

Risk Management: importance According to the US National Academy of Engineering, "insufficient consideration of risk“ by BP contributed to the explosion on the Deepwater Horizon oil rig on 20 April 2010.

1.Larson, C. & Grey, E. (2008). Project Management: The Managerial Process. 4 th edition, McGraw Hill. (chapter 8). 2.Lock, D. (2003). Project Management. 8 th edition, Gower. (chapters 10, 11).