1. PROJECT MANAGEMENT week 8
Dr. Meryem Uluskan

2. 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

3. Risk Management Process

4. 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.

5. Risk Management Process

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

7. 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.

8. 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

9. 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.

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

11. 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?

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

13. 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).

14. Managing Risk Step 2: Risk assessment - FMEA

15. 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.

16. 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

17. 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

18. 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.

19. 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.

20. Risk Response Matrix

21. 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.

22. 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.

23. 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

24. 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.

25. 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

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

27. 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.

28. Change Control Process

29. Change Request Example

30. Change Request Log

31. 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.

32. PERT—PROGRAM EVALUATION REVIEW TECHNIQUE

33. 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.

34. 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).

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

36. 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.

37. 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.

38. 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.

39. 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.

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

41. EXAMPLE USING THE PERT TECHNIQUE
The critical path is
The expected project duration (TE) is 64 time units.

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

43. EXAMPLE USING THE PERT TECHNIQUE

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

45. 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.

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

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

48. 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.

49. 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.