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8
Managing Risk
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Project Planning Process
FIGURE
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Chapter Concepts
Identifying risks and their potential impact
Assessing the likelihood of occurrence and degree of
impact of risks
Risk response planning
Risk monitoring
Project Management Knowledge Areas from PMBOK® Guide
Project Risk Management
© 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be
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Risk
• Risk is an uncertain event, if it occurs, has negative
(threat) effects on the project objectives.
• Need to identify all possible risks and their causes,
likelihood of occurrence, and impacts
▪ What can go wrong (risk event)
▪ What is (are) the risk event’s impact(s) (consequences)
▪ Identify actions to reduce likelihood that adverse events will occur
(anticipation plans)
▪ What to do when an event occurs (contingency plans)
Risk
Risk sources come from within (internal) and/or from
outside (external) the project
Causes Consequences
External (Threats):
inflation, customer behavior, Cost overruns
government regulation(new policies Project delay
imposed), Subcontractors (delay in Inadequate functionality
performance and progress) Canceled projects
Risk Customer dissatisfaction
Internal: (Weakness)
Loss of company image
absenteeism, resignation, skills
unavailable, lack of technical data, Demoralized staff
inaccurate estimates, specs Poor product performance
incomplete, poor project Legal proceedings
management, accidents such as
collapse of excavated trenches
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The Risk Event Graph
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Risk Management’s Benefits
A proactive rather than reactive approach.
Reduces surprises and negative consequences.
Prepares the project manager to take advantage
of appropriate risks.
Provides better control over the future.
Improves chances of reaching project performance
objectives within budget and on time.
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The Risk Management Process
Determine which risks are likely to affect the
project objectives negatively
Tools: Brainstorming, Risk Breakdown
Structure, Risk profile
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different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
Identify Risks
❑ Risks that are accounted for should be somewhat likely to
occur and/or can have a significant negative impact on
accomplishing the project objective.
❑ Establishing risk categories may help to identify and evaluate
risks.
• Some possible categories are technical, schedule, cost, human
resources, external, or sponsor/customer.
❑ Historical information from past projects is another source
that can be helpful in identifying possible risks.
❑ The project team can progressively elaborate and identify
new risks, as well as the estimated impacts of previously
identified risks as more information becomes available.
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Risk Breakdown Structure
Macro-
Risks
Unproven or complex Shifting legal or regulatory Cost, time, and scope Poor allocation of
technology, unrealistic environment, labor issues, objectives are internally time and resources,
performance goals, and changing owner priorities, inconsistent, lack of inadequate quality of
changes to the country risk, weather. prioritization of projects, the project plan, and
technology used or to the inadequacy or interruption poor use of project
industry standards during of funding, resource management
the project conflicts with other disciplines
projects, and
inadequate expertise and
experience by project
personnel 11
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The Risk Management Process
Determine which risks are likely to negatively
affect the project objectives
Tools: Brainstorming, RBS, Risk profile
Determine the likelihood that the risk event will
occur and the degree of impact the event will
have on the project objectives
Assessment techniques: Scenario analysis, Risk
assessment matrix, Failure Mode and Effects
Analysis (FMEA)
Project Risk = (Impact of Event) x (Probability of
Event) x (Detection of the event)
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Risk Assessment Matrix
❑ A tool for assessing and managing risks.
❑ It helps to:
• List the impact of the risk
• Evaluate the likelihood of occurrence
• Determine the degree of impact
• Identify the action trigger
• Name a person responsible
• Create a response plan to avoid, mitigate, or accept the risk
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Risk Assessment Matrix
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Risk Severity Matrix
It provides a basis for prioritizing which risks to address
R1
R2
R3
R4
5
Red Zone: Major Risk
4 R3 R1
Likelihood
Yellow Zone: Moderate Risk
3
2 R2
Green Zone: Minor Risk
1 R4
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different from1the U.S. Edition.
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Impact
May3not be scanned,
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5 duplicated, or posted to a publicly accessible website, in whole or in part.
copied,
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The Risk Management Process
Determine which risks are likely to negatively
affect the project objectives
Tools: Brainstorming, Risk profile
Determine the likelihood that the risk event will
occur and the degree of impact the event will
have on the project objectives
Assessment techniques: Scenario analysis, Risk
assessment matrix, Failure Mode and Effects
Analysis (FMEA)
Project Risk = (Probability of Event) x (Impact of
Event) x (Detection of the event)
Develop an action plan to reduce the impact
and/or likelihood of each risk
Mitigate, Transfer, Share, Retain
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Plan Risk Responses
Set of actions
▪ Prevent or reduce the likelihood of occurrence or the
impact of a risk
▪ Implement if the risk event occurs
Establishes a trigger point for implementing an
action
Assigns responsibility for implementation
Avoid, mitigate, or accept the risk
Include a contingency fund to cover implementation
cost
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Step 3: Risk Response Development
Development of risk response plans
Mitigating Risk: Develop preventive actions that could help to
▪ Reduce the likelihood an adverse event will occur
▪ Reduce impact of adverse event
➢ Change design of a system to reduce or
eliminate either the probability of occurrence
of a particular risk event or the adverse
consequences if it occurs.
➢ Retaining the same design but use different
materials or a different method of assembly.
➢ More attractive labor relations policy to
minimize the risk of stoppages
➢ Training of staff to avoid accidents
➢ Improved site security to prevent theft.
➢ Advance ordering of key components
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Step 3: Risk Response Development
Avoiding Risk/Exploit
– Choose a course of action that eliminates your exposure to the threat.
– Changing the project plan to eliminate the risk or condition
➢ Use of conventional power generation sources instead of nuclear power.
A nuclear power source, although cost efficient, has a high risk due to
potentially catastrophic consequences.
➢ Avoid the risk that a small contractor would file bankruptcy by using a well-
established contractor instead for that particular job.
Transferring Risk/Share
▪ Allocating some or all of the ownership of an opportunity to
another party who is best able to capture the opportunity for
the benefit of the project.
▪ Make contracts and financial agreements with a third party,
such as an insurance company or contractor, to transfer the
impact of risk
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Step 3: Risk Response Development
Sharing Risk:
Allocating risk to different parties, such as contractor
➢ Risks can be reduced through pooling with different stakeholders.
➢ Airbus R&D is done by several countries.
Retaining Risk/Accept
➢ Retain a risk event with low chance of occurring. Retaining is
the practice of setting up a self-insurance reserve fund to pay for
losses as they occuerd
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Risk Profile Matrix
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Risk Response Matrix
It summarizes how the project team plans to manage
risks that have been identified
Trigger points are indicators or symptoms of a risk event
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different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
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The Risk Management Process
Determine which risks are likely to negatively
affect the project objectives
Tools: Brainstorming, Risk profile
Determine the likelihood that the risk event will
occur and the degree of impact the event will
have on the project objectives
Assessment techniques: Scenario analysis, Risk
assessment matrix, Failure Mode and Effects
Analysis (FMEA)
Project Risk = (Probability of Event) x (Impact of
Event) x (Detection of the event)
Develop an action plan to reduce the impact or
likelihood of each risk
Regular review of the risk management matrix
throughout the project
New risks may also be identified, and need to
be added to the risk assessment matrix
Monitor
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of the U.S. only, to determine
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if any
risk response plans need to be implemented 23
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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
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Critical Success Factors
Identify risks and their potential impacts before the project
starts.
Involve the project team or experts in assessing risks.
Assign high priority to managing risks that have a high
likelihood of occurrence and a high potential impact on the
project outcome.
Develop response plans for addressing high priority risks.
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Summary
Risk is an uncertain event that, if it occurs, can jeopardize accomplishing the
project objective.
Risk management involves identifying, assessing, and responding to project
risks in order to minimize the likelihood of occurrence and/or potential impact
of adverse events on the accomplishment of the project objective.
Risk identification includes determining which risks may adversely affect the
project objective and estimating what the potential impacts of each risk might
be if it occurs.
Assessing each risk involves determining the likelihood that the risk event will
occur and the degree of impact the event will have on the project objective,
and then prioritizing the risks.
A risk response plan is a defined set of actions to prevent or reduce the
likelihood of occurrence or the impact of a risk, or to implement if the risk
event occurs.
Regularly review and evaluate all risks to determine if there are any changes to
the likelihood of occurrence or the potential impact of any of the risks, or if
any new risks have been identified.
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