MGT 609 – Project Management Fundamentals

Week 11 (Chapter 8)
Managing Risk

For academic use only.

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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
• Monitoring risks

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Learning Outcomes
Be sure you know these concepts

• Discuss what is involved in managing risks

• Identify and categorize risks
• Assess and prioritize risks
• Prepare a risk response plan
• Develop a risk assessment matrix
• Monitor risks

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Project Management Knowledge
Areas from PMBOK® Guide

This chapter covers the following

areas of the PMBOK®
• Project Risk Management

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Risk Management – PMBOK® Processes
Six Processes in Risk What is a risk?
Management
1. Plan Risk Management (how “Project risk is an uncertain event or
will risk management activities condition that, if it occurs, has a
be conducted) positive or negative effect on the
project.” - PMBOK®
2. Identify risks
3. Qualitative Risk Analysis
4. Quantitative Risk Analysis
5. Plan Risk Responses
Risk cannot be totally eliminated.
6. Control Risks

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 Types of Risks
Known Knowns Known Unknowns
These are risks that we can identify There is no question about the
such as the potential for a key team event occurring, the uncertainty is
member to leave the company when it will occur and/or the
during the implementation or the severity of it when it does happen.
possibility that a vendor will be Examples: inclement weather,
unable to deliver the raw materials union contract negotiations, and
on schedule. software test failures.

Unknown Unknowns
It is impossible to predict this type of event until it happens. The
sinking of the Titanic or the terror attacks of 9/11 are examples of this
type of risk.

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We know what we know…..
But the scariest things are those that we don’t know we don’t know.

"There are known knowns" is a

phrase from a response United
States Secretary of Defense Donald
Rumsfeld gave to a question at a
U.S. Department of Defense news
briefing on February 12, 2002 about
There are known knowns; there are
the lack of evidence linking the
things we know we know. We also
government of Iraq with the supply know there are known unknowns; that
of weapons of mass destruction to is to say we know there are some
terrorist groups. things we do not know. But there are
also unknown unknowns – the ones
Click here to listen to Donald Rumsfeld we don’t know we don’t know. And if
one looks throughout the history of our
country and other free countries, it is
https://en.wikiquote.org/wiki/Donald_Rumsfeld the latter category that tend to be the
difficult ones.
MGT 609 Project Management Fundamentals -Donald Rumsfeld

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 Additional types of risk
Variability Risk Ambiguity Risk
Uncertainty exists about a Uncertainty exists about
key characteristic of an what might happen in the
activity or decision. For future. Some areas of the
example, productivity or the project such as the
error rate of a specific activity requirements, technical
may be more or less than solution or changes in the
expected. regulatory environment.

From the new PMBOK® - 6th edition

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 Identify Risks
• All stakeholders should be involved in risk
identification
• Brainstorm sources of risks
• Establish categories for risks and evaluate
• Use historical information
• Progressively elaborate and identify new
risks as more information becomes
available
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 Risks versus Uncertainty

Risk Uncertainty
Unknown Unknowns
Known Unknowns

Opportunities
exist in uncertain
conditions and an
Management techniques entrepreneurial
are applied to risk situation is created.
situations

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Negative and Positive Risks
Negative (Threats) Positive (Opportunities)
• Materials are delivered late
• Market changes direction
• Loss of key employees
• Weather delays
• Optimistic schedule is not
feasible
• Union contract is up for
renegotiation
?
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 Assess Risks
Qualitative Quantitative
Methods Methods
• Risk Probability • Sensitivity analysis
and Impact
• Expected monetary
value analysis
(decision tree)
• Monte Carlo simulation

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 Qualitative Method:
Risk Assessment Matrix

Figure 8.1 – Risk Assessment Matrix

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Developing the Risk Impact Matrix
Note: The PMBOK@ refers to it as the “Probability and Impact Matrix”

When determining the level of risk there are three key aspects to
consider:
 The event causing the risk.
 The likelihood of the event happening.
 The impact on the plan if the event occurs.

Use a Risk Impact Matrix to assess the risk event impact

• Determine all consequences and their severity if the event
happens
• Identify when, during the project, will the event likely happen
• Estimate the probability that the risk event will occur
• Determine how difficult it will be to detect the event occurrence

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 Building a Probability & Impact Matrix
(Step 1 – Listing the risks and their probabilities)

How do I determine
the Probability?
Every Risk has an impact but
not all impacts are equal!

ID # Risk Probability
1 Loss of Lead Programmer 3
2 Blizzard prevents team from getting to office
3 Raw materials are not delivered on time

If you think that the likelihood of your lead programmer leaving the company
is about 50 -50 then you would select “Occasional” as the category for this to
occur. You can assign number values to each category. Let’s give Risk #1 a
Probability of 3.
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 Building a Probability & Impact Matrix
(Guidelines for Determining Probability)

Based on the likelihood of the occurrence, the risks can be

classified under one of the five categories:
1. Definite: A risk that is almost certain to show-up during project
execution. If you’re looking at percentages a risk that is more than
80% likely to cause problems will fall under this category.
2. Likely: Risks that have 60-80% chances of occurrence can be
grouped as likely.
3. Occasional: Risks which have a near 50/50 probability of
occurrence.
4. Seldom: Risks that have a low probability of occurrence but still can
not be ruled out completely.
5. Unlikely: Rare and exceptional risks which have a less than 10%
chance of occurrence.

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 Building a Probability & Impact Matrix
(Step 2 – Determine the potential impacts)
How do I calculate
the Impacts?
Every Risk has an impact but not all
impacts are equal!
ID # Risk Probability Impact
1 Loss of Lead Programmer 3 5
2 Blizzard prevents team from getting to office 2
3 Raw materials are not delivered on time 5

If you think that the loss of your lead programmer will be

catastrophic to the success of the project then it would be
given an impact rate of 5.

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 Building a Probability & Impact Matrix
(Guidelines for Determining Impact)
The impact of a risk can be classified into one of the five
categories, based on how severe the damage can be.
1. Insignificant: Risks that will cause a near negligible amount of damage
to the overall progress of the project.
2. Marginal: If a risk will result in some damage, but the extent of damage
is not too significant and is not likely to make much of a difference to the
overall progress of the project.
3. Moderate: Risks which do not impose a great threat, but yet a sizable
damage can be classified as moderate.
4. Critical: Risks with significantly large consequences which can lead to a
great amount of loss are classified as critical.
5. Catastrophic: These are the risks which can make the project
completely unproductive and unfruitful, and must be a top priority during
risk management.
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 Building a Probability & Impact Matrix
(Step 3 – Calculating the Risk Values)
The “value” of the risk is a qualitative assessment of
how damaging the risk might be given the level of
probability that it will occur. Now we can
calculate the
value of each
Simply multiple the Probability X Impact to risk!
arrive at the Risk Value.

ID # Risk Probability Impact Risk Value

1 Loss of Lead Programmer 3 5 15
2 Blizzard prevents team from
getting to office
2 1 2
3 Raw materials are not 5 2 10
delivered on time
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 Building a Probability & Impact Matrix
(Guidelines for Calculating the Risk Values)
Looking at the risks from the previous slide, which is the
least concern to you as the project manager? Which of
them is the most concerning? (Answer below.)
If you have hundreds of risks in your project (which is quite
likely in large complex projects) you will not be able to
address all of them. The Risk Impact Matrix helps to
prioritize the risks so you can focus on those that might be
the most detrimental to the project.

Answers:
Risk #1 is the most concerning because it has the highest value.
Risk #2 is of the least concern because it has the lowest value.

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 Fishbone Diagrams

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 Fishbone Diagrams
Fishbone Diagrams are used to identify the root cause of a
problem or potential risk. Kaoru Ishikawa pioneered quality
management processes and is now considered to be one of the
founding fathers of modern management.

Each of the main “bones” represents a category which is then

populated with more specific possible causes. Often called a
cause-effect diagram.

Note the two individual heat exchangers in the previous slide (E470
and E583, denoted in red) which were flagged in two separate risk
branches.

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 Quantitative Methods:
• Sensitivity analysis
• Examines uncertainty of each project element and
how it impacts the other elements.
• Expected monetary value analysis (EMV)
• Calculates the outcome of various scenarios
• Also known as a decision tree analysis
• Monte Carlo simulation
• A computerized technique which illustrates the
outcomes and probabilities of any choice of action

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 Sensitivity Analysis

Sensitivity analysis is typically displayed as a tornado

diagram which presents the calculated correlation
coefficient for each element of the risk analysis model.
This can include project risks, high-variability activities
or sources of ambiguity.

Sensitivity analysis helps to determine with risks have

the most potential impact on project outcomes.

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 Sensitivity Analysis
Correlation with Project Duration

Activity B12.3 Manufacture reactors

Risk 5.2 DCS mail fail installation test

Risk 5.7 Duplicate test may not be required

Activity A3.12 Construct control room

Risk 4.6 Piling contractor may deliver early

Activity A7.1 Provide temporary facilities

Activity D1.9 Install Equipment

Risk 7.2 Hydrotest may find fewer faults

Activity or Risk Driving Project Duration

-0.2 -0.1 0 0.1 0.2 0.3 0.4 0.5

Figure 11-14 – Example Tornado Diagram from the new PMBOK®, 6th edition (see page 434)

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 Decision Trees
Decision Trees are used to analyze the
alternative choices and assist in the
selection of best decision.

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 Decision Trees
Decision Definition Decision Node Chance Node Net Path Value
Decision to be Input: Cost of Each Decision Input: Scenario Probability, Reward if it Occurs Computed: Payoffs
Output: Decision Made Output: Expected Monetary Value (EMV) minus Costs along Path
Made

Decision EMV = $46M 60%

Strong Demand ($200M) $80M
(the larger of $36M Build New Plant
and 46M)
(Invest $120M) 40%
$36M = .6 * ($80M) + .4 * (-$30M)
Weak Demand ($90M) -$30M
Build or EMV (before costs) of Build New
Plan considering demand
Upgrade
60% Strong Demand ($120M) $70M
Upgrade Plant
Decision Node
(Invest $50M) 40%
Chance Node Weak Demand ($60M) $10M
End of Branch $46M = .6 * ($70M) + .4 * ($10M)
EMV (before costs) of Upgrade
Plan considering demand

Note 1: The decision tree shows how to make a decision between alternative capital strategies (represented as “decision nodes”)
when the environment contains uncertain elements (represented as “chance nodes”).
Note 2: Here, a decision is being made whether to invest $120M US to build a new plant to instead invest only $50M US to upgrade an
existing plant. For each decision, the demand (which is uncertain, and therefore represents a “chance node”) must be accounte d for.

Figure 11-14 (Excerpt): Example Decision Tree from the new PMBOK®, 6th edition (see page 435)
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 Monte Carlo Simulation
A simulation analysis for schedule risk uses the
network diagram and duration estimates while a cost
risk analysis uses the cost estimates.

Computer software is used to run iterations of various

input values such as cost or duration estimates.
Outputs represent the range of possible outcomes for
the project. These can be illustrative in a cumulative
probability distribution (S-curve) indicating the
probability of achieving any particular outcome

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 Monte Carlo Simulation
Range of Uncertainty

100 100
90 90

Cumulative Probability (%)

Cumulative Probability (%)

80 80
85% Chance of
70 70
Target Costing $2.45M
60 or Less 60
50 $2.2M 50
23% Chance
40 of Meeting 40
30 Target 30
20 20
10 10
0 0
2.0 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8

Predicted Total Project Cost (in Millions)

Figure 11-13: Quantitative S-Curve from the new PMBOK®, 6th edition (see page 433)

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 Risk Strategies – for Negative Risks
• Avoid – eliminate the threat by removing it from
the project (change the work package, eliminate
a feature of the project)
• Transfer – shift the risk to a third party
(insurance, warranties, guarantees)
• Mitigate – reduce the probability of risk
occurring or lower the impact of a risk if it does
occur.
• Accept – acknowledge the risk and accept that
it might occur.
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 Summary (part 1)
• Risk is an uncertain event that, if it occurs, can
jeopardize accomplishing the project objective.
• Risk management includes identification, assessment,
monitoring, and response to project risks in order to
minimize the likelihood of occurrence and/or the
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.

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 Summary (part 2)
• 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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Student Exercise

Case 2

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