Project

Management
By Dr. Ilias MAJDOULINE

Risk Management
Chapter 10
Learning Objectives

• What is Risk and how is it calculated?

• Risk Categorization
• Risk Reserve
• Plan Risk Management
• Identify Risk
• Perform Qualitative Risk Analysis
• Perform Quantitative Risk Analysis
• Plan Risk Responses
• Monitor & Control Risks
Quality Management Processes :

Planning Plan Risk Management

Identify Risks

Perform Qualitative Risk Analysis

Perform Quantitative Risk Analysis

Plan Risk Responses

Monitoring and controlling Control Risks

Which one is Risk ?
1. The first deliverable may be delayed by weather disturbances
2. The project is using untested technology
3. The organization does use sponsors

ISSUE ≠ RISK
What is Risk ?
• A risk is an uncertain event that, if it occurs, has a
positive or a negative effect on the project’s
objectives
• Risk is uncertainty that matters !
≠ ISSUE :
an event that has already happened and is currently
impacting the project’s objectives.
The two-dimensions of Risk
PROBALBILITY :
How likely or unlikely is the risk to
happen ?

IMPACT :
What is the effect on the project’s
objectives in case it happens ?
Threats and opportunities
For example :
If technology changes during the project, what can
be the threats or the opportunities ?
Risk factors
When looking at risk, it’s necessary to determine :
• The probability that a risk event will occur (how likely)
• The range of possible outcomes
• Expected timing (when)
• The anticipated frequency (how often)
Risk Appetites, Tolerances, and thresholds

Risk Appetites:
• The degree of uncertainty an entity is willing to take on in anticipation of
a reward
Risk Tolerances:
• The degree, amount, or volume of risk that an organization or individual
will withstand
Risk Thresholds:
• Refers to measures along the level of uncertainty or the level of impact at
which a stakeholder may have a specific interest.
Definition of Project Risk Management :

• Project Risk Management includes the processes

of conducting risk management planning,
identification, analysis, response planning, and
controlling risk on a project
Plan Risk Management
It is the process of defining how to conduct risk
management activities for a project
Plan Risk Management
RISK MANAGEMENT

Project charter

Project
Management Plan
Stakeholder
register
Plan Risk Management
Enterprise
Environmental
Factors

Organizational Risk Management Plan

process assets

Analytical techniques Expert judgment Meetings

Risk Categories
External: Regulatory, environmental, government,…
Internal: Time, cost, or scope changes; inexperience; poor
planning; people; materials; equipment…
Technical: Changes in technology
Unforeseeable: Small portion of risks (about 10%)
Identify Risks
It is the process of determining which risks may affect the
project and documenting their characteristics
Identify Risks
Scope baseline RISK MANAGEMENT

Schedule management
plan
Risk Management
Activity duration Plan
estimates
Cost management plan

Activity cost estimates

Quality management plan Identify Risks

HR management plan

Procurement documents

Stakeholders register Risk Register

Organizational process assets
Documentation Information gathering
Organizational environmental
reviews Checklist analysis Assumptions analysis
factors techniques
Diagraming techniques SWOT analysis Expert judgment
Risk Register
• List of risks
• List of potential responses
• Root causes of risks
• Updated risk categories
Perform Qualitative Risk Analysis
It is the process of prioritizing risks for further analysis or
action by assessing and combining their probability of
occurrence and impact.
Perform Qualitative Risk Analysis
RISK MANAGEMENT

Risk Management Risk Register

Plan

Scope baseline
Organizational process assets Project documents
Perform Qualitative Risk Analysis updates
Organizational environmental
factors

Risk probability and Probability and Risk data quality Risk Risk urgency Expert
impact assessment impact Matrix assessment categorization assessment judgment
Probability & Impact Matrix
Risk Data Quality Assessment

Risk data quality assessment is a technique to evaluate the

degree to which the data about risks is useful. It may include :
• Extent of the understanding of the risk,
• Data available about the risk,
• Accuracy, quality, reliability, and integrity of the data.
Risk categorization
Risks can be categorized by sources of risk (using the RBS) or the
area of the project affected (using the WBS),… to determine the
areas of the project most exposed.

It helps in risk response planning, allowing you to eliminate many

risks at once.
Risk Urgency Assessment

• Risks requiring near-term responses may be considered more

urgent to address.
• Indicators of priority may include time to affect a risk
response, symptoms and warning signs…
• The assessment of risk urgency is combined with the risk
ranking to give a final risk rating.
Perform Quantitative Risk Analysis
It is the process of numerically analyzing the effect of
identified risks on overall project objectives.
Perform Quantitative Risk Analysis
RISK MANAGEMENT

Risk Management Risk Register

Plan

Schedule management
plan
Cost management plan Project documents
Perform Quantitative Risk Analysis updates

Organizational process assets

Organizational environmental
factors

Data gathering and Quantitative Risk analysis Expert

representation techniques and modeling techniques judgment
Data Gathering &
Representation Techniques
• Interviewing
• Probability distributions :
• Beta Distribution
• Triangular Distribution
Quantitative Risk Analysis and
Modeling Techniques

• Sensitivity Analysis
• Expected Monetary Value Analysis
• Decision Trees
• Monte Carlo Analysis (Simulation Technique)
 Sensitivity analysis
Helps to determine which risks have the most potential impact on the project

Server installed by November 1

Data security test

User training
RISKS

Integration testing

System installation

User acceptance test

User screen requirements

$-30,000 $-20,000 $-10,000 0 $10,000 $20,000 $30,000 $40,000 $50,000

Expected Monetary Value Analysis
Helps to determine an overall ranking of risk
EMV = Probability x Impact

Work Package Risk Probability Impact Expected Value

A 20% $40,000

B 50% $20,000

C 70% $10,000
Expected Monetary Value Analysis
Helps to determine an overall ranking of risk
EMV = Probability x Impact

Work Package Risk Probability Impact Expected Value

A 20% $40,000 $8,000
B 50% $20,000 $10,000
C 70% $10,000 $7,000
 Decision Trees
Calculates the average outcome when the future includes scenarios that may or may not happen

Decision to make Decision Node Chance Node Net Path Value

60% Strong Demand

$80M
($200M)
Build New Plant $200M - $120M = $80M
(Invest $120M)
Weak Demand -$30M
EMV = 60%x($80M) + 40% ($90M)
40%x (-$30M) = $36M $90M - $120M = -$30M
Build or Upgrade ?
60% Strong Demand
$70M
($120M)
Upgrade Plant $120M - $50M = $70M
EMV = $46M (Invest $50M)
Weak Demand $10M
EMV = 60%x($70M) + 40% ($60M)
40%x ($10M) = $46M $60M - $50M = $10M
 Exercise 1
Calculate the EMV and make a decision

Decision to make Decision Node Chance Node Net Path Value

70% Strong Use

$60M
($80M)
Buy the License $80M - $20M = $60M
(Invest $20M)
EMV = $45M Weak Use $10M
EMV = 70%x($60M) + 30% ($30M)
30%x ($10M) = $45M $30M - $20M = $10M
Buy or Rent ?
70% Strong Use
$50M
($60M)
Rent the License $60M - $10M = $50M
(Invest $10M)
Weak Use $0M
EMV = 70%x($50M) + 30% ($10M)
30%x ($0M) = $35M $10M - $10M = $0M
 Exercise 2
A company is trying to determine if prototyping is worthwhile on the project. They
have come up with the following impacts. Based on this diagram, what is the
expected monetary value of each option? What is the best decision ?

35% Failure
$320M
($120M)
Prototype $120M + $200M = $320M
(Setup cost $200M)
EMV = $242 M Pass $200M
EMV = 35%x($320M) + (no impact)
65%x ($200M) = $242M $200M + $0 = $200M
Prototype or Not ?
70% Failure
$450M
($450M)
Do not Prototype $0M + $450 = $450M
(Invest $0M)
Pass $0M
EMV = 70%x($450M) + (no impact)
30%x ($0M) = $315M $0M + $0 = $0M
Plan Risk Responses
It is the process of developing options and actions to enhance
opportunities and to reduce threats to project objectives
THREATS OPPORTUNITIES

Eliminate Make sure

before they they will
happen happen

Decrease the Increase the

probability / probability /
Impact Contingency Impact
plan
Residual
threats
Fallback plan
Plan Risk Responses
RISK MANAGEMENT

Risk Management Risk Register

Plan

Project documents
updates
Plan Risk Responses
Project Management
Plan updates

Strategies for negative Strategies for positive Contingent response

Expert judgment
risks or threats risks or opportunities strategies
Threats Response Strategies

• Avoid
• Mitigate
• Transfer
• Accept
Opportunities Response
Strategies

• Exploit (reverse of avoid)

• Enhance (reverse of mitigate)
• Share
• Accept
 Exercise

• Identify the type of risk response strategy

Risk Register Updates
• Residual risks
• Contingency plans
• Fallback plans
• Risk owners
• Secondary risks
• Risk triggers
• Reserves
8- Cost Budget $1400 Creating a budget

7- Management Reserve $50

6- Cost Baseline $1350

5- Contingency reserve $100

4- Project estimates $1250

3- Control account estimates CA1 CA1

$850 $400

2- Work packages estimates WP1 WP2 WP3 WP4

$100 $250 $500 $175

1- Activity estimates A1 A2 A3 A4 A5
$25 $40 $45 $180 $70
 Exercise
Example of calculating a contingency reserve for a manufacturing project
Cost Contingency
Project Data
Reserve Calculations
There is 30% probability of a delay in the receipt of parts, with a
cost to the project of $9,000
There is 20% probability that the parts will cost $10,000 less
than expected
There is 25% probability that 2 parts will not fit together when
installed, costing an extra $3,500
There is 30% probability that the manufacture may be simpler
than expected, saving $2,500.
There is 5% probability of a design defect, causing $5,000 of
rework.
TOTAL COST CONTINGENCY RESERVE
 Exercise
Example of calculating a contingency reserve for a manufacturing project
Cost Contingency
Project Data
Reserve Calculations
There is 30% probability of a delay in the receipt of parts, with a Add $2,700
cost to the project of $9,000
There is 20% probability that the parts will cost $10,000 less Subtract $2,000
than expected
There is 25% probability that 2 parts will not fit together when Add $875
installed, costing an extra $3,500
There is 30% probability that the manufacture may be simpler Subtract $750
than expected, saving $2,500.
There is 5% probability of a design defect, causing $5,000 of Add $250
rework.

TOTAL COST CONTINGENCY RESERVE $1,075

 Create a flowchart of the risk process from
Identify Risks through Plan Risk Responses.
Question : What do you do with noncritical risks ?

Answer : Document them in a watch list, and

revisit them periodically
 Question : Would you choose only one risk
response strategy?

Answer : No, you can select a combination of

choices
 Question : What risk management activities are
done during the execution of the project?

Answer : Watching out for noncritical risks that

increase in importance, and looking for new risks.
 Question : How would risks be addressed in
project meeting?

Answer : By asking, “What is the status of risks?

Are there any new risks? Is there any change to
the order of importance?”.
Control Risks
It is the process of implementing risk response plans, tracking
identified risks, monitoring residual risks, identifying new
risks, and evaluating risk process effectiveness throughout the
project.
Control Risks
RISK MANAGEMENT

Work performance
information
Risk Register
Change requests
Schedule management
plan
Project management
Work performance plan updates
reports Control Risks
Work performance data Organizational
process assets
updates
Project documents
updates

Variance and Technical performance

Risk reassessment Risk Audits Reserve analysis Meetings
trend analysis measurement
Practice Exam
Chapter 10 – Risk Management
 1. D 12. B 23. D 34. A
2. C 13. C 24. B 35. A
3. C 14. A 25. C 36. C
4. A 15. D 26. B 37. B
5. B 16. C 27. A 38. A
Answers 6. C 17. C 28. B
7. B 18. C 29. D
8. B 19. D 30. A
9. D 20. D 31. B
10. A 21. A 32. B
11. D 22. D 33. A