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11 - Project Risk Management

Project Management Training
Project Risk Management
Monitoring &
Controlling Processes
Planning
Processes

Enter phase/ Initiating Closing Exit phase/

Start project Processes Processes End project

Executing
Processes

Knowledge Process
Area Initiating Planning Executing Monitoring & Contol Closing

Plan Risk Management

Identify Risk
Risk Perform Qualitative Risk Analysis Monitor and Control Risks
Perform Quantitative Risk Analysis
Plan Risk Response
Project Risk Management

• Risk is an uncertain event or condition that, if occurs, has an effect

on at least one project objective.
• Risk management objectives:
– increase the probability and impact of positive events (opportunities).
– decrease the probability and impact of negative events (threat).
• Terms & concepts:
– Uncertainty: a lack of knowledge about an event that reduces confidence
– Risk averse: someone who does not want to take risks.
– Risk tolerances: area of risk that are acceptable/unacceptable.
– Risk thresholds: the point at which a risk become unacceptable

• Remember that in this area there is no activity in executing process group

Project Risk Management

Risk factors
2. 3. 4.
1. The range of Expected The anticipated
The probability possible timing (when) frequency of
that it will occur outcome in the project risk event
(impact) life cycle (how often)
11.1 Plan Risk Management
• The process of defining how to conduct risk management activities for a
project.

Tools &
Inputs Outputs
Techniques
1. Project scope statement 1. Planning meetings and 1. Risk management plan
2. Cost management plan analysis
3. Schedule management
plan
4. Communication
management plan
5. Enterprise environmental
factors
6. Organizational process
assets
 Plan Risk Management
• Importance of Risk Management Planning
– Ensure that the degree, type, and visibility of risk management are commensurate
– Provide sufficient resource and time for risk management activities
– Establish an agreed-upon basis for evaluating risk

• Risk Categories
– A standard list of risk categories can help to make sure areas of risk are not forgotten.
– Companies and PMO should have standard list of risk categories to help identify risk.

• 2 Main type of Risk

– Business – Risk of gain or loss
– Pure (insurable) risk – Only a risk of loss (i.e. fire, theft, personal injury, etc)

• Sources of risk = risk categories

• Risk categories may be structured into Risk Breakdown Structure (RBS)
 Risk Management Plan
• Risk management plan describe how risk management will be structured and
performed on the project.
• Subset of project management plan.
• May includes:
 Methodology
 Roles & responsibilities
 Budgeting
 Timing
 Risk categories.
 Definition of probability and impact
 Stakeholder tolerances
 Reporting formats
 Tracking
 Probability and impact matrix (?)
8.2 Identify Risk
• The process of obtaining seller responses, selecting a seller, and awarding a
contract.

Tools &
Inputs Outputs
Techniques
1. Project management 1. Documentation reviews 1. Risk register
plan 2. Information gathering
2. Procurement techniques
documents 3. Checklist analysis
3. Source selection criteria 4. Assumptions analysis
4. Qualified seller list 5. Diagramming
5. Seller proposals techniques
6. Project documents 6. SWOT analysis
7. Make-or-buy decisions 7. Expert judgment
8. Teaming agreements
9. Organizational process
assets Q: Who should be involved in risk
identification?
A: EVERYONE
 Identify Risk
• Risk should be continually reassessed (iterative) such as in integrated change
control activity, when working with resources, when dealing with issues.

• Information gathering techniques

– Brainstorming
– Delphi technique: Expert participate anonymously; facilitator use questionnaire; consensus may
be reached in a few rounds; Help reduce bias in the data and prevent influence each others.
– Interviewing: interviewing experts, stakeholders, experienced PM
– Root cause analysis: Reorganizing the identified risk by their root cause may help identify more
risks
• Checklist analysis: checklist developed based on accumulated historical information from previous
similar project
• Assumption analysis: identify risk from inaccuracy, instability, inconsistency, incompleteness.
• SWOT analysis – Strengths, Weaknesses, Opportunities, Threats
 Diagramming techniques
• Cause and effect diagrams (fish-bone diagram)
Described in Quality Management
• System or process flow charts.
• Influence diagrams
– show the casual influences among project variables, the timing or time ordering of events, and the
relationships among other project variables and their outcomes.
– excellent for displaying a decision’s structure

Risk Register
• After Indentify Risk process the output is initial entries into the risk register. It
includes:
 List of risk
 List of POTENTIAL responses
 Root causes of risks
 Updated risk categories
11.3 Perform Qualitative Risk Analysis
• The process of prioritizing risks for further analysis of action by assessing
and combining their probability of occurrence and impact.

Tools &
Inputs Outputs
Techniques
1. Risk register 1. Risk probability and 1. Risk register updates
2. Risk management plan impact assessment
3. Project scope statement 2. Probability and impact
4. Organizational process matrix
assets 3. Risk data quality
assessment
4. Risk categorization
5. Risk urgency
assessment
6. Expert judgment
 Qualitative Risk Analysis
• Help to focus on high priority risks
• A subjective analysis
• Analysis using…
– Relative probability or likelihood of occurrence
– Impact on project objective
– Time frame response
– Organization’s risk tolerance
– Etc.
• Can be also used to:
– Compare risk to the overall risk of other projects
– Determine whether the project should be selected, continued or terminated.
– Determine whether to proceed to Perform Quantitative Risk Analysis
 Probability Impact Matrix
• Different matrices can be used for cost, time, scope
• It helps guide risk responses (priority action & response strategies)

Colors shows
level of
importance

PROBA RISK
No Category Description of Risk IMPACT
BILITY LEVEL

1 Resource Testing environment not available 4 B ORANGE

Documentation approval took longer
2 Schedule 4 A RED
time
 Risk Register Updates

• Update/add additional information to previous output i.e. Risk

Register, which include:
– Relative ranking/priority
– Risk grouped by categories
– List of risk requiring additional analysis in the near term
– List of risk for additional analysis and response
– Watch-list (non-critical or non-top risks)
– Trends
Since risk analysis process is iterative, PM should know if risk is increasing, decreasing
or staying the same
– Cause of risk requiring particular attention
11.4 Perform Quantitative Risk Analysis
• The process of numerically analyzing the effect of identified risks on overall
project objectives.

Tools &
Inputs Outputs
Techniques
1. Risk register 1. Data gathering and 1. Risk register updates
2. Risk management plan representation
3. Cost management plan techniques
4. Project scope statement 2. Quantitative risk
5. Organizational process analysis and modeling
assets techniques
3. Expert judgment

If not necessary, this process may be

skipped.
 Quantitative Risk Analysis
• Is a numerical evaluation (more objective)
• This process may be skipped.

• Purpose of this process

– Determine which risk events warrant a response.
– Determine overall project risk (risk exposure).
– Determine the quantified probability of meeting project objectives.
– Determine cost and schedule reserves.
– Identify risks requiring the most attention.
– Create realistic and achievable cost, schedule, or scope targets.
 Quantitative Risk Analysis: Tools & Techniques

• Determining Quantitative Probability and Impact might be done by:

– Interviewing
– Cost and time estimating
– Delphi technique
– Use of historical records from previous projects
– Expert judgment
– Sensitivity analysis – tornado diagram
– Expected monetary value (EMV) analysis
– Decision tree
– Monte Carlo analysis (simulation)
 Decision Tree and EMV

EVM  (Probability)  (Impact) 

• EVM used with Decision Tree to choose between many alternative which take into
account the future events
• Example:

Example Source:
 Sensitivity Analysis

• To determine which risks have the most potential impact to the project
• Changing one or more elements/variables and set other elements to
its baseline then see the impact.
• One typical display of sensitivity analysis is the tornado diagram
 Risk Register Updates

• Update/add additional information to previous output i.e. Risk

Register, which include:

– Prioritize list of quantified risks

– Amount of contingency time and cost reserve needed
– Possible realistic and achievable completion dates, project cost, with
confidence level
– The quantified probability of meeting project objectives
– Trends
11.5 Plan Risk Response
• The process of developing option and action to enhance opportunities and to
reduce threats to project objectives.

Tools &
Inputs Outputs
Techniques
1. Risk register 1. Strategies for negative 1. Risk register updates
2. Risk management plan risks or threats 2. Risk-related contract
3. Cost management plan 2. Strategies for positive decisions
4. Project scope statement risks or opportunities 3. Project management
5. Organizational process 3. Contingent response plan updates
assets strategies
4. Expert judgment
4. Project document
updates
 Plan Risk Responses/Mitigation
• Do something to eliminate threats before they happens
• Do something to make sure the opportunities happens
• Decrease the probability and/or impact of threats
• Increase the probability and/or impact of opportunities

• For the remaining (residual) threats that cannot be eliminated:

– Do something if the risk happens (contingency plan).
– Do something if contingency plan not effective (fallback plan)
 Strategies for Threats
• Avoid
– Eliminate the threat entirely
– Isolate project objectives from the risk’s impact
• Transfer (Deflect, Allocate)
– Shift some or all the negative impact of a threat to a third party
• Mitigate
– Implies a reduction in the probability and/or impact of an adverse risk event
to be within acceptable threshold limits
• Accept
– Deal with the risks
– Project management plan is not changed

Transferring a risk will leave some risk

behind.
 Strategies for Opportunities
• Exploit
– Seek to ensure the opportunities definitely happen
• Share
– Allocate some or all of the ownership of the opportunity to a third party who
is best able to capture the opportunity for the project benefit.
• Enhance
– Increase the probability and/or the positive impacts of an opportunity.
• Accept
– Not actively pursuing an opportunity
11.6 Monitor & Control Risk
• The process of ..
– implementing risk response plans,
– tracking identified risks,
– monitoring residual risks,
– identifying new risks, and
– evaluating risk process effectiveness throughout the project.

Tools &
Inputs Outputs
Techniques
1. Risk register 1. Risk reassessment 1. Risk register updates
2. Project management 2. Risk audits 2. Organizational process
plan 3. Variance and trend assets updates
3. Work performance analysis 3. Change requests
information 4. Technical performance
4. Performance report measurement
4. Project management
plan updates
5. Reserve analysis
6. Status meetings 5. Project document
updates
 Risk Monitoring & Controlling

• Other purposes are to determines if

– Project assumptions are still valid
– Risk has changed or can be retired
– Risk management policy & procedure are being followed
– Align contingency reserves with current risk assessment
BACKUP SLIDES
Important Terms
• Mutual Exclusive: if two events cannot both occur in a single trial
• Probability: something will occur
• Normal Distribution: common probability density distribution chart
• Statistical independence: the probability of one event occurring does not affect the
probability of another event occurring
• Standard deviation (or Sigma): how far you are from the mean
• 3 or 6 sigma
– Represent the level of quality has decided to try to achieve
– 6σ is higher quality standard than 3σ
– Used to calculate the upper and lower control limits in a control chart

Percentage of occurrences
Number of σ between two control limits
1 68.26%
2 95.64%
3 99.73%
6 99.99985%
Example: Definition of Risk Probability and Impact
• This should be defined in Risk Management Plan
• Required for Perform Qualitative Risk Analysis
• Can reduce the influence of bias

Image Source: PMBOK Guide 4th Edition. PMI © 2009, p.281

Example: Risk Breakdown Structure (RBS)
• Showing risk categorization
• Help to ensure a comprehensive process of systematically identifying risk
to a consistent level of detail

Image Source: PMBOK Guide 4th Edition. PMI © 2009, p.281

Example: Influence Diagram
• Diagramming technique used when Identify Risk

Decision Node
ValueNode

Usage
decision
Test
Survey Economic
Value

Chance event Net

Node Human Value
Exposure Cancer
Cost

Cancer
Risk
Carcinogenic
potential

Image Source: Influence Diagram & Decision Trees, Lecture slide MHA 6350, Dr. Lloyd R. Burton
 Next topic:
Project Procurement Management
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