OPMA 5364
Project Management
Part 7
Project Risk Management
Topic Outline: Risk Management
•
•
•
•
•
•
•
•
•
Project risks and risk management
Identification of risks
Risk assessment and risk analysis
Contingency planning
Time and cost padding
Expected values
Risk management exercise
PERT analysis
Computer simulation analysis
Copyright 2004, Dr. Greg Frazier
Part 7 - Project Risk Mgmt.
2
Project Risks
Uncertainty a random chance that something
will happen, with no way to control whether it
happens
Risk an uncertain event or condition that
could negatively impact project performance
Each risk has a likelihood, or probability, of
occurring and possible outcomes if it does
occur
Copyright 2004, Dr. Greg Frazier
Part 7 - Project Risk Mgmt.
3
Managing Risks
Since the project manager is responsible for
project success, he or she can increase the
likelihood of success by better managing risks
Risk management is a proactive approach to
dealing with uncertainties rather than a
reactive approach
Some risks can be disregarded and some can
be avoided, but others should be planned for
Copyright 2004, Dr. Greg Frazier
Part 7 - Project Risk Mgmt.
4
Project Risk Management
Risk management in projects involves:
• Identifying risks
• Assessing and analyzing the likelihood and
impacts of risks
• Trying to reduce the uncertainties (by
gathering more information or making different
decisions)
• Trying to lessen the impacts of risks
• Developing contingency plans for critical risks
• Monitoring risks as the project progresses
Copyright 2004, Dr. Greg Frazier
Part 7 - Project Risk Mgmt.
5
PMI’s View of Risk Management
Risk management consists of 6 subprocesses:
• Risk Management Planning
– How to approach and conduct risk mgmt. activities
• Risk Identification
• Qualitative Risk Analysis
– Assessing likelihoods and possible outcomes
• Quantitative Risk Analysis
– Computer simulations; decision tree analysis; etc.
• Risk Response Planning
• Risk Monitoring and Control
Copyright 2004, Dr. Greg Frazier
Part 7 - Project Risk Mgmt.
6
Identification of Risks
Identifying all of the possible events or
conditions that might occur and may
negatively impact project performance
A brainstorming session with the project team
can be a helpful way to ensure that all
important risks are identified
Determining symptoms or warning signs that
indicate when the risk is about to occur
Determining root causes of the risk
Copyright 2004, Dr. Greg Frazier
Part 7 - Project Risk Mgmt.
7
Risk Assessment
This info. should be developed for each risk:
• Description of risk
• All the possible outcomes of the risk
• The magnitude or severity of the outcomes
• Likelihood (probability) of the risk occurring,
and likelihood of each possible outcome
• When the risk might occur during the project
• Interaction of the risk outcomes with other
parts of this project or other projects
Copyright 2004, Dr. Greg Frazier
Part 7 - Project Risk Mgmt.
8
Risk Assessment Matrix
Risk
Likelihood
System
Low
Crash
Software
High
Glitches
Users
Medium
Dissatisfied
Hardware
Low
Malfunction
Copyright 2004, Dr. Greg Frazier
Severity
Detection
Difficulty
When
High
High
Startup
Low
Medium
Medium
Low
Medium
Medium
Part 7 - Project Risk Mgmt.
PostStartup
PostStartup
Startup
9
Risk Analysis Tools
• Probability analysis
• Decision tree analysis
• Monte Carlo
simulation analysis
• Life-cycle cost
analysis
• Delphi techniques for
consensus
Copyright 2004, Dr. Greg Frazier
• Technology
forecasting
• Game theory analysis
• PERT analysis
• Sensitivity analysis
• Expected value
analysis
Part 7 - Project Risk Mgmt.
10
Reducing Risks
• Try to reduce uncertainties (collect more
information, use more reliable vendors,
design for easy production, don’t use leading
edge technologies, etc.)
• Try to reduce the severity of potential
outcomes (purchase insurance, convince
customer to share the risk impacts, train
employees how to respond quickly, etc.)
Copyright 2004, Dr. Greg Frazier
Part 7 - Project Risk Mgmt.
11
Contingency Planning
A contingency plan is an alternative plan used if
a risk event or condition occurs.
Examples:
• Having a backup supplier for a key material
• Carrying a safety stock for a key part
• Having an alternate distribution channel to
send products to China (air instead of boat)
• Having hurricane evacuation plans
Copyright 2004, Dr. Greg Frazier
Part 7 - Project Risk Mgmt.
12
Time and Cost Padding
Padding is a commonly used approach to
address risks, since it is very easy to
implement and since it protects against most
minor risks
Padding refers to inflating the original time or
cost estimates for activities or for the project
Unfortunately, this leads to longer project
durations and higher costs
Copyright 2004, Dr. Greg Frazier
Part 7 - Project Risk Mgmt.
13
Time and Cost Padding
People will generally use up as much time and
money as they are allowed (if you don’t use it
you lose it!)
Student syndrome if extra padding is built into
activity time estimates, some people are likely
to procrastinate getting started, and then the
protection against risk is lost
Although padding can be useful in reducing the
severity of risk, it can also lead to
inefficiencies and waste
Copyright 2004, Dr. Greg Frazier
Part 7 - Project Risk Mgmt.
14
Expected Values
A construction manager is trying to decide what size
crew to schedule for tomorrow based on weather:
Weather
Probability: 10% 20% 30% 40%
Expected
Alternative Nice Cold Rain Snow
Value
Large crew $860 $710 $160 $-350
$136
Med. crew 520 430 190 -120
$147
Small crew 280 240 170
130
$179
sample calculation:
Large  .10(860)+.20(710)+.30(160)+.40(-350) = 136
Copyright 2004, Dr. Greg Frazier
Part 7 - Project Risk Mgmt.
15
Risk Management Exercise
First Technology Equipment case (25 minutes)
• Divide into small groups
• Read case
• Discuss the issues and answer 2 questions:
– Use expected value to decide if it’s economically
better to make or buy the component?
– Why might management opt for other than the most
economical choice?
Copyright 2004, Dr. Greg Frazier
Part 7 - Project Risk Mgmt.
16
Uncertain Task Durations
• Probability distributions
• Discrete, uniform, triangular, normal, beta, etc.
• Most common way to consider task uncertainty
is to estimate the most likely, pessimistic, and
optimistic durations.
• PERT analysis assumes a Beta distribution for
each task
Copyright 2004, Dr. Greg Frazier
Part 7 - Project Risk Mgmt.
17
Estimating Task Times (with PERT)
Activity duration estimates:
a=optimistic, m=most likely, b=pessimistic time
Expected task duration:
Te = (a + 4m + b)/6
Variance of task duration:
Var = [(b – a)/6]2
Copyright 2004, Dr. Greg Frazier
Part 7 - Project Risk Mgmt.
18
PERT Example
Task Pred. Opt. Most Likely
a
-3
4
b
-2
3
c
a
3
3
d
a
2
2
e
b
4
6
f
b
3
4
g
c,d
1
1
h
e
4
4
i
f
3
5
j
e,g
3
6
k
h,i
1
1
Te = (a + 4m + b)/6
Copyright 2004, Dr. Greg Frazier
Pess.
Te
Var
6
4.167 0.250
4
3.000 0.111
5
3.333 0.111
2
2.000 0.000
11
6.500 1.361
4
3.833 0.028
2
1.167 0.028
4
4.000 0.000
8
5.167 0.694
10
6.167 1.361
2
1.167 0.028
Var = [(b – a)/6]2
Part 7 - Project Risk Mgmt.
19
PERT Example
• Use Te values for task durations on project
network to compute slack values.
• The results of the new computations still
shows path b-e-j as the critical path, with an
expected project duration of
Tcp = 3.000 + 6.500 + 6.167 =
Varcp = 0.111 + 1.361 + 1.361 =
StdDevcp = sqrt(2.833) =
• MS Project with 3 task durations
Copyright 2004, Dr. Greg Frazier
Part 7 - Project Risk Mgmt.
20
Computer Simulation Analysis
General purpose simulation software can model
how many products flow through all the
machines in a factory and on to the warehouse.
This capability is much more than what is
needed to simulate projects.
Monte Carlo simulation is much simpler type of
simulation analysis that we can use to model the
uncertainty of task durations and costs.
Crystal Ball and @RISK are two such packages.
Copyright 2004, Dr. Greg Frazier
Part 7 - Project Risk Mgmt.
21
Crystal Ball and Project Analysis
• Crystal Ball allows you to specify any type of
probability distribution for each task.
• You specify all precedence relationships.
• It then “shoots” random numbers into your
probability distributions to simulate thousands
of completions of the project.
• The result is a probability distribution of the
total duration of the project, from which you
can answer the what-if questions about how
long the project might actually take.
Copyright 2004, Dr. Greg Frazier
Part 7 - Project Risk Mgmt.
22
Goldratt’s Critical Chain
• Assuming that an activity duration is known
leads to underestimating project durations
• Because of this, people tend to pad their time
estimates
• This may result in the “student syndrome”
– What is that?
• This in turn leads to procrastination, which can
then result in missing the finish date
Copyright 2004, Dr. Greg Frazier
Part 7 - Project Risk Mgmt.
23
Goldratt’s Critical Chain
• Add safety time buffers at strategic points in the
project network
• Safety time buffer at end of critical path is called
a project buffer
• Safety time buffer just before where noncritical
paths feed into the critical path is called a
feeding buffer.
Copyright 2004, Dr. Greg Frazier
Part 7 - Project Risk Mgmt.
24