Project Management Part 5 Project Risk Management

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Project ManagementPart 5Project Risk
Management
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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

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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

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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

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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

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PMIs 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

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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

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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

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Risk Assessment Matrix
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Risk Analysis Tools

• Probability analysis
• Decision tree analysis
• Monte Carlo simulation analysis
• Life-cycle cost analysis
• Delphi techniques for consensus

• Technology forecasting
• Game theory analysis
• PERT analysis
• Sensitivity analysis
• Expected value analysis

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Reducing Risks

• Try to reduce uncertainties (collect more
  information, use more reliable vendors, design
  for easy production, dont 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.)

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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

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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

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Time and Cost Padding

• People will generally use up as much time and
  money as they are allowed (if you dont 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

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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

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Risk Management Exercise

• Nelson Mandela Bridge case (25 minutes)
• Divide into small groups
• Read case
• Discuss the issues and answer these questions
• How would you have identified the risks?
• Using the table provided, discuss how the risks
  were addressed and/or how risks could have been
  addressed. Also, indicate any additional risks
  you can think of.
• Indicate whether the risks listed are internal or
  external.
• Describe how you would determine the expected
  values of the risks listed.
• Do you think that risk was adequately managed in
  this project? Why?

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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

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Estimating Task Times (with PERT)

• Activity duration estimates
• aoptimistic, mmost likely, bpessimistic time
• Expected task duration
• Te (a 4m b)/6
• Variance of task duration
• Var (b a)/62

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PERT Example

• Task Pred. Opt. Most Likely Pess.
  Te Var
• a -- 3 4 6 4.167 0.250
• b -- 2 3 4 3.000 0.111
• c a 3 3 5 3.333 0.111
• d a 2 2 2 2.000 0.000
• e b 4 6 11 6.500 1.361
• f b 3 4 4 3.833 0.028
• g c,d 1 1 2 1.167 0.028
• h e 4 4 4 4.000 0.000
• i f 3 5 8 5.167 0.694
• j e,g 3 6 10 6.167 1.361
• k h,i 1 1 2 1.167 0.028
• Te (a 4m b)/6 Var (b a)/62

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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

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Goldratts 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

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Goldratts 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.

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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 _at_RISK are two such packages.

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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.