Managing Risks in Projects MT 246 Module 13

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Managing Risks in ProjectsMT 246 - Module 13
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Last Lecture Cost Estimating and Budgeting

• Estimating Process
• takes place at proposal time
• time phasing and bottom line totals
• direct labor
• direct material
• Overhead, G A, and Profit applied to totals
• final iteration at negotiation of contract
• Budgeting Process
• estimates at time of contract signature become
  budget for remainder of program
• updated and reforecast throughout life of
  contract

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Risk Concepts

• The Likelihood that some Problematical Event will
  Occur
• The Impact of the Event if it does Occur
• Risk f (likelihood, impact)
• Project is considered Risky if at least One
  Factor is large

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Risk Identification

• Risk Tolerance is a Function of Experience
• PM
• Stakeholders
• Risk of Failure
• Schedule
• Budget
• Technical Goals
• Risk of Opportunity
• Rewards
• Savings
• Benefits

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Risk Identification (Continued)

• Ways to Identify Project Risk
• Chronology
• Type of Work
• High Risks
• Approach is New/Unusual
• Technology is New/Unusual
• Staff needs Training in New Tasks/Skills
• Process using New Equipment, Systems or Procedures

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Sources of Risk

• Any Factor of uncertain Probability which can
  affect the Outcome is of a Project is a
• Risk Source
• Risk Hazard

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Sources of Risk (Continued)

• Internal Risks
• Market Risk
• Ill Defined Market or Customer needs and
  Requirements
• Failure to Identify Changing Needs and
  Requirements
• Failure to identify Newly Introduced Products by
  Competitors
• Technical Risk
• Maturity
• Complexity
• Quality
• Concurrency, or Dependency

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Sources of Risk (Continued)

• External Risks,
• Market Conditions
• Competitors Actions
• Government Regulations
• Interest Rates
• Decisions by Sr. Mgmt or Customer
• Budgets
• Staffing
• Priorities

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Sources of Risk (Continued)

• External Risks (Continued)
• Customer Needs and Behavior
• Supplier Relations
• Weather
• Labor Troubles
• Material or Labor
• External Control by Customers or Subcontractors

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Identification Techniques

• Analogy
• Records, History and Lesson Learned from Previous
  Projects
• Checklist
• Factors which can affect the Project
• Becomes more Relevant with more accurate and
  Complete Historical Data
• WBS Analysis
• Each WP is Assessed for Internal and External
  Risk

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Identification Techniques (Continued)

• Process Flowcharts
• Look at Functional Process Designs
• Pinpoint Potential Trouble Spots
• Precedence Relationships in Project Network
• Brainstorming and Cause and Effect Diagrams
• Outcome (Effect) can Identify Causes (Hazards)
• Risk Hazard (cause) can Identify Outcomes
  (Effect)

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Cause and Effect Diagram
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Risk Assessment

• Risk Likelihood
• Probability a Hazard or Risk Factor will
  Materialize
• Numerical Value between 1.0 (Certain) and 0
  (Impossible)
• Qualitative Rating
• High Greater than 50
• Medium 20 to 50
• Low 20 or Less
• Composite Likelihood Factor (CLF)
• Sum of Multiple, Independent Risk Sources

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Sources of Failure and Likelihood
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Influence Diagram
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Risk Assessment(Continued)

• Risk Impact
• What Happens if a Risk Hazard Materialized
• Specified in Terms of
• Time
• Cost
• Performance Measures
• Qualitative
• High
• Medium
• Low

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Risk Assessment(Continued)

• Risk Impact (Continued)
• Numerical Measure Between 0 and 1.0
• 0 not Serious
• 1.0 Catastrophic
• Composite Impact Factor (CIF) is the Impact from
  Multiple Risk Source, Simple Weighted Average
• CIF (W1)TI (W2)CI (W3)SI

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Impact Values for Technical, Cost, and Time
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Risk Assessment(Continued)

• Risk Consequence
• Function or Likelihood and Impact
• Can be Expressed as Numerical rating between 0
  and 1.0
• Risk Consequence Rating (RCR)
• RCR CLF CIF - CLF(CIF)
• Can be Expressed as an Expected Value or the
  Average Outcome for large Tries
• Risk Consequence (Impact) x (Likelihood)

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Risk Assessment(Continued)

• PERT
• Incorporates Risk through the three Estimates for
  Each Project Activity
• a, Optimistic
• m, Most Likely
• b, Pessimistic
• Use a larger value of b to account for Greater
  Risk
• This Produces a larger Variance for Project
  Completion Time (Add buffer Time to Project)
• PERT Provides a Way for Measuring the
  Consequences of Risk on Project Completion Times

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Risk Assessment(Continued)

• Risk Priority
• PM must Define a Risk Tolerance Level
• Consider Risks at that Level and Higher
• Team Members Review all these Tasks and Make
  Recommendations
• In Complex Systems Joint Failures Can Occur
• Bhopal India 10,000 Deaths
• Chernobyl 50,000 Cancer Deaths Forecast

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Risk Response Planning How to Deal with the
Problem

• Transfer the Risk
• Avoid Risk
• Reduce Risk
• Contingency Planning
• Accept Risk (Do Nothing)

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Risk Likelihood, Risk Impact, and Expected Value
Consequences
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Transfer the Risk

• Transfer Partly or Fully from Customer to
  Contractor or Vice Versa
• Use Contract Incentives
• Fixed Price Contractor Assumes All the RISK for
  Cost Over-Run
• FP Incentive Fee Contractor 60, Customer 40
• Cost Plus Incentive Fee Contractor 40, Customer
  60
• CPFF Customer Assumes almost All the Risk

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Avoid Risk

• Alter the Initial Project Concept
• Eliminate Risky Activities
• Minimize System Complexity
• Reduce End-Item Quality Requirements
• Change Contractors
• Incorporate Redundancies
• Change Safety Procedures
• Better to Reduce Risk to Acceptable Level Than
  Eliminate Payoff Opportunity

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Reduce RiskTechnical Performance

• Best Technical Team
• Perform Analysis of Key Technical Parameters
• Models and Simulations
• Use CASE Tools
• Parallel Development on High-Risk Tasks
• Incentivize the Technical Team
• Consultants for Critical Reviews and Assessments
• TE

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Reduce RiskTechnical Performance (Continued)

• Reduce System Complexity to a Minimum
• Reorganize Tasks
• End Item Design
• Decouple Activities
• Contains Failure to one Activity
• Use Design Margins
• A Management Reserve
• Design Value is Greater than Design Requirement

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Reduce RiskMeeting Schedules

• Create Master Project Schedule
• Schedule Risky Tasks Early to Allow Time to
  Recover
• Focus on Critical and Near-Critical Activities
• Path
• Risk
• Best People on Time-Critical Tasks

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Reduce RiskMeeting Schedules (Continued)

• Incentives for OT
• Compensated Salary
• Compensated Time
• Do High Risk Activities in the Project Network in
  Parallel
• Organize Project Early with Adequate Staff

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Reduce RiskMeeting Project Cost

• Identify and Monitor Cost Drivers
• Perform Design Alternative Reviews and
  Assessments
• Validate System Design and Performance
• Modeling
• Assessment
• Maximum Use of Proven Technology and COTS

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Reduce RiskMeeting Project Cost (Continued

• Systems Engineering
• Build Test Models to Verify Design
• Early Breadboarding
• Prototyping,
• Test Evaluation
• Focus on Meeting the Minimum Requirements and
  Nothing More

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Contingency Planning

• The Get-Well-Plan
• Identify Risks
• Anticipate what might Happen
• Plan of Action to Respond
• Form
• Post-Hoc Remedial
• In Parallel to the Original Plan
• Preventive Action to Mitigate the Risk Impact

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Accept Risk (Do Nothing)

• Not All Risks are Severe or Fatal
• Cost Benefit Analysis
• Not for Risks which are Potentially Severe

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Risk Management is Project Management

• Another Tool for PM
• Supplements
• Requirements Definition
• Task Definition
• Scheduling
• Budgeting
• Configuration Management
• Change Control
• Performance Tracking and Control

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Risk Management Principles

• Create Risk Management Plan
• Create a Risk Profile
• Likelihood
• CS Impact
• Contingencies
• Trigger Events
• Risk Officer
• Not the PM
• Devils Advocate

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Risk Management Principles (Continued)

• Calculate a Risk Reserve
• Risk Time RT
• Risk Cost RC
• Monitor Risk Continuously
• Establish Communication Channels
• Document Everything of any Value for Lesson
  Learned

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Expect the Unexpected

• Do All You Can
• Cannot Cover Every Contingency
• Bonapartes Principle came along before Murphys
  Laws, i.e., Something Surely Will Go Wrong Plan
  for It to Occur

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Caveats (Bewares)

• Input to RA is Subjective
• Not what will but what might
• Analysis and Planning gives Sense of Power
• Managing not Eliminating
• Stifles Imagination
• Brute Force Approach to Technology
• Micromanagement is Never Appropriate

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Risk Analysis Methods

• Expected Value
• Decision Trees
• Uncertainty and Payoff Tables
• Simulations

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Expected Value

• For A Project,Expected Value Represents the
  Average Outcome
• Weighted Average of all Outcomes
• Likelihoods are the Weights
• EV SUM (Outcomes x Likelihood)
• Risk Project Time and Cost are Determined Using
  Expected Value

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Expected Value (Continued)

• Risk Consequence on Project Duration is Risk
  Time, RT
• RT (Corrective Time) x (Likelihood)
• Risk Consequence on Project Cost is Risk Cost, RC
• RC (Corrective Cost) x (Likelihood)
• BTE Baseline Time Estimate
• BCE Baseline Cost Estimate

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Expected Value (Continued)

• To Account for Risk factors that Affect the
  Project as a Whole
• Expected Project Completion Time, ET
• ET BTE RT
• Expected Project Completion Cost , EC
• EC BTC RC
• When ET and EC cannot be Estimated
• ET BTE (1 Likelihood)
• EC BTEC (1 Likelihood)

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Expected Value (Continued)

• A Better Way to Calculate Expected Values for the
  Entire Project
• Consider each WBS Element/Work Package Separately
• Estimate Risk Likelihood and ET and EC
• Aggregate for the Entire Project

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Expected Value (Continued)

• EC BCE ( (Corrective Cost) x (Likelihood))

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Expected Value (Continued)

• ET BTE ( (Corrective Time) x (Likelihood))

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Project Network With Risk Times from Previous
Table
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Decision Trees

• Decision Tree a Pictorial Representation of
  different Chance events or Strategies
• Assess the Risk Response which obtains the
  best-to-be Expected Consequence
• Application
• Cost of Potential Project Failure Against Benefit
  of Project Success
• Expected Outcome BCE x (Failure Likelihood)
  Net Profit x (Probability of Success)
• Alternative Risk Responses
• BCE 10M,
• Risk Factor (Likelihood ) 0.6
• Risk Impact 5M

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Decision Tree for Alternative Risk Responses
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Uncertainty and Payoff Tables

• Uncertainty When no Prior Experience Exists EV
  Risk Consequence Cannot be Computed
• Best Strategy under Uncertainty
• Identify Alternative Routes
• Routes are Called States of Nature
• Consider all Strategies and Assign the Likely
  Outcome for Each State of Nature
• The Likely Outcomes are Represented in a Payoff
  Table

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Payoff Table for Three Strategies and Three
States of Nature
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Uncertainty and Payoff (Continued)

• Regret Any Choice of Strategy other than the
  Best One
• Minmax Regret A Strategy which minimizes the
  regret of not having made the best(max) choice
• Regret for a Given State of Nature is the
  difference in the outcomes between the Best
  Strategy and any other Strategy (Regret Table)

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Regret Table for Three Strategies and Three
States of Nature
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Uncertainty and Payoff (Continued)

• Another Approach to Strategy Selection
• Assume Every State of Nature has the Same
  Likelihood using the Maximum Expected Payoff
  Criteria
• Outcome is Calculated from the Expected Payoff
  for Each Strategy as the Sum from Each State of
  Nature Value Times the Constant Likelihood Value
• The Maximum Value (by Strategy) is the Best
• NB Three of the Four Selection Criteria Yield C
• Irresistible

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Simulations

• This Top was Covered in Chapter 8
• More in the Tutorial _at_RISK

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Next Topic

• Chapter 11 Project Control
• It will Require Two Lectures
• Read Chapter 11
• Work Review Questions and Problems in Chapter 10
  (This is not a HW assignment) 3, 4,9,13,15, 20,
  22, 23, 28