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INTRODUCTION
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BASIC DEFINITIONS
Risk
Uncertain or chance events that planning can not
overcome or control. Risk Management
A proactive attempt to recognize and manage internal
events and external threats that affect the likelihood ofa projects success.
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RISK MANAGEMENT QUESTIONS
What can go wrong (risk event).
How to minimize the risk events impact(consequences).
What can be done before an event occurs(anticipation).
What to do when an event occurs(contingency plans).
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Risk Managements Benefits
A proactive rather than reactive approach.
Reduces surprises and negativeconsequences.
Prepares the project manager to take
advantage of appropriate risks.
Provides better control over the future.
Improves chances of reaching project
performance objectives within budget and on
time.
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RISK MANAGEMENT PROCESS
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The Risk
Management
Process
FIGURE 7.2
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RISK MANAGEMENT PROCESS
Step 1: Risk Identification
Generate a list of possible risks throughbrainstorming, problem identification and risk
profiling.
Macro risks first, then specific events
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i. Scenario Analysis
Done by assigning probability and impact
measure to represent risk event.
Proposed probability value=01.1/ 0.2, 0.3..Proposed impact measure=0,1, 2, 3
These values need to be established upfront as
to what they represent for each category ofevents
eg. for cost (1=insifnificant cost increase, 2=10%
increase, 3=10-20% increase, 4=20-40% increase,
5=>40% increase)
Cost scenario=probabilityXimpactCopyright 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 711
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ii. Risk Assessment Matrix
FIGURE 7.4
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Risk Severity Matrix
FIGURE 7.5
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iv. Probability Analysis
Decision tree analysis
Split decision into project/work alternatives
For all alternatives, assign values and mutuallyexclusive probability of occurrences
Continue splitting work into sub-works and assign
values and mutually exclusive probability ofoccurrences
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v. Semi quantitative scenario analysis
Similar to scenario analysis but using
quantitative as well as qualitative values
Probability = 0.1, 0.2, 0.3Impact value = low, moderate high
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RISK MANAGEMENT PROCESS
Step 3: Risk Response Development
Mitigating Risk
Reducing the likelihood an adverse event will occur. Reducing impact of adverse event.
Transferring Risk
Paying a premium to pass the risk to another party.Avoiding Risk
Changing the project plan to eliminate the risk or condition.
Sharing Risk Allocating risk to different parties
Retaining Risk
Making a conscious decision to accept the risk.
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RISK MANAGEMENT PROCESS
Step 4: Risk Response Control
Risk control
Execution of the risk response strategy
Monitoring of triggering events
Initiating contingency plans
Watching for new risks
Establishing a Change Management System
Monitoring, tracking, and reporting risk
Fostering an open organization environment
Repeating risk identification/assessment exercises
Assigning and documenting responsibility for managing risk
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CONTINGENCY PLANNING
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Basic Definitions
Contingency Plan
An alternative plan that will be used if apossible foreseen risk event actually occurs.
that will reduce or mitigate the negativeimpact (consequences) of a risk event.
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Why Contingency Planning Required?
Having no plan may slow managerial
response.Decisions made under pressure can be
potentially dangerous and costly.
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Contingency Planning for Different Risk
Types
Technical Risks
Backup strategies if chosen technology fails.
Assessing whether technical uncertainties can beresolved.
Schedule Risks
Use of slack increases the risk of a late project finish.
Imposed duration dates (absolute project finish date)Compression of project schedules due to a shortened
project duration date.
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Contingency Planning for Different Risk Types
Costs Risks
Time/cost dependency links: costs increase when
problems take longer to solve than expected.rise in input costs (increase if the duration of a project
is increased).
Funding RisksChanges in the supply of funds for the project can
dramatically affect the likelihood of implementation or
successful completion of a project.
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Contingency Funding and Time Buffers
Contingency Funds
i.e Funds to cover project risksidentified and
unknown. Size of funds reflects overall risk of a project
Form1: Budget reserves
Are linked to the identified risks of specific work packages.Form2: Management reserves
Are large funds to be used to cover major unforeseen risks(e.g., change in project scope) of the total project.
Time Buffers
Amounts of time used to compensate for unplanned
delays in the project schedule.
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Change Management Control
Sources of Change
Project scope changes
Implementation of contingency plans
Improvement changes
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Change Management Control
The Change Control Process
Identify proposed changes.
List expected effects of proposed changes on scheduleand budget.
Review, evaluate, and approve or disapprove of changes
formally.
Negotiate and resolve conflicts of change, condit ion, and
cost.
Communicate changes to parties affected.
Assign responsibility for implementing change.
Adjust master schedule and budget.
Track all changes that are to be implemented
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The Change Control
Process
FIGURE 7.8
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Benefits of a Change Control System
1. Inconsequential changes are discouraged by the
formal process.
2. Costs of changes are maintained in a log.
3. Integrity of the WBS and performance measures is
maintained.
4. Allocation and use of budget and managementreserve funds are tracked.
5. Responsibility for implementation is clarified.
6. Effect of changes is visible to all parties involved.7. Implementation of change is monitored.
8. Scope changes will be quickly reflected in baseline
and performance measures.
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PowerPoint Presentation by Charlie CookCopyright 2006 The McGraw-Hill Companies. All rights reserved.
THE MANAGERIAL PROCESS Clifford F. Gray
Eric W. LarsonThird Edition
Chapter 7 Appendix
PERT and PERT Simulation
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PERTPROGRAM EVALUATION REVIEW
TECHNIQUE
Assumes each activity duration has a range
that statistically follows a beta distribution. PERT uses three time estimates for each
activity: optimistic, pessimistic, and a weighted
average to represent activity durations.Knowing the weighted average and variances for each
activity allows the project planner to compute the
probability of meeting different project durations.
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Activity and Project Frequency Distributions
FIGURE A7.1
Tendency for work to
stay late when delayed
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Activity Time Calculations
The weighted average activity t ime is computed by
the following formula:
(7.1)
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Activity Time Calculations (contd)
The variability in the activity t ime estimates is
approximated by the following equations:
The standard deviation for the activity:
The standard deviation for the project:
Note the standard deviation of the activity is squared in this equation;
this is also called variance. This sum includes only activities on the
cri tical path(s) or path being reviewed.
(7.2)
(7.3)
Take note of the
typographical error
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Activity Times and Variances
TABLE A7.1
Sum of sigma te squared = 44
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Probability of Completing the Project
The equation below is used to compute the Z value
found in statistical tables (Z = number of standard
deviations from the mean), which, in turn, tells theprobability of completing the project in the time specified.
(7.4)
Take note of the
typographical error
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THE Z TABLE
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EXAMPLE
A hypothetical project, where:
- the network is as given below
- and we need to estimate the probability that itcan finish earlier than the schedule 67 (TS)days
delivery period.
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CALCULATING THE SHORTEST POSSIBLE
TIME THE CRITICAL PATH
FIGURE A7.2
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CALCULATING THE SHORTEST POSSIBLE
TIME THE CRITICAL PATH (contd)
FIGURE A7.2 (contd)FIGURE A7.2
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Activity Times and Variances
TABLE A7.1
Sum of sigma te squared = 44
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CALCULATION OF PROBABILITY
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Z = 67 64/(root of 44)
Z = 3/6.63Z = 0.452
Limiting values:When Ts=64, Z=0.00, P=50%
When Ts=infinity, Z=4, P=100%
When Ts= negative infinity, Z=-4, P=0%
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Possible Project Duration
FIGURE A7.3
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Z Values
TABLE A7.3
Z = 67 64/(root of 44)
Z = 3/6.63
Z = 0.452
Therefore probability of completing the project on the 67
th
days =67.36%. P(not completed on 67th days)=32.64%