opma 5364 project management part 7 project risk management

OPMA 5364Project Management

Part 7

Project Risk Management

Copyright 2004, Dr. Greg Frazier Part 7 - Project Risk Mgmt. 2

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


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


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


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


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


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


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


Risk Assessment Matrix

Risk Likelihood SeverityDetection Difficulty When

System Crash

Low High High Startup

Software Glitches

High Low MediumPost-

Startup

Users Dissatisfied

Medium Medium LowPost-

Startup

Hardware Malfunction

Low Medium Medium Startup


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


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.)


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


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


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


Expected Values

A construction manager is trying to decide what size crew to schedule for tomorrow based on weather:

WeatherProbability: 10% 20% 30% 40% ExpectedAlternative Nice Cold Rain Snow ValueLarge crew $860 $710 $160 $-350 $136Med. crew 520 430 190 -120 $147Small crew 280 240 170 130 $179sample calculation:Large .10(860)+.20(710)+.30(160)+.40(-350) = 136


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?


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


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


PERT ExampleTask 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)/6]2


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


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.


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.


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


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.

opma 5364 project management part 7 project risk management

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