Engineering Project Economy -

Lecture 8 – Planning for Risk Dr. Khaldoon Shehab

Management
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 Risk Management
Risk in project management, unlike the common definition of the word, can be both
negative (threats) and positive (opportunities). The objective of Project Risk
Management is to decrease the likelihood and impact of negative events, while
increasing the likelihood and impact of positive ones
 The Process of Planning for Risk

Perform Perform
Identify Plan Risk
Qualitative Quantitative
Risks Risk Analysis Responses
Risk Analysis
1. Identify Risks
Identify Risks is the process of
determining individual risks as well as
sources of overall project risk, and
documenting their characteristics .
All project personnel should be
encouraged to identify potential risks
 Information gathering techniques
Brainstorming Delphi Technique*

A method designed to reach consensus, the

With the goal of obtaining a Delphi technique requires experts to
comprehensive list of risks, brainstorming answer a distributed questionnaire
may either be conducted free-form or anonymously. Summarized responses are
using a mass interviewing technique such re-circulated to obtain consensus. The
as the Nominal Group Technique Delphi technique reduces bias and undue
influence

* Was in earlier PMBOKs

Interviews and Checklists are also information gathering techniques

Data Analysis – Root Cause Analysis
An Ishikawa, Fishbone or Cause and Effect diagram
 Outputs Identify Risks
Risk Register - a document where results of risk analysis and risk response planning
are recorded:
✓List of identified risks
• “EVENT” may occur causing “IMPACT”
• If “CAUSE” exists, “EVENT” may occur leading to “EFFECT”
✓Potential risk owners
✓List of potential responses
Example Project Risk Register

Risk ID Cause Risk Impact If It Occurs

Bureaucracy in the Owner’s organization have usually

Delay in placing orders, delay in project supplies,
resulted in long approval processes as well as they feel Owner’s delaying the
1 and slippage in the project schedule and may be
that the personnel involved in the approval process are approval of suppliers
incurring liquidated damages for the delay
incompetent

Delay in testing and commissioning of HVAC

2 Absence of electricity transformer electricity power is not stable equipments and other equipments which will
delay project completion date

Bureaucracy in Archaeologists Heritage Authority (AHA)

have usually resulted in long approval processes as well as Delayed approvals in issuing Delay in construction start date which will result
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they feel that the personnel involved in the approval site permits in delaying project completion
process are incompetent
A Risk Breakdown Structure (RBS)
is a list of risks by category and
Subcategory such as:
• Project Management Risk
• Technical Risk
• External Risk
• Internal Risk
• Organizational Risk
Etc.
2. Perform Qualitative Risk Analysis
Perform Qualitative Risk Analysis is the process of
prioritizing individual project risks for further analysis
or action by assessing their probability of occurrence
and impact as well as other characteristics

This allows the team to focus on the high-priority risks

Data Representation - Probability and Impact Matrix
High

MUST mitigate
P
r
o
b Write
a Contingency
b Plan
i
l
i
t
y
Identified
No contingent plan

Low Impact High

Probability-Impact Matrix

Propability - Impact (P-I) Matrix

5 -5 -10 -15 -20 -25 25 20 15 10 5 5
LIKELIHOOD

LIKELIHOOD
4 -4 -8 -12 -16 -20 20 16 12 8 4 4

3 -3 -6 -9 -12 -15 15 12 9 6 3 3

2 -2 -4 -6 -8 -10 10 8 6 4 2 2

1 -1 -2 -3 -4 -5 5 4 3 2 1 1

-1 -2 -3 -4 -5 5 4 3 2 1

THREATS OPPORTUNITIES
(NEGATIVE IMPACT) (POSITIVE IMPACT)

RISK IMPACTS (CONSEQUENCES)

Data Representation -Probability and Impact Matrix
Probability Threats Opportunities

0.90 0.01 0.18 0.36 0.36 0.18 0.01

0.70 0.07 0.14 0.28 0.28 0.14 0.07

0.50 0.05 0.1 0.20 0.20 0.1 0.05

0.30 0.03 0.06 0.12 0.12 0.06 0.03

0.10 0.01 0.02 0.04 0.04 0.02 0.01

0.1 0.2 0.4 0.4 0.2 0.1

Impact (ratio scale) on an objective

Risk Register
Risk Risk Description Likelihood Impact Risk Exposure
ID Cause Risk Impact
1 Bureaucracy in Owner’s Delay in placing 3 4 12
the Owner’s delaying orders, delay in
organization the project supplies, and
have usually approval of slippage in the
resulted in long suppliers project schedule and
approval may be incurring
processes as liquidated damages
well as they feel for the delay
that the
personnel
involved in the
approval process
are incompetent
Risk Register
Risk ID Risk Description Likelihood Impact Risk
Cause Risk Impact Exposure
1 Absence of electricity transformer electricity power Delay in testing 2 4 8
is not stable and
commissioning of
HVAC equipments
and other
equipments which
will delay project
completion date
2 Bureaucracy in Archaeologists Delayed approvals Delay in 3 4 12
Heritage Authority (AHA) have in issuing site construction start
usually resulted in long approval permits date which will
processes as well as they feel that result in delaying
the personnel involved in the project
approval process are incompetent completion
3 Absence of sewerage network Waste water The Hotel cannot 4 5 20
cannot be become
disposed operational
Outputs of Perform Qualitative Risk Analysis
• Risk register Updates
 3- Perform Quantitative Risk Analysis
Perform Quantitative Risk Analysis is the process of
numerically analyzing the combined effect of identified
individual risks and other sources of uncertainty on
overall project objectives. Perform quantitative
analysis is used on risks that have been prioritized by
qualitative analysis as substantially impacting project
objectives

During this step, project managers can calculate the

following:
1. Expected Monetary Value for each risk
2. Contingency Reserve for the project
Expected Monetary Value (EMV) and Contingency Reserve

Expected Monetary Value (EMV) = Probability * Impact

Contingency Reserve = ƩEVM

Example 1: The following are four risks with probabilities and impact for a small construction
project. Determine the EMV for each risk and the project contingency reserve:
Solution

Contingency Reserve
 Decision tree analysis
A Decision Tree : is a common use of EMV analysis

Example 2: determine the best decision to take for the following decision tree assumptions. Assume 5 years of
return on investment

0.6
Increased shopper traffic
(+$100,000)/month
Flagship store in new mall
Chance Node
(-$1,000,000)
Stronger competition
(-$50,000) )/month
0.4
New store or renovation? Decision Node
0.8 Initial business surge
(+$50,000) )/month
Renovate existing store Chance Node
(-$250,000)
Dwindling shopper traffic
(-$100,000) )/month
0.2
Solution
Assumed 5 years of return on investment
0.6
Increased shopper traffic 100000*5*12 – 1000000
(+$100,000)/month = + 5,000,000
Flagship store in new mall
Chance Node
(-$1,000,000)
Stronger competition
-50000*5*12 – 1000000
EMV of Node 1= 0.6* 5m + (-4m*0.4) (-$50,000) )/month = - 4,000,000
= + 1,400,000 0.4
New store or renovation? Decision Node
0.8 Initial business surge 50000*5*12 – 250000
EMV of Decision Node =
(+$50,000) )/month = + 2,750,000
+ 1,400,000
Renovate existing store
Chance Node
(-$250,000)
Dwindling shopper traffic -100000*5*12 – 250000
EMV of Node 2= 0.8* 2.75m + (-6.25m*0.2) = - 6,250,000
(-$100,000) )/month
= + 950,000 0.2
Example 3: You are planning modifications to a product line. Below is a complete assessment
of risks on the project:

• 30% probability that parts will be delayed, costing $50,000

• 20% chance that parts will be $10,000 less expensive
• 25% chance that parts will have an interference fit, resulting in a rework cost of $3,500
• 30% chance that production will be simpler, saving $2,500
• 5% probability that design faults will cause $10,000 in rework

• Determine:
• EMV for each risk
• Project Contingency reserve
Solution
 Example 4: A construction project will have an Base cost of $1,250,000. There is a 10 percent
chance that the costs will increase by 10 percent. There is a 20 percent chance that the building
foundation will win the “Foundation of the Year” award and its $50,000 prize. There is a 5
percent chance that an accident will add $125,000 to the cost.
Calculate the following:
a. calculate the contingency reserve
b. What is the expected value of the project?
c. What is the best case scenario and its value?
d. What is the worst case scenario and its value?
Solution
Base cost = - $1,250,000

Risk Probability Impact EMV

the costs will increase 10% =10%*1250000 = - $12,500

$125,000
Wining the “Foundation of the Year” award 20% $50,000 + $10,000

Accident will happen 5% $125,000 - $6,250

a. Contingency Reserve -$8,750

b. expected value of the project = - 1250000 - 8750 = - $1,258,750

(i.e. Base cost + contingency Reserve)

c) best case scenario and its value = - 1250000+10000 = -$1,240,000

(i.e. Only good things happen)

d) best worst case scenario and its value = -1250000-12500-6250 = -$1,268,750

(i.e. Only bad things happen)
 Outputs Perform Quantitative Risk Analysis
The primary document updated in the process is the Risk Report, which will
include:
• Assessment of overall project risk exposure
• Detailed probabilistic analysis of the project
• Prioritized list of individual project risks
• Recommended risk responses
4. Plan Risk Responses
Plan Risk Responses is the process of developing
options, selecting strategies, and agreeing on
actions to address overall project risk exposure, as
well as to treat individual project risks
 Risk strategies

Avoid – eliminate the task or the threat, or isolate the project objectives from the threat

Transfer – contract the task to professionals, offer incentives, or buy insurance

Negative
risks
Mitigate – reduce either the likelihood or the impact of the threat, or both

Accept – proceed anyway in spite of the risk, maybe with a fallback contingency reserve

Exploit – modify the project to ensure the opportunity is realized

Share – work with a third party who is best placed to tip the odds in favor Positive
risks
Enhance – increase the likelihood or impact of the opportunity, or both

Accept – make the most of an opportunity if it comes along, but not proactively
Thank you for you Attention