BUS 5003

Project Management

Session 5b
Professor: Kevin Yam ([email protected])
 Chapter Seven
Managing Risk

© 2021 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 7–2
 Where We Are Now

© 2021 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 7–3
 Learning Objectives
1. Describe the risk management process
2. Understand how to identify project risks
3. Assess the significance of different project risks
4. Describe the four different responses to managing risks
5. Understand the role contingency plans play in risk management
process
6. Understand opportunity management and describe the four
different approaches to responding to opportunities in a project
7. Understand how contingency funds and time buffers are used to
manage risks on a project
8. Recognize the need for risk management being an ongoing
activity
9. Describe the change control process

© 2021 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 7–4
 Chapter Outline

7.1 Risk Management Process

7.2 Step 1: Risk Identification
7.3 Step 2: Risk Assessment
7.4 Step 3: Risk Response Development
7.5 Contingency Planning
7.6 Opportunity Management
7.7 Contingency Funding and Time Buffers
7.8 Step 4: Risk Response Control
7.9 Change Control Management

© 2021 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 7–5
 Risk Management Process
• Risk Definition
– An uncertain event or condition that if it occurs, has a positive or
negative effect on project objectives.
– No amount of planning can overcome or control risk.
• Risk Management
– An attempt to recognize and manage potential and unforeseen
trouble spots that may occur when the project is implemented
• What can go wrong (risk event)
• How to minimize the risk event’s impact (consequences)
• What can be done before an event occurs (anticipation)
• What to do when an event occurs (contingency plans)

© 2021 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 7–6
 The Risk Event Graph

FIGURE 7.1
© 2021 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 7–7
 Risk Management’s Benefits

• A proactive rather than reactive approach

• Reduces surprises and negative consequences
• 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

© 2021 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 7–8
 The Risk
Management
Process

FIGURE 7.2
© 2021 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 7–9
 Managing Risk

• Step 1: Risk Identification

– Generate a list of all the possible risks that could affect the
project through brainstorming and other problem identifying
techniques.
– Focus on the events that could produce consequences, not on
project objectives.
– Use risk breakdown structure (RBS) in conjunction with work
breakdown structure (WBS) to identify and analyze risks.
– Identify the macro risks first then specific areas can be checked.
– Use risk profile (a list of questions) to address traditional areas
of uncertainty on a project.

© 2021 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 7–10
The Risk Breakdown Structure (RBS)

FIGURE 7.3
© 2021 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 7–11
Partial Risk Profile for Product Development Project

FIGURE 7.4
© 2021 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 7–12
 Managing Risk

• Step 2: Risk Assessment

– Scenario analysis assesses the significance of each risk event
in terms of probability and impact.
– Risk assessment form evaluates the severity, probability of
risk events and its detection difficulty.
– Risk severity matrix prioritizes which risks to address.
– Failure Mode and Effects Analysis (FMEA) extends the risk
severity matrix by including ease of detection in the equation:
Risk Value = Impact x Probability x Detection
– Probability analysis uses statistical techniques in assessing
project risk.
– Decision trees, net present value (NPV), program evaluation
and review technique (PERT), PERT simulation

© 2021 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 7–13
Defined Conditions for Impact Scales of a Risk on Major
Project Objectives (Examples for negative impacts only)

FIGURE 7.5
© 2021 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 7–14
 Risk Assessment Form

FIGURE 7.6
© 2021 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 7–15
 Risk Severity Matrix

Failure Mode and Effects Analysis (FMEA)

Impact × Probability × Detection = Risk Value

User Interface
4 Backlash problems
Likelihood

Red zone (major risk)

3 Yellow zone (moderate risk)
Green zone (minor risk)

System
2
freezing

Hardware
1 malfunc-
tioning

1 2 3 4 5 FIGURE 7.7
Impact
© 2021 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 7–16
 Managing Risk (cont’d)

• Step 3: Risk Response Development (MATER)

– Mitigating Risk
• Reducing the likelihood an adverse event will occur
• Reducing the impact of an adverse event
– Avoiding Risk
• Changing the project plan to eliminate the risk or condition
– Transferring Risk
• Paying a premium to pass the risk to another party
• Requiring Build-Own-Operate-Transfer (BOOT) provisions
– Escalating Risk
• Notifying the appropriate people within the organization of the
threat
– Retaining Risk
• Making a conscious decision to accept the risk of an event occurring

© 2021 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 7–17
 Contingency Planning
• Contingency Plan Defined
– Is an alternative plan that will be used if a possible foreseen risk event
becomes a reality.
– Is a plan of action that will reduce or mitigate the negative impact of the
risk event.
– Is not a part of the initial implementation plan and only goes into effect
after the risk is recognized.
• Risks of the absence of a contingency plan
– Cause a manager to delay or postpone the decision to implement a
remedy
– Lead to panic and acceptance of the first remedy suggested
– Make the decision making under pressure which can be dangerous and
costly

© 2021 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 7–18
 Risk Response Matrix

FIGURE 7.8
© 2021 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 7–19
 Risk and Contingency Planning

• Technical Risks
– Backup strategies if chosen technology fails
– Assessing whether technical uncertainties can be
resolved
• 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

© 2021 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 7–20
 Risk and Contingency Planning (cont’d)

• Cost Risks
– Time/cost dependency links: costs increase when
problems take longer to solve than expected.
– Price protection risks (a rise in input costs) increase if
the duration of a project is increased.
• Funding Risks
– Changes in the supply of funds for the project can
dramatically affect the likelihood of implementation or
successful completion of a project.

© 2021 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 7–21
 Opportunity Management (ESEEA)
• Exploit
– Seeking to eliminate the uncertainty associated with an opportunity to
ensure that it definitely happens
• Share
– Allocating some or all of the ownership of an opportunity to another
party who is best able to capture the opportunity for the benefit of the
project
• Enhance
– Taking action to increase the probability and/or the positive impact of an
opportunity
• Escalate
– Notify the appropriate people within the organization of the opportunity
• Accept
– Be willing to take advantage of the opportunity if it occurs, but not taking
action to pursue it

© 2021 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 7–22
 Contingency Funding and Time Buffers
• Contingency Funds
– Are funds to cover project risks—identified and unknown
– For control purposes, contingency funds are divided into
• Contingency reserves—cover identified risks and allocated to
specific segments or deliverables of the project
• Management reserves—cover unidentified risks and are allocated to
risks associated with the total project
• Time Buffers
– Are amounts of time used to cushion against potential delays in
the project
• Add to activities with severe risks
• Add to merge activities that are prone to delays
• Add to noncritical activities to reduce the likelihood that they will
create another critical path
• Add to activities that require scare resources

© 2021 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 7–23
 Contingency Fund Estimate

TABLE 7.1
© 2021 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 7–24
 Managing Risk (cont’d)

• Step 4: Risk Response Control

– Risk Register
• Details all identified risks, including descriptions, category, probability of
occurring, impact, responses, contingency plans, owners, and current status
– 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

© 2021 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 7–25
 Change Control Management

• Sources of Change
– Project scope changes
– Implementation of contingency plans
– Improvement changes

© 2021 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 7–26
 Change Management Systems

1. Identify proposed changes

2. List expected effects of proposed changes on
schedule and budget
3. Review, evaluate, and approve or disapprove of
changes formally
4. Negotiate and resolve conflicts of change, condition,
and cost
5. Communicate changes to parties affected
6. Assign responsibility for implementing change
7. Adjust master schedule and budget
8. Track all changes that are to be implemented

© 2021 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 7–27
 The Change
Control Process

FIGURE 7.9
© 2021 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 7–28
 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 management
reserve 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.

© 2021 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 7–29
 Sample Change
Request

FIGURE 7.10
© 2021 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 7–30
 Change
Request Log

FIGURE 7.11
© 2021 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 7–31
 Key Terms

Avoiding risk Risk

Budget reserve Risk breakdown structure (RBS)
Change management system Risk profile
Contingency plan Risk register
Escalating risk Risk severity matrix
Management reserve Scenario analysis
Mitigating risk Time buffer
Opportunity Transferring risk
Retaining risk

© 2021 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 7–32