Chapter 7

Managing Risk

McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All Rights Reserved.
7-2
 Risk Management Process
 Risk
 An uncertain event that, if it occurs, has a positive
or negative effect on project objectives
 Risk Management
A proactive attempt to recognize and manage
internal events and external threats that affect the
likelihood of a project’s success
o What can go wrong (risk event)
o How to minimize the risk event’s impact (consequences)
o What can be done before an event occurs (anticipation)
o What to do when an event occurs (contingency plans)

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The Risk Event Graph

FIGURE 7.1

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 Risk Management’s Benefits
A proactive rather than reactive approach
 Reducessurprises and negative
consequences
 Prepares
the project manager to take
advantage of appropriate risks
 Provides better control over the future
 Improveschances of reaching project
performance objectives within budget and on
time
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 The Risk
Management
Process

FIGURE 7.2

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 Managing Risk
 Step 1: Risk Identification
 Generate a list of possible risks through
brainstorming, problem identification and risk profiling.
o Macro risks first, then specific events
 Step 2: Risk Assessment
 Scenario analysis
 Risk assessment matrix
 Failure Mode and Effects Analysis (FMEA)
 Probability analysis
o Decision trees, NPV, and PERT
 Semiquantitative scenario analysis
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 Partial Risk Profile for
Product Development Project

FIGURE 7.3

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Risk Breakdown Structure

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Risk Assessment Form

FIGURE 7.4

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Impact Scales

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Risk Severity Matrix

FIGURE 7.5

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 Managing Risk (cont’d)
 Step 3: Risk Response Development
 Mitigating Risk
o Reducing the likelihood an adverse event will occur
o Reducing impact of adverse event
 Transferring Risk
o Paying a premium to pass the risk to another party
 Avoiding Risk
o Changing the project plan to eliminate the risk or condition
 Sharing Risk
o Allocating risk to different parties
 Retaining Risk
o Making a conscious decision to accept the risk
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 Contingency Planning
 Contingency Plan
 An alternative plan that will be used if a possible
foreseen risk event actually occurs
A plan of actions that will reduce or mitigate the
negative impact (consequences) of a risk event
 Risks of Not Having a Contingency Plan
 Having no plan may slow managerial response
 Decisions made under pressure can be
potentially dangerous and costly

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Risk Response Matrix

FIGURE 7.7

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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

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 Risk and Contingency Planning
(cont’d)
 Costs Risks
 Time/cost dependency links: costs increase when
problems take longer to solve than expected.
 Decidingto use the schedule to solve cash flow
problems should be avoided.
 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.

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Contingency Funding and Time Buffers
 Contingency Funds
 Fundsto cover project risks—identified and
unknown
o Size of funds reflects overall risk of a project
 Budget reserves
o Are linked to the identified risks of specific work packages
 Management reserves
o 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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Contingency Fund Estimate (000s)

TABLE 7.1

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 Managing Risk (cont’d)
 Step 4: Risk Response Control
 Risk control
o Execution of the risk response strategy
o Monitoring of triggering events
o Initiating contingency plans
o Watching for new risks
 Establishing a Change Management System
o Monitoring, tracking, and reporting risk
o Fostering an open organization environment
o Repeating risk identification/assessment exercises
o Assigning and documenting responsibility for managing risk

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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 schedule
and budget.
 Review, evaluate, and approve or disapprove of changes
formally.
 Negotiate and resolve conflicts of change, condition, 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 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.
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Change
Request
Form

FIGURE 7.9

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Change
Request
Log

FIGURE 7.10

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 Key Terms
Avoiding risk
Budget reserve
Change management system
Contingency plan
Management reserve
Mitigating risk
Risk
Risk profile
Risk Breakdown Structure
Risk severity matrix
Scenario analysis
Sharing risk
Time Buffer
Transferring risk

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 Chapter 7 Appendix

PERT and
PERT
Simulation

McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All Rights Reserved.
 PERT—Program 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

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 Activity Time Calculations
The weighted average activity time is computed by
the following formula:

(7.1)

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Activity Time Calculations (cont’d)
The variability in the activity time estimates is
approximated by the following equations:
The standard deviation for the activity:

(7.2)

The standard deviation for the project:

(7.3)

Note the standard deviation of the activity is squared in this equation; this
is also called variance. This sum includes only activities on the critical
path(s) or path being reviewed.

7-32
Activity Times and Variances

TABLE A7.1

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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 the
probability of completing the project in the time specified.

(7.4)

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Hypothetical Network

FIGURE A7.2

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Hypothetical Network (cont’d)

FIGURE A7.2 (cont’d)

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Possible Project Duration

FIGURE A7.3

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Z Values

TABLE A7.3

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