Project Management 4

Module 5: Project risk management

Module 5: Project risk management

• After completing this module, you will be able to:– contribute to the assessment of the impact and

likelihood of identified risks

– contribute to the development of risk management statements and plans

–monitor and control the project risks

1. CONTRIBUTE TO THE ASSESSMENT OF THE IMPACT AND LIKELIHOOD OF IDENTIFIED RISKSAfter completing this outcome, you will be able to:• explain a range of the risk elements of a project

• assess and describe likelihood of risk causes of the project in consultation with appropriate stakeholders

• discuss and describe impact of risk effects on the project

1.1 Explain a range of risk elements of a project

• The goal of the risk and constraint analysis is to establish the feasibility of the project within the economy, politics, laws and organisational structure that limit your business

• Project risk is management is: “the systematic processes of identifying, analysing and responding to project risk” (PMBOK)

• Risk is: “factors that may cause a failure to meet the project’s objectives” (APMBOK)

Activity 1 – Project risks

• Individually or in a group, brainstorm a list of all the possible risks elements that may influence the outcome of a project

Goals of project risk management

• Identify factors, or risks, that can negatively impact a project

• Quantify each possible risk• Assess each risk and predict the possible

impact on the project• Accept or reject risks based on stakeholders

level or risk tolerance• Maximise positive outcomes and minimise

negative outcomes by closely monitoring all accept risks

Components of risk management

• Risk identification

• Risk assessment

• Risk response

• Risk control

Understanding project risk

• Risks are generally associated with uncertain outcomes or a lack of knowledge of future events 

• Risks are measured according to the probability of their occurrence and the consequences of not achieving project goals 

• Compare actual project and product results to the project’s quality standards

Common sources of risk• The project deliverables or objectives are not clearly defined• Technical data is missing• Several alternatives are possible at any given time during the

project• Performance standards are unrealistic• Project objectives change• Errors occur during the design phase and are not recognised• No contingency plans are developed• Cost estimates are not developed effectively• The schedule is vague or unrealistic• Staff members lack the skills to complete the project successfully

and in time

Common sources of risk

• Once a project team identifies possible sources of risk for their project, they should:– Estimate the probability that a risk will result

from each source

– Estimate how frequently a risk will result from each source

– Describe possible consequences of that risk

– Identify the time at which the risk could occur

Risk identification

• Risk identification involves recognising and classifying all of the areas of potential risk related to a project

• Risk is part of project planning

• Risk identification is ongoing and should be performed through the project’s life cycle

Classifying project risks

• Once risks have been identified, it is important to classify them. There are various ways to classify project risks:– According to the type of risk being faced

– According to whether they are internal or external

– Based on their source

Tools for identifying risk

• Brainstorming

• Sensitivity analysis

• Work breakdown structure

• Network diagrams

• Historical information

• Interviews with stakeholders

Types of risks

• Known risks

• Predictable risks

• Unpredictable risks

• Insurable risks

The risk continuum

Scope of risk management

Unknown-unknown Known-unknown Known

No information Partial information Complete information

Enter new market Feasibility study identifies unknown issues

Close-out reportProject successfully completed

Activity 2 – Classification of project risks

• Divide into groups and complete the risk classification, with the help of realistic examples of each risk for each of the three projects as mentioned.

• Facilitators should help learners with background knowledge about the project if learners are not familiar with the project.

• The fourth project should be a project from your immediate environment or area that they are busy with – write down examples of risk elements that may influence it.

1.2 Discuss and describe the impact of risk effect on the project

• Risk areas– Funding / budget

– Time

– Staffing

– Customer relations

– Project size

– Overall structure

– External factors

1.2 Discuss and describe the impact of risk effect on the project

• Business risks–Market acceptance

– Time-to-market

– Incompatible product fit

– Difficult to sell

– Loss of political support

2. CONTRIBUTE TO THE DEVELOPMENT OF RISK MANAGEMENT STATEMENTS AND PLANS

After completing this outcome, you will be able to:• discuss and describe development of risk statements

and plans

• discuss the communication process for risk threat prevention, recovery activities and opportunity

2.1 Discuss and describe the development of risk management

statements and plans

Risk management plan and control

Risk management plan and control

Document risk management plan

Document risk management plan

Define objectives

Define objectives Identify riskIdentify risk Quantify riskQuantify risk Develop

responseDevelop response

Activity 3

• Pay a visit to a nearby business (any type) or have a conversation either with somebody in business or with your parents (if they’ve got their own business), or anyone with previous project experience.

• Refer to any of the risk areas and find out if they experience it, how they deal with it and what they do to counter or overcome the risk?

• Indicate how government decisions, changes or legislation (over the last couple of years) influences the outcome of a project. Write down the influence and how it influences the project.

Taking risks stage by stage

• Risks during the project/idea initiation phase:– Unavailable subject matter experts

– Poor definition of problem or project

– No feasibility study

– No or unclear objectives

– No buy-in from the organisation or other “to be stakeholders”

Taking risks stage by stage

• Risks during the project planning phase:– No risk management plan

– Spotty planning

– Underdeveloped requirements and specifications

– Unclear statement of work

– No management or stakeholder support

– Poor role definition

– Inexperienced team

– Definite lack of skills

Taking risks stage by stage

• Risks during the project execution/construction phase:– Changes in scope– Changes in schedule– No control systems in place– Unskilled labour– Material availability or poor quality material– Unreliable suppliers– Unexpected price increase (not budget for it)– Strikes– Weather– Regulatory requirements

Taking risks stage by stage

• Risks during the project close-out / termination phase:– Unacceptable to customer

– Poor quality product/project

– Budget problems

– Penalties to be paid for exceeding the time parameter of the project

The basics of risk management

• Identify the risk• Analyse the probability the risk will occur and the

potential impact of the risk• Determine the overall severity of the risk• Determine which risks are the most important for

further action• Document a response plan for the risk– Accept the risk– Avoid the risk– Monitor the risk– Transfer the risk

The basics of risk management

• Identify the risk• Analyse the probability the risk will occur and the

potential impact of the risk• Determine the overall severity of the risk• Determine which risks are the most important for

further action• Document a response plan for the risk– Accept the risk– Avoid the risk– Monitor the risk– Transfer the risk

Project standards for risk management

• Risk management plan

• Procurement

• Contingency reserves

• Alternative strategies

• Insurance

Project reserves

• Management reserves– Created for unpredictable risks

• Contingency reserves– Created for predictable risks

• Approaches used for developing contingency allowances:– Budgeting a standard allowance for contingencies and

applying it to all projects.– Identifying a percentage of additional cost or time needed,

based on past experience.– Pinpointing the most likely risks for a project, assessing the

probability that they will occur, identifying the possible consequences, and then allotting contingencies based on these results.

Constraints

• Constraints can be identified in advance

• Real world limits on the possibilities for your projects

Constraints

Constraints

• Budget constraints

• Schedule constraints

• People constraints

• Real world constraints

• Facilities and equipment restraints

2.2 Communication process for risk threat prevention, recovery activities

and opportunity• Questions the project team should ask when

determining if a risk is worthwhile:–Why should the risk be accepted?

–What are the potential benefits?

– Are the potential benefits worth the risk?

–What are the potential losses?

–What is the possibility of failure?

When a risk should be avoided

• When the risk outweighs the possible benefit• When there are no specific benefits to be

gained• When the odds are not in favour of a positive

outcome• When there are several possible alternatives• When there is not enough data to identify

possible outcomes• When the risk does not help achieve the

project goals

Managing project risks

• Outline the actual risks associated with the project so project stakeholders are aware of them

• Calculate the probability that the risk could occur

• Identify the severity of consequences if the risk does occur

Risk assessment

• Goals for risk assessment–Making sure risks are adequately considered in

a structured and systematic manner– Determining the impact of a risk on

achievement of the project’s goals– Establishing the effects that a risk will have on

all aspects of a project– Categorising risks that should be accepted and

risks that should be avoided– Identifying risks that require attention

Risk assessment process

• Calculate the probability of occurrence.

• Assess the possible consequences.

• Select the most important risks

Benefits of risk assessment

• Confidence that risks have been thoroughly examined and included in project plans, resulting in risk reduction

• Information about possible risks is available throughout the project, resulting in a better decision-making process

• Project objectives might be affected by certain risks, allowing the objectives to be improved upon

• Confidence that many of the project weaknesses have been identified in advance and are incorporated into the project plan

• Decrease the number of changes made to the project plan during project execution, resulting in higher chances of project success

3. MONITORING AND CONTROLLING THE PROJECT RISKAfter completing this outcome, you will be able to:• explain the monitoring and control systems linked to

the risk management statements and plans

• explain the need to communicate and document lessons learned in attending to risks

3.1 Explain the monitoring and control systems linked to the risk management

statements and plans• Risk control entails executing the risk

management plan in order to control the effects of project risks

• Risk control is a continuous process

• A workaround is an unplanned response or alternative solution

• The risk control function implements the risk management plan

Disaster recovery planning

• The management of the disaster recovery plan should be assigned to a manager with responsibility to set up a team to:– Develop the disaster recovery plan

– Control the disaster recovery

–When the time comes, implement the disaster recovery plan quickly and effectively

3.2 Explain the need to communicate and document lessons learned in

attending to risks• Lessons learned from project risks include the

following:– A risk management plan must be developed and

explain to all the role-players how risk will be managed

– The continual monitoring of the project to identify any new or increasing risks

– The continual monitoring of the effectiveness of the risk management plan

– Regular reports to the project sponsor and steering committee on the risk as well as the implementation of the risk management plan