Special Lecture L1

BITS Pilani Pilani Campus

Project Management MMZG 523

Risk Management

Sunil P R


Course Outline MMZG 523

BITS Pilani, Pilani Campus

Outline

• Course name: Project Management

• Course code: MMZG 523

• Number of modules: 7

• Number of lectures: SECOND SEMESTER 2014-2015

• Textbook: “Project Management The Managerial Process”

Clifford F. Grey, Erik W. Larson, Gautam V. Desai

• Pedagogy: Interactive

• Work integration: WILe exercises

• Evaluation components: Assignment / Quiz, Mid-sem (C/B), Compre (O/B)

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MODULE 4 : PROJECT RISK MANAGEMENT

SESSION 14: RISK MANAGEMENT & CONTROL


Learning Outcomes – Session 14

• PROJECT MANAGEMENT: PMI BEST PRACTICES

• WHAT IS RISK & RISK MANAGEMENT

• UNDERSTAND TYPES & SOURCES OF RISKS

• ANALYSIS OF PROJECT LIFE CYCLE & RISK EVENT GRAPH

• APPLICATION OF RISK MANAGEMENT PROCESS

– RISK IDENTIFICATION

– RISK ASSESSMENT

– RISK RESPONSE DEVELOPMENT

– RISK RESPONSE CONTROL

• REFLECTING ON PRACTICE

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What is a Project? • A Project is “a temporary endeavour undertaken to create a

unique product or service.” (PMBOK® Guide, Fifth Edition, 2012)

• A Project

– has a unique purpose

– is temporary

– is developed using progressive elaboration

– requires resources, often from various areas

– should have a primary customer or sponsor

– The project sponsor usually provides the direction and funding

– involves uncertainty 6


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“The application of knowledge, skills, tools and techniques to project activities to meet project requirements” (PMBOK® Guide, IV Edition)

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Stakeholders Core Functions

Facilitating Functions

Project Management


Risk Defined

• In the context of projects, “Risk is an uncertain event or condition that, if it occurs, has a positive or negative effect on project objectives.”

• A Risk has a cause and, if it occurs, a consequence.

• “Effect of uncertainty on objectives” (ISO 31000(2009) /ISO Guide 73:2002)

• “The combination of the probability of an event and its consequences”

• If the uncertain events occurs, it will impact the cost, schedule, and quality of the project.

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BITS Pilani, Pilani Campus 9

Cost Time

Scope

Integration

Stakeholder

Human Resources

Communications

Procurement

Risk

Quality

Quality = Time + Cost

The Balanced Project


The Sources of Risks

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INTERNAL EXTERNAL

Resources Processes

SOURCES of RISKS

Political risk Country Risk Market Risk

Currency Risk Interest Rate Risk

Credit or default Risk Environmental Risk

Human errors (incompetence, inexperienced) Inadequate human resources

Inadequate internal controls

Technology Risks Operational Risks

Legal Risks


Risk Event Graph

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Risk Management

Risk Management is the process of -

• Risk Identification

• Assessment and prioritization of risks

• Developing Response Strategies &

• Monitoring & Controlling Changes

• It’s about coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of uncertain events or to maximize the realization of opportunities.

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The Risk Management Process

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Step 1: Risk Identification

• Organizations use risk breakdown structures (RBSs) in conjunction with work breakdown structures (WBSs) to help management teams identify and eventually analyze risks.

• A risk profile is another useful tool. A risk profile is a list of questions that address traditional areas of uncertainty on a project. These questions are usually developed and refined from previous, similar projects.

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The Risk Identification: RBS

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Case Study: Metro misses September 2015 deadline, delay costs BMRC Rs 2.3 crore/day TNN | Jan 2, 2015, 05.30AM ISTBENGALURU: The confidence that chief minister Siddaramaiah displayed last

year while announcing that Namma Metro would be up and running on all its Phase I corridors by September 2015 was, after all, gas. Going by the progress of work, there is no sign Bengaluru's ambitious mass rapid transit system will be completely operational any time this year. Failure to adhere to the CM's promise is not just about convenient travel eluding Bengalureans, but also about crores of rupees of taxpayers' money going down the drain due to cost escalation. The approved cost estimate of the 42-km network was Rs 11,609 crore, and the target for getting the entire phase operational was December 2012. But project cost estimates, as in May 2014 and for September 2015 completion, stand at Rs 13,845 crore, up Rs 2,236 crore. This means each day's delay has cost Rs 2.3 crore. "There is no effort from the government to crack the whip on BMRC, whose bosses haven't made any extra efforts to chase contractors and get work done. For the contractors, Metro work is a learning process. They make mistakes and redo the work. Estimates have fallen short on the ground and added to the cost. Flawed contracts with incomplete work details have pushed up bills," the sources explained. The delay has meant that costs have shot up under all heads. When the project was conceived, the land cost was estimated around Rs 500 crore, but now stands at Rs 2,100 crore. The cost of raw material has also shot up. Steel, which cost BMRC Rs 40,000 a tonne till last year, is now Rs 55,000 a tonne. Similarly, copper, purchased by the corporation at Rs 1 lakh per tonne, now costs Rs 3-4 lakh per tonne. Missed deadlines: December 2012 > December 2013 > March 2015 > September 2015 Over three years down the line, the Metro is operational only on 2 streches. The two stretches on which the Metro operates span only about 16km of the 42.3km that Phase I is slated to cater to. On an average, the two stretches ferry 50,000 people daily against the targeted 10 lakh passengers.


Activity : Risk Identification

• Identify the Risks? 1. . 2. . 3. . 4. .


Step 2: Risk Assessment

• Step 1 produces a list of potential risks. Not all of these risks deserve attention.

• Scenario analysis:

– Probability of the event.

– Impact of the event.

• Risks need to be evaluated in terms of the likelihood the event is going to occur, the impact or consequences of its occurrence and the difficulty in detecting.

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• Risk Assessment Form: Assess the Impact, Likelihood & Detection on a scale of 5, 5 being Highest & 1 Lowest.

Risk Assessment: Case

• Project: Upgradation of Banking software & hardware-

– Provide more features

– Higher stability & availability

– Enhanced security controls

– Project also involves some changes on client end software.


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• Red zone: Major

• Yellow zone: Moderate

• Green zone: Minor

• Failure Mode & Effect Analysis:

• Risk Value=

• Impact x Probability x Detection

Risk Severity Matrix


Step 3: Risk Response Development

Responses to risk can be classified as mitigating, avoiding, transferring & retaining.

Mitigating Risk:

• Reducing risk is usually the first alternative considered. There are basically two strategies for mitigating risk:

– reduce the likelihood that the event will occur and/

– Or reduce the impact that the adverse event would have on the project.

Avoiding Risk:

• Risk avoidance is changing the project plan to eliminate the risk or condition. Although it is impossible to eliminate all risk events, some specific risks may be avoided before you launch the project.

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Step 3: Risk Response Development

Transferring Risk:

• Passing risk to another party, but this transfer does not change risk. Passing risk to another party almost always results in paying a premium.

• Fixed-price contracts are the classic example of transferring risk from an owner to a contractor.

Retaining Risk:

• In some cases a conscious decision is made to accept the risk of an event occurring.

• The risk is retained by developing a contingency plan to implement if the risk materializes. In a few cases a risk event can be ignored and a cost overrun accepted.

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The Contingency Plan

• A contingency plan is an alternative plan that will be used if a possible foreseen risk event becomes a reality.

• A key distinction between a risk response and a contingency plan is that a response is part of the actual implementation plan and action is taken before the risk can materialize, while a contingency plan is not part of the initial implementation plan and only goes into effect after the risk is recognized.

• Contingency planning evaluates alternative remedies for possible foreseen events before the risk event occurs and selects the best plan among alternatives.

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Risk Response Matrix

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Build fallback/

redundancy

SLA

Contract

Response Conting

ency

Response Conting

ency

Response Conting

ency

Avoid: Eliminate

Contingency

Risk Response Types

User Training


Risk Response Matrix

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Build fallback/

redundancy

SLA

Contract

Mitigate: Reduce

Likelihood

Retain: Reduce Impact

Mitigate: Reduce

Likelihood


Retain: Reduce

Likelihood


Avoid: Eliminate

Transfer: Impact

Response Types


Step 4: Risk Response Control

• A Risk register details all identified risks, including descriptions, category, and probability of occurring, impact, responses, contingency plans, owners, and current status.

• Risk control involves executing the risk response strategy, monitoring triggering events, initiating contingency plans, and watching for new risks.

• Establishing a change management system to deal with events that require formal changes in the scope, budget, and/or schedule of the project is an essential element of risk control.

• A second key for controlling the cost of risks is documenting responsibility. This can be problematic in projects involving multiple organizations and contractors.

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Step 4: Change Control • Most changes easily fall into three categories:

– Scope changes in the form of design or additions, big changes.

– Implementation of Contingency plans, when risk events occur, represent changes in baseline costs and schedules.

– Improvement changes suggested by project team members.

• Change management systems involve reporting, controlling, and recording changes to the project baseline-

– Identify proposed changes.

– List expected effects of proposed change(s) on schedule & budget.

– Review, evaluate, and approve or disapprove changes formally.

– Negotiate and resolve conflicts of change, conditions, and cost.

– Communicate changes to parties affected.

– Assign responsibility for implementing change.

– Adjust master schedule and budget & Track all changes to be implemented.

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Reflecting on your Practice Reflect on some of the Uncertain/Risk events that you have come

across in your Project Management experience.

Relate these Uncertain/Risk events to the Project Life Cycle: What was the cost to fix the risk events and how the cost varied depending on the stage of the project.

Apply the RBS method for Identifying the Risks in your Project.

Use Risk Assessment Form and Risk Severity Matrix to analyze the Impact, Probability and Detection.

Develop Risk Response Strategies and Contingency Plan by classifying the Risks under the four risk categories i.e.-

– 1) Mitigating 2) Avoiding 3) Transferring and 4) Retaining Risks.

Trace the Change Control Process for one of your project & write down if there were any changes in Scope, Cost and Timelines.

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Question Session


Work Breakdown Structure

• Decomposition of project deliverables and activities into smaller, more manageable parts.

• The lowest level in WBS is a Work Package, point at which the cost & schedule for the work can be reliably estimated.

• The Work Breakdown Structure (WBS) helps you develop estimates, assign personnel, track progress, and show the scope of the project work.

• To create a WBS:

o Ask, "What has to be done to accomplish X?"

o Continue to ask this question, breaking those tasks into the smallest possible subtasks, until your answer represents a component or task that cannot be subdivided further.

o Estimate how long it will take to complete each of these tasks and how much each will cost in terms of dollars and person-hours. 30


Impact Analysis

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The Risk Identification: Project Profile

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End of Lecture

Documents

Special Lecture L1