Lesson 11 - PMP Prep Risk V2

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Project Risk Management

Based on PMBOK® Guide – Fifth Edition

PMBOK is a registered mark of the Project Management Institute, Inc.

Project Risk Management © Simplilearn Solutions

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Agenda

What is risk How is risk calculated Risk categorization Decision Tree Risk reserve The risk management knowledge area

o Plan risk management o Identify risks o Perform qualitative risk analysis o Perform quantitative risk analysis o Plan risk responses o Control risks


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What is Risk

*Risk is an uncertain event or condition that, if it occurs, has a positive or negative effect on a project’s objectives.

Example: Positive Events You ordered new software which is

cheaper than your old software because of budget constraints. However, the new software turns out to be more efficient.

Example: Negative Events The government mandates a

compulsory holiday due to an outbreak of swine flu. The project gets delayed.

Positive events or conditions are also called opportunities or “good risks”. A risk that can have a positive or negative risk is called business risk. A risk that can only have a negative consequence is called pure risk.

One who does not take risks is called risk averse.

Risk tolerance: The degree of risk you are willing to accept.

Risk threshold: This helps identify the level of risk beyond which specific responses are needed. For example, a company may have a policy that a risk that increases the project cost by 10% or less is ok, but not more than that.

* Definition taken from the Glossary of the Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) – Fifth Edition, Project Management Institute, Inc., 2013.


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How is Risk Calculated

Probability: The likelihood that a risk event could happen Impact: If the event does happen, the impact on the project objectives is

Risk Weighting = Probability * Impact

Work Package Probability Impact Expected Monetary

Value (EMV)

X 25% -$10,000 -$2,500

Y 40% -$2,000 -$800

Z 10% +$20,000 +$2,000

TOTAL EMV -$1,300


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Risk Categorization

External: Regulatory, governmental, subcontractors, suppliers, and environmental

Internal: Funding, resources, and prioritization

Technical: Requirements, technology, and quality

Project Management: Estimating, planning, schedule, and communication

Scope risk: Looks like you have not understood the work properly and you might have to redo the whole thing!

Resource risk: CEO assigns the technical architect to work on another project. In such cases, who would make design decisions on the project?

Schedule risk?

Cost risk?

Quality risk?


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Decision Tree

Failure : Probability=10% Impact= $15,000

Decision: Which car would you buy? The new car or the old car?

Initial cost of buying the new car = $20,000

Initial cost of buying the old car= $15,000

Pass : Probability=90% Impact= $000

Failure : Probability=70% Impact= $10,000

Pass : Probability=30% Impact= $000

New Car $20,000 + ($15,000 * 10%) + ($000*90%) = $21,500

Old Car $15,000 + ($10,000*70%) + ($000*30%) = $22,000


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Risk Reserve

1. Activities

2. Work Packages

3. Control Account

4. Project

5. Contingency Reserve

6. Cost Baseline

7. Management Reserve Note: Management reserves are NOT part of the

cost baseline, and meant to be used ONLY in emergencies

Contingency reserves are for “known-unknowns”, management reserves are for “unknown-unknowns”


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Project Risk Management Processes

Sl. No. Project Risk Management Processes Done During

1 Plan Risk Management Planning Process Group

2 Identify Risks Planning Process Group

3 Perform Qualitative Risk Analysis Planning Process Group

4 Perform Quantitative Risk Analysis Planning Process Group

5 Plan Risk Responses Planning Process Group

6 Control Risks Monitoring and Controlling Process Group

Project risk management includes the processes of conducting risk management planning, identification, analysis, response planning, and risk monitoring and controlling on a project.

The objective of risk management is to increase the probability and/or impact of positive events and decrease the probability and/or impact of negative events.


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Plan Risk Management

Plan risk management is the process of defining how to conduct risk management activities for a project. The risk management plan serves as the roadmap for identifying, analyzing, and addressing risks on the project. It is part of the planning process group.

Inputs Project management plan Project charter Stakeholder register Enterprise environmental factors Organizational process assets

Tools and Techniques Analytical techniques Expert judgment Meetings

Outputs Risk management plan

Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) – Fifth Edition, Project Management Institute, Inc., 2013, Page 312.


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Definition of Impact Scale (Example)

Project Objective

Very Low 0.05

Low 0.1

Moderate 0.2

High 0.4

Very High 0.8

Scope Barely noticeable change

Minor areas affected

Some important areas affected

Unacceptable change in scope

Entire scope rendered useless

Cost Insignificant cost increase

<10% cost increase

10-20% cost increase

20-40% cost increase

>40% cost increase

Time Insignificant change

<5% change to schedule

5-10% change to schedule

10-20% schedule change

>20% schedule change

Quality Barely noticeable degradation

Few parameters affected

Needs sponsor approval

Major quality compromise

Need to scrap the project


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Identify Risks

Identify risks is the process of determining which risks may affect the project and documenting their characteristics. It belongs to the planning process group.

Inputs Risk management plan Activity cost estimates Activity duration estimates Scope baseline Stakeholder register Cost management plan Schedule management plan Quality management plan Human resource management plan Procurement documents Project documents Organizational process assets Enterprise environmental factors

Tools and Techniques Documentation reviews Assumptions analysis Diagramming techniques Expert judgment Checklist analysis SWOT analysis Information gathering techniques

Outputs Risk register



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Perform Qualitative Risk Analysis

Perform qualitative risk analysis is the process of prioritizing risks for further analysis or action by assessing their probability of occurrence and impact. This process belongs to the planning process group.

Inputs Risk register Risk management plan Scope baseline Enterprise environmental factors Organizational process assets

Tools and Techniques Risk probability and impact

assessment Risk data quality assessment Probability and impact matrix Risk categorization Risk urgency assessment Expert judgment Outputs

Project documents updates



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Probability and Impact Matrix Example


Probability Threats Opportunities

0.9 0.05 0.09 0.18 0.36 0.72 0.72 0.36 0.18 0.09 0.05

0.7 0.04 0.07 0.14 0.28 0.56 0.56 0.28 0.14 0.07 0.04

0.5 0.03 0.05 0.10 0.20 0.40 0.40 0.20 0.10 0.05 0.03

0.3 0.02 0.03 0.06 0.12 0.24 0.24 0.12 0.06 0.03 0.02

0.1 0.01 0.01 0.02 0.04 0.08 0.08 0.04 0.02 0.01 0.01

Impact 0.05 0.10 0.20 0.40 0.80 0.80 0.40 0.20 0.10 0.05

High

Low

Medium

High Low Medium

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Perform Quantitative Risk Analysis

Perform quantitative risk analysis is the process of numerically analyzing the effect of identified risks on overall project objectives. This is part of the planning process group.

Inputs Risk register Risk management plan Cost management plan Schedule management plan Enterprise environmental factors Organization process assets

Tools and Techniques Data gathering and representation

techniques Expert judgment Quantitative risk analysis and modeling

techniques

Outputs Project documents updates



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Plan Risk Responses

Plan risk responses is the process of developing options and actions to enhance opportunities and to reduce threats to project objectives. It is part of the planning process group.

Inputs Risk register Risk management plan

Tools and Techniques Strategies for negative risks (or threats)

o Avoid o Transfer o Mitigate o Accept

Strategies for positive risks (or opportunities) o Exploit o Share o Enhance o Accept

Contingent response strategies Expert judgment

Outputs Project management plan update Project documents updates

Residual Risk: The risk that remains after the risk responses were implemented

Secondary Risk: The risk that arises from the implementation of a risk response



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Control Risks

Control risk is the process of implementing risk response plans, tracking identified risks, monitoring residual risks, identifying new risks, and evaluating risk process effectiveness throughout the project. It is part of the monitoring and controlling process group.

Inputs Risk register Project management plan Work performance data Work performance reports

Tools and Techniques Risk audits Risk re-assessment Meetings Reserve analysis Variance and trend analysis Technical performance measurement Outputs

Project management plan updates Project documents updates Work performance information Organizational process assets updates Change requests



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Summary

Topics covered so far: Risk: An uncertain event that affects the project positively or negatively EMV for a risk = Probability * Impact Contingency reserves: For known unknowns Management reserves: For unknown unknowns The risk management processes

o Plan risk management o Identify risks o Perform qualitative risk analysis o Perform quantitative risk analysis o Plan risk responses o Control risks


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Quiz – 1

1. Purchasing insurance coverage for your project equipment is an example of which risk response? A. Transfer B. Mitigation C. Acceptance D. Avoidance


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Quiz – 1

Answer 1: The right answer is A. Transfer. You transferred your financial risk to the insurance company.

1. Purchasing insurance coverage for your project equipment is an example of which risk response? A. Transfer B. Mitigation C. Acceptance D. Avoidance


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Quiz – 2

2. What action should a project manager first take when an unidentified risk event occurs? A. Inform the customer of the possible consequences B. Inform the senior management of the possible consequences C. Redo the risk identification process to get prepared for other ‘known-

unknowns’ D. Create a work around


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Answer 2: The correct answer is D. The right project management practice dictates that a work around should be created as a response to the event.


Quiz – 2

2. What action should a project manager first take when an unidentified risk event occurs? A. Inform the customer of the possible consequences B. Inform the senior management of the possible consequences C. Redo the risk identification process to get prepared for other ‘known-

unknowns’ D. Create a work around


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Quiz – 3

3. You are a project manager with a financial firm that has multinational dealings. You feel the financial meltdown in one of the client countries could affect your project adversely, so you want to hedge your risks. Although the probability of occurrence of the event is low, you are advised to play it safe. In terms of risk attitude, your organization could best be described as? A. Risk Seeker B. Risk Averse C. Risk Neutral D. Risk Mitigator


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Answer 3: The correct answer is B. Someone who doesn't want to take risk is called risk averse and this project manager seems to be part of such an organization.


Quiz – 3

3. You are a project manager with a financial firm that has multinational dealings. You feel the financial meltdown in one of the client countries could affect your project adversely, so you want to hedge your risks. Although the probability of occurrence of the event is low, you are advised to play it safe. In terms of risk attitude, your organization could best be described as? A. Risk Seeker B. Risk Averse C. Risk Neutral D. Risk Mitigator


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Quiz – 4

4. Decision tree analysis can be classified as: A. A quantitative risk analysis and modeling technique B. A subset of the EMV technique C. A subset of the EVM technique D. A risk response strategy


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Answer 4: The right answer is A. The decision tree is a quantitative risk analysis technique that involves a diagram describing different decisions under consideration and the impact on the project of choosing one over the another.


Quiz – 4

4. Decision tree analysis can be classified as: A. A quantitative risk analysis and modeling technique B. A subset of the EMV technique C. A subset of the EVM technique D. A risk response strategy


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Quiz – 5

5. How early can a comprehensive risk analysis be done on a project? A. During project initiation B. After scope decomposition C. During scope validation D. After the project management plan has been baselined


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Quiz – 5

Answer 5: The right answer is B. Only after the entire scope has been defined in the WBS, can a comprehensive risk analysis be done.

5. How early can a comprehensive risk analysis be done on a project? A. During project initiation B. After scope decomposition C. During scope validation D. After the project management plan has been baselined


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Quiz – 6

6. A project manager is managing a short duration pilot project and has started the risk management planning process. He has identified new risks and prioritized them based on the probability and impact matrix. The project manager now proceeds to plan responses for the risks without analyzing the risks numerically. According to you, this decision of project manager is: A. Incorrect , it is important to numerically analyze each risk so that they

can be responded properly B. Correct, quantitative risk analysis is waste of time and not required if

risks are already assessed qualitatively C. Incorrect, quantitative risk analysis is important. We need to calculate

EMV for each risk and then later move to risk response planning D. Correct, this is a short duration project and project manager might skip

quantitative risk analysis if he feels it is not assisting in the risk management process


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Quiz – 6

Answer 6: The correct answer is D. The amount of rigor in the analysis is dependent upon the duration and complexity of the project. For a short duration project, it may not be necessarily to perform numeric (quantitative) risk analysis.

6. A project manager is managing a short duration pilot project and has started the risk management planning process. He has identified new risks and prioritized them based on the probability and impact matrix. The project manager now proceeds to plan responses for the risks without analyzing the risks numerically. According to you, this decision of project manager is: A. Incorrect, it is important to numerically analyze each risk so that they

can be responded properly. B. Correct, quantitative risk analysis is waste of time and not required if

risks are already assessed qualitatively. C. Incorrect, quantitative risk analysis is important. We need to calculate

EMV for each risk and then later move to risk response planning. D. Correct, this is a short duration project and project manager might skip

quantitative risk analysis if he feels it is not assisting in the risk management process.


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Thank You


Lesson 11 - PMP Prep Risk V2

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