Project Procurement and Risk

8/3/2019 Project Procurement and Risk

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Chapter 12


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12.1 Plan Procurements

12.2 Conduct Procurements

12.3 Administer Procurements

12.4 Close Procurements


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Project Procurement Managementincludes the processes to purchase or

acquire the products, services, or resultsneeded from outside the project team toperform the work. This chapter presentstwo perspectives of procurement. The

organization can be either the buyer orseller of the product, service, or resultsunder a contract.


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Project Procurement Management includesthe contract management and change

control processes required to administercontracts or purchase orders issued byauthorized project team members.


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Project Procurement Management alsoincludes administering any contract issued byan outside organization (the buyer) that is

acquiring the project from the performingorganization (the seller), and administeringcontractual obligations placed on the project

team by the contract.


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Buyer The customer

Seller Contractor; vendor; supplier external

to the performing organization The terms and conditions of the contract

become key inputs to many of the sellers

processes


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Scope Baseline Requirements

Documentation TeamingAgreements

Risk Register Risk RelatedContractDecisions

ActivityResourceRequirements

ProjectSchedule

Activity Cost

Estimates Cost

Inputs1 Tools andTechniques2 Outputs3

Process 12.1

Reference: Figure 12.2.PMBOK Guide 4th Ed

Make-or-BuyAnalysis

ExpertJudgment

ContractTypes

___________

9Procurement 2Planning

ProcurementManagement

Plan

ProcurementStatementsof Work

Make-or-BuyDecisions

ProcurementDocuments

Source

SelectionCriteria


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Plan Procurements

The process of documenting projectpurchasing decisions, specifying theapproach and identifying the potential sellers.

It identifies those project needs which canbest be, or must be, met by acquiringproducts, services or results outside of the

project organization, versus those projectneeds which can be accomplished by theproject team.


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Plan Procurements: Inputs

1. Scope Baseline

Scope statement. The scope statement containsthe product scope description, service

description and result description and the list ofdeliverable and the acceptance criteria.

WBS

WBS Dictionary


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2. Requirements Documentation

Requirements documentation may include:

Important information about projectrequirements that is considered during planningfor procurements.

Requirements with contractual and legalimplications that may include health, safety,security etc .


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3. Teaming Agreements

Teaming agreements are legal contractualagreements between two or more entities to

form a partnership or joint venture, or someother arrangement as defined by the parties.

The agreement defines buyer-seller roles for

each party.


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4. Risk Register

5. Risk Related Contract Decisions

6. Activity Resources Requirements

7. Project Schedule

8. Activity Cost Estimates

9.

Cost Performance Baseline10. Enterprise Environmental Factors


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10. Organizational Process Assets

The organizational process includes

Formal procurement policies, procedures and

guidelines. Management systems that are considered in

developing the procurement management plan andselecting the contract types to be used.

An established multi-tier system of pre qualifiedsellers based on previous experience.


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Plan Procurements: Tools and

Techniques1. Make-or-Buy Decision

A make-or-buy decision is a generalmanagement technique used to determine

whether particular work can be bestaccomplished by the project team or mustbe purchased from outside sources.


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Techniques2. Expert Judgment

Expert technical Judgment will often be usedto assess the inputs from this process.

Expert purchasing judgment can also beused to develop or modify the criteria thatwill be used to evaluate seller proposal.


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Techniques3. Contract Types

The risk shared between the buyer and seller isdetermined by the contract type.

All legal contractual relationships generally fallinto one of two broad families, either Fixed-Priceor Cost-reimbursable.


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Techniques Fixed Price Contracts

This category of contracts involves setting afixed total price for a defined product or

service to be provided. It further includesfollowing types based amount of risk involvedand amount of incentive included.

Firm Fixed Price Contracts (FFP) Firm Fixed Incentive Fee contracts (FPIP)

Fixed Price with Economic Price Adjustment Contracts(FP-EPA)


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Spectrum of risk (For contracts)

CPPC CPFF CPIF FPI FFP

Cost Plus FixedFee (CPFF)

Cost PlusIncentive Fee(CPIF)

Variable Sharing Ratio

Firm Fixed Price

0 100

Cost PlusPercentage ofCosts (CPPC)

100 0

Fixed PriceIncentive (FPI)

Seller RiskLOW HIGH

Buyer RiskHIGH LOW


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Techniques Cost-reimbursable Contracts

This category of contracts involves payments(Cost reimbursements) to the seller for all

legitimate actual cost incurred for thecompleted work, plus a fee representingseller profit.


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Techniques Three of more common types of cost

reimbursable in use are: Cost Plus Fixed Fee Contracts (CPFF)

Cost Plus Incentive Fee Contracts(CPIF) Cost Plus Award Fee Contracts (CPAF)


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Plan Procurements: Outputs

1. Procurement Management Plan

The procurement management plan describes

how the procurement will be managed fromdeveloping procurement document throughcontract closure.


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The procurement management plan caninclude guidance for types of contracts to beused, risk management issues etc

A procurement management plan can formalor informal, can be highly detailed or broadlyfarmed, and is based on the needs of each

project.


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2. Procurement Statement of Work

The statement of work describes theprocurement item in sufficient detail to allow

prospective sellers to determine if they arecapable of providing the products, services.

3. Make-or-Buy Decisions

4.

Procurement Documents Procurement document is used to solicit

proposals from prospective sellers.


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Common terms are used for different types ofprocurement documents and may includerequest for information (RFI), invitation for bid

(IFB), request for proposal (RFP), request forquotation (RFQ) etc.

5. Change Request


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9 3


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ProjectManagement

PlanProcurementDocuments

SourceSelection

CriteriaQualifiedSeller List

SellerProposals

ProjectDocuments


Process 12.2


BidderConferences

ProposalEvaluationTechniques

IndependentEstimates

ExpertJudgment

Advertising

Internet

Search

9Procurement

SelectedSellers

ProcurementContractAward

ResourceCalendars

ChangeRequests

ProjectManagement

Plan UpdatesPro ect

3Executing


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Conduct Procurement

Conduct procurement is the process ofobtaining seller responses, selecting a sellerand awarding a contract.

On major procurement items, the overallprocess of requesting responses from sellersand evaluating those responses can be

repeated.


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Conduct Procurement

A short list of qualified sellers can beestablished based on a preliminary proposal.

A more detailed evaluation can then be

conducted based on a more specific andcomprehensive requirements documentrequested from the sellers on the short list.


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Conduct Procurement: Inputs

1. Project Management Plan

2. Procurement Documents

3. Source Selection Criteria

4. Qualified Seller List


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Conduct Procurement: Inputs

5. Seller Proposals

6. Project Documents

7. Make-or-Buy Decisions

8. Teaming Agreements

9. Organizational Process Assets


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Conduct Procurement: Tools and

Techniques1. Bidder Conferences

Bidder Conferences (sometimes calledcontractor conferences, vendor conferences)

are meeting with all perspective sellers andbuyers prior to submittal of bid or proposal. Theyare used to ensure that all perspective sellershave a clear and common understanding of the

procurement.


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Techniques2. Proposal Evaluation Techniques

On complex procurement, when sourceselection will be made based on seller

responses to previously defined weightedcriteria, a formal evaluation review process willbe defined by the buyers procurement policies.

The evaluation committee will make their

selection for approval by management prior tothe award.


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Techniques3. Independent Estimates

For many procurement items, the procuringorganization may elect to either prepare its own

independent estimates, or have an estimate ofcosts prepared by an outside professionalestimator, to serve as a benchmark on proposedresponses.


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Techniques4. Expert Judgment

5. Advertising

Existing lists of potential sellers can often be

expanded by placing advertisements in generalcirculation publications such as newspapers orin specially trade publications.

6. Internet Search


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Techniques7. Procurement Negotiations

Negotiations clarify the structure, requirementsand other terms of the purchases so that mutual

agreement can be reached prior to signing thecontract.

Final contract language reflects all agreementsreached.


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Conduct Procurement: Outputs

1. Selected Sellers

The sellers selected are those sellers who havebeen judged to be in a competitive range based

upon the outcome of the proposal or bidevaluation, and who have negotiated a draftcontract that will become the actual contractwhen award is made.


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2. Procurement Contract Award

A procurement contract is awarded to eachselected seller.

The contract can be in the form of simplepurchase order or complex document.

A contract is a mutually binding legal documentthat obligates the seller to provide the specified

product or service and obligates the buyer tocompensate the seller.


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3. Resource Calendars

The quantity and availability of contractedresources and those dates on which each

specific resource can be active or idle isdocumented.

4. Change Requests

5. Project Management Plan Updates

6. Project Document Updates


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ProjectManagement


ContractsPerformance

ReportApprovedChangesReport

WorkPerformanceInformation


Process 12.2


ContractChange

ControlSystem

ProcurementPerformanceReview

Inspection andAuditing

PerformanceReporting

PaymentsSystems

9Procurement

ProcurementDocumentation

Org: Processassets Updates

ChangeRequests

ProjectManagementPlan Updates

____________

3Executing


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Administer Procurement

Administer procurement is the process ofmanaging procurement relationships,monitoring contract performance, and making

changes and corrections as needed. Both the buyer and seller will administer the

procurement contract for similar purposes.

Each must sure that both parties meet theircontractual obligations and that their ownlegal rights are protected.


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Administer Procurement: Inputs

1. Procurement Documents

Procurement documents contain completesupporting records for administration of the

procurement processes. This includes procurement awards and the

statement of work.


3. Contracts


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Administer Procurement: Inputs

4. Performance Report

5. Approved Changes Requests

Approved changes request can include

modifications to the terms and conditions of thecontract including the procurement statement ofwork, pricing, and description of the products,services to be provided.

6. Work Performance Information


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Administer Procurement: Tools and

Techniques1. Contract Change Control System

A contract change control system defines theprocess by which the procurement can be

modified. It includes the paperwork, tracking systems,

disputes resolution procedures, and approvallevels necessary for authorizing changes.


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Techniques2. Procurement Performance Review

A procurement performance review is astructured review of the sellers progress todeliver project scope and quality, within cost and

on schedule, as compared to the contract.

3. Inspections and Audits Inspections and audits required by the buyer

and supported by seller as specified in theprocurement contract can be conducted duringexecution of the project to verify compliance inthe sellers work process or deliverables.


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Techniques4. Performance Reporting

5. Payment Systems

6. Claims Administration

7. Record Management System


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Administer Procurement: Outputs

1. Procurement Documentation

Procurement documentation includes, but notlimited to, the procurement contract with all

supporting schedule, requested unapprovedcontract changes and approved changesrequests.

Procurement documentation also includes any

seller-developed technical documentation andother work performance information such as,deliverables, seller performance report etc.


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Administer Procurement: Outputs

2. Organizational Process Assets Updates

Elements of organizational process assets thatmay be updated include:

Correspondence Payments Schedules and requests

Seller performance evaluation documentation

3. Change Requests

4. Project Management Plan Updates

9 3E i


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ProjectManagement



Process 12.2


ProcurementAudits

NegotiationSettlement

RecordManagementSystem

9Procurement

Close

Procurements

Org: Processassets Updates

______

3Executing


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Close Procurement

Close procurement is the process ofcompleting each procurement.

It supports the close project or phase

process, since it involves verification that allwork and deliverables were acceptable.

The close procurement also involves

administrative activities.


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Close Procurement

Close procurements addresses each contractapplicable to the project or project phase.

Early termination of a contract is a special

case of procurement closure that result froma mutual agreement of both parties, from thedefault of one party, or for convenience of the

buyer if provided for in the contract.


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Close Procurement: Inputs


2. Procurement Documentation

To close the contract, all procurement

documentation is collected, indexed and filled. This information can be used for the lesson

learned information and as a basis forevaluating contractors for future contracts.


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Close Procurement: Tools and

Techniques1. Procurement Audits

The procurement audit is a structured review ofthe procurement process originating from the

Plan procurement process through AdministerProcurements

The purpose of a procurement audit is to identifysuccesses and failures that warrant recognition

in the preparation or administration of otherprocurement contracts on the project.


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Close Procurement: Tools and

Techniques2. Negotiated Settlement

In all procurement relationships, the finalequitable settlement of all outstanding issues,

claims, and disputes by negotiation is primarygoal.

Whenever settlement can not be achievedthrough direct negotiation, some form of

alternative dispute resolution (ADR) includingmediation or arbitration may be explored.


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Close Procurement: Outputs

1. Closed Procurements

2. Organizational Process Assets Updates

Procurement File

Deliverable Acceptance

Lessons Learned Documentation


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Warranty

Implied Warranty

Act of sale implies:

General fitness for use

Fitness for special uses

Express Warranty

Beyond the mere act of the sale

Seller makes specific representations

P l ( P)


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Request For Proposal (RFP)

The purpose of preparing a request forproposal is to state, comprehensively and indetail, what is required , from customer point

of view, to address the identified need.

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R F P l (RFP)


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A good RFP allows contractors or projectteam to understand what the customerexpects so that they can prepare a thorough

proposal that will satisfy customers needsand requirements at a realistic price.

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R F P l (RFP)


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R F P l (RFP)


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R F P l (RFP)


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Following are some guidelines for draftinga formal request for proposal to external

contractors: An RFP must provide a statement of

work. An SOW deals with the scope of theproject, outlining the tasks or workelements the customers wants thecontractor or project team to perform.

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R F P l (RFP)


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The RFP must include the customerrequirements, which define specifications and

attributes. Requirements cover size, quantity,color, weight, speed, and other physical oroperational parameters the contractors

proposed solution must satisfy.

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R F P l (RFP)


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The RFP should state that what deliverablesthe customer expects the contractors orproject team to provide. Deliverables are the

tangible items that the contractor is to supply.

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R F P l (RFP)


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The RFP should list any customer-supplieditems. For example, the RFP might state thatthe customer will supply a copy of its logo for

use on the brochure.

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R F P l (RFP)


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The RFP might stat that the approvalsrequired by the customer. For example, thehousing customer may want to review and

approve the plans before construction isstarted.

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R F P l (RFP)


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Some RFPs mention the type of contractthe customer intends to use. It could be

fixed price, in which case the customer willpay the contractor a fixed amountregardless of how much the work actuallycosts the contractor.

See figure on next slide.

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Spectrum of risk (For contracts)



Cost PlusIncentive Fee

(CPIF)


Firm Fixed Price

0 100

Cost PlusPercentage of

Costs (CPPC)

100 0


Seller RiskLOW HIGH

Buyer RiskHIGH LOW

R t F P l (RFP)


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The RFP should stat the required schedulefor the completion of the project. It mightsimply stat that the house will complete within

six months, or it may include more detailedschedule.

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R t F P l (RFP)


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The RFP should provide instructions for theformat and contents of the contractorproposals.

The RFP should indicate thedue datebywhich the customer expects potentialcontractors to submit proposals.

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R t F r Pr p l (RFP)


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An RFP may include theevaluation criteria.These are criteria that the customer will useto evaluate proposals from competing

contractors in order to select the one toperform the project.

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R q st F r Pr p s l (RFP)


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In rare case an RFP will indicate the fundsthe customer has available to spend onproject.

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BID/NO BID DECISION


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BID/NO BID DECISION

Because the development and preparation ofa proposal takes time and can be costly,contractors interested in submitting a

proposal in the response to an RFP must berealistic about the probability of beingselected as the wining contractor.

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BID/NO BID DECISION


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BID/NO BID DECISION

Evaluating whether to go forward with thepreparation of a proposal is some timereferred to as the bid/no-bid decision.

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BID/NO BID DECISION


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BID/NO BID DECISION

Some factors that contractor might considerin making a bid/no-bid decision are thefollowing:

Competition. Which other contractors mightalso submit a proposal in response to theRFP?

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BID/NO BID DECISION


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BID/NO BID DECISION

Risk. Is there a risk that the project will beunsuccessful-technically and financially?

Mission. Is the proposed project consistent

with the contractors business mission?

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BID/NO BID DECISION


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BID/NO BID DECISION

Extension of capabilities. Would the proposedproject provide the contractor with anopportunity to extend and enhance its

capabilities? Reputation. Has the contractor successfully

completed projects for the same customer inthe past?

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BID/NO BID DECISION


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BID/NO BID DECISION

Customer funds. Does the customer reallyhave funds available to go forward with theproject?

Proposal resources. Are appropriateresources available to prepare qualityproposal?

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BID/NO BID DECISION


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BID/NO BID DECISION

Project resources. Are appropriate resourcesavailable to perform the project if thecontractor is selected as the winner?

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Developing A Wining Proposal


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A proposal is selling document; it is not atechnical report.

It is important to remember that the proposal

process is competitive. A customer uses a request for proposal to

solicit competing proposals from contractors.

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In the proposal the contractor mustconvince the customer that the contractor

Understands what the customer is lookingfor.

Can carry out the proposed project.

Will provide the greatest value to thecustomer.

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Is the best contractor to solve the problem.

Will capitalize on successful experience withprevious related projects.

Will do the work professionally. Will achieve the intended results.

Will satisfy the cutomer.

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The preparation of proposal can be astraightforward task performed by a singleperson or it can be a resource intensive effort

requiring a team of organization andindividuals.

Developing a comprehensive proposal for alarge project should be treated as a projectitself.

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Proposal Contents


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Proposal Contents

Proposals are often organized into threesections:

o Technical

o Managemento Cost

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Proposal Contents


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Proposal Contents

Technical section

The technical section should contain thefollowing elements:

o Understanding the problem.o Proposed approach or solution.

o Benefits to the customer.

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Proposal Contents


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Proposal Contents

Management section

The objective of management section is toconvince the customer that the contractor can

do the proposed work.

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Proposal Contents


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Proposal Contents

The management section contains thefollowing elements:

o Description of work tasks.o Deliverables.

o Project Schedule.

o Project Organization.o Related Experience

o Equipment and Facilities

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Proposal Contents


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Proposal Contents

Cost Section

The objective of the cost section is toconvince the customer that contractors price

for the proposed project is realistic andreasonable.

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Proposal Contents


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Proposal Contents

The cost section contains the followingelements:

o Labor.

o Materials.o Subcontractors and Consultants.

o Equipments and Facilities.

o Travel.

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Proposal Contents


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Proposal Contents

o Documentation.

o Overhead.

o Escalation

o Contingency or Management Reserve.

o Fee or Profit.

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Proposal Submission And Follow Up


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The customer RFPs will usually provideinstructions regarding

o Due date, by which proposal must be

submitted.o Name and address of the person to whom

the proposal should be submitted.

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Contractors must continue to be proactiveeven after the proposal is submitted.

The contractor should call the customer to

confirm that the proposal was received.

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Customer Evaluation Of The


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Proposals Customers evaluate contractors proposal in

many different ways.

Some customers initially look at the prices of

the various proposals and select , forexample, only three lowest-priced proposalsfor further evaluation.

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Proposals In large projects , customers create a

proposal review team that uses a scorecardto determine whether each proposal meets all

requirements in the RFP and to rank theproposal against predefined evaluationcriteria.

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Procurement Cycle


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Procurement Cycle

The procurement process can be effectivelypresented as a cycle outlining a series ofdesecrate steps .

In practice there may be some iterationbetween certain steps and indeed the stepsmay be carried out in a different order.

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Procurement Cycle


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Procurement Cycle

Procurement Planning

The procurement planning will be viewedfrom the buyers perspective, as the process

of identifying what products and services arebest procured out side the projectorganization.

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Procurement Cycle


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P ocu e e t Cyc e

Procurement Planning

This is the buy or make decision which is akey component of the execution strategy

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Procurement Cycle


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y

Procurement List The procurement list is developed from

projects scope of work.

From the procurement list the projectmanager must decide his execution strategyto buy or make.

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Procurement Cycle


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y

Procurement Schedule The procurement schedule is developed after

the CPM network diagramand schedule Bar

chartshave been produced but before theresource histogramsand cash flowstatementshave been considered.

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Procurement Cycle


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y

Procurement Schedule Order date = ES Lead Time JIT

Where:

ES (Start Date)

JIT (just-in-time)

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Procurement Cycle


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y

Supplier and Vendor List All potential suppliers and vendors need to be

identified and pre-qualified according to the

project quality plan

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Procurement Cycle


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y

Supplier and Vendor List The buyer need to be satisfied that the

supplier has the production and quality

management systems to deliver the productto the required specification, qualitystandards and schedule.

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Procurement Cycle


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y

Invite to Tender Compile a bid package (enquiry document)

for the suppliers to quote against.

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Procurement Cycle


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y

Invite to Tender The initial enquiry document is the basis for

the contract, it should be progressively

adjusted and marked up as more informationbecomes available.

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Procurement Cycle


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y

Tender Adjudication Scrutinize the quotations (Tenders), and

compile a technical and commercial bid

tabulation to ensure you are comparingApples with Apples

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Procurement Cycle


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y

Tender Adjudication Consider suppliers suggestions and negotiate

to achieve the best price and conditions,

while striving for a win-win arrangement .

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Procurement Cycle


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y

Tender Adjudication This process should take advantage of

market conditions, but should also be govern

by companys ethics policy.

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Procurement Cycle


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y

Raise the Order Comply with corporate standard terms and

conditions of contract.

The purchase order should be a stand alonedocument superseding all previousdocumentation and correspondence, andmust be formally accepted by the supplier.

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Procurement Cycle


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y

Raise the Order Where possible pass on any contractual

requirements from client with a back to back

agreement with suppliers.

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Procurement Cycle


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Transport

Always consider the different methods of

transport. Where possible the products quality

should be checked and confirmed beforeliving the factory.

This particularly applies to items beingexported.

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Procurement Cycle


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Insurance

Consider placing the order for the

transport and insuring yourself so that ifthere is a problem or claim you can dealwith the transport and insurancecompanies directly.

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Procurement Cycle


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Receiving

Checking the goods against delivery note,

check the delivery note against the orderand the check the quality of productsagainst the required condition.

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Procurement Cycle


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Receiving (Case)

A project I was working on received to

counter rotating gearboxes for an OffshoreSupply Vessel, but on inspection the werefound to both rotate the same way!Fortunately this was picked up by the

receiving inspection which gave the shipyardtime to have the correct type shipped over.

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Procurement Cycle


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Warehousing

Store the delivered (Received) items for safe

keeping and retrieval. Check if warehousing requires any special

handling equipment and storage facilities.

Issue the stock against the required internal

requisition order.

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Procurement Cycle


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Accounts (Last step of procurement cycle)

The accounts should check the budget ,

purchase order, invoice and delivery notefor variances before making payments.

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E di i


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Expediting

On a large project theexpeditor becomes the

project managers eyesand ears as he takeson a criminalinvestigating approach.

Monitoring & Control, Basic Concepts,

Lecture by Mumtaz Meer

Expediting


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Consider asking the following questions: Have you received the order?

Is the order understood?

What is your job number? Who is your project manager?

Has the job been planned into your

production system?(Show me)

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Expediting


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Have the instructions been received byproject manager?

Are their suitably qualified resourcesavailable?(Name them and showqualification)

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Expediting


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Is the work progressing as planned?

Are there any problem?

Will you meet the contracted deliverydate?

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Expediting


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By asking all these questions the expeditorbecomes an invaluable source of progressinformation giving early warning of any supply

problems so that the project manager hastime to respond.

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B2B

P t


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Procurement

B2B (business to business)procurement platforms are anew type of business facilityoffered by the internet.

B2B market places are juston-line catalogues

Monitoring & Control, Basic Concepts,

Lecture by Mumtaz Meer

B2B Procurement


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Sellers list their products with prices,specifications and delivery terms.

Buyers scan the catalogues, place their

orders electronically, and can even makepayment online

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B2B Procurement


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The potential benefit for buyers includedramatically reducing procurementadministration costs and time, lower material

prices, faster supply chains, and reducedinventory requirements.

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B2B Procurement


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The benefit for the sellers include increasedsales volume, lower cost of making a sale,and reduced inventory requirements.

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B2B Procurement


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The B2B procurement system are beingsuccessfully driven by large companies whoare collaborating on a market sector basis.

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B2B Procurement


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For example, Boeing, Lockheed Martin, BAESystems, and Raytheon have combined toform a global B2B website for their

industry.

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B2B Procurement


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B2B procurement offers project managerthe opportunity to:

Reduce transaction cost. Generate less paper work.

Provide an economy of scale through

consolidating purchasing. Reduce the level of unapproved Rough

purchases.

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B2B Procurement


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The project managers also needs to beaware of the associated risks of accessingthese global market.

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B2B Procurement


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Although web browsing will identify a widerrange of products, if these are procuredfrom overseas there will be more links inthe supply chain and longer lead times.

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Just in Time


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Just in Time is a procurementmanagement system that provides theproduction line with components as theyneed them.

This will reduce stock levels and stockinvestment, but will also increase the risk

of production disruption.

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Just in Time


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Toyota cars developed the KanbanSystem, Which is known in the West asJust-in-Time (JIT).

This was one of the most spectacularfeatures of the Toyota car productionsystem.

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Just in Time


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The Toyota system created a greaterattention to both the customer who couldorder their special car with out extra cost,and the worker who was much moreinvolved in maintaining quality much moreaware and better educated than their

western contemporaries

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Just in Time


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The down side of JIT as that it makescompanies far more sensitive tointerruption

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Project Risk Management includes theprocesses concerned with conducting riskmanagement planning, identification, analysis,responses, and monitoring and control on aproject; most of these processes are updatedthroughout the project.

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The objectives of Project Risk Managementare to increase the probability and impact ofpositive events, and decrease the probabilityand impact of events adverse to the project.

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Risk Management


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Risk Management is the act or practice ofdealing with risk.

It includes planningfor risk, assessing

(identifying and analyzing) risk issues,developing risk handlingoptions, andmonitoringrisks to determine how risks havechanged

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Risk Management


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Proper risk management is proactive ratherthan reactive.

Risk management is not a separate project

office activity assigned to a risk managementdepartment, but rather it is one aspect ofsound project management.

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Risk Management Process


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Risk Management includes several relatedactions involving risk:

Risk Planning

Risk Assessment Risk Handling

Risk Monitoring

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Process 11.18Risk 2Planning


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ProjectScopeStatement

CostManagementPlan

ScheduleManagement

PlanCommunicationsManagementPlan

Enterprise

Inputs1 Tools andTechniques2 Outputs3RiskManagementPlan

____________

PlanningMeetings andAnalysis

___________

Reference: Figure 11.2.

PMBOK Guide 4th Ed


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RiskManagementPlan

Activity CostEstimates

ActivityDurationEstimates

Scope

Baseline StakeholderRegister

CostManagementPlan

Inputs1 Tools andTechniques2 Outputs3Risk Register

___________

_


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Documentation Reviews

InformationGatheringTechniques

ChecklistAnalysis

AssumptionsAnalysis

DiagrammingTechniques

SWOT

Anal sis


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Risk is a measure of the probability andconsequences of not achieving a defined

project goal. Risk has two primary components for a given

event:

A probability of occurrence of that event. Impact of the event occurring (Amount at

stake)


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Conceptually, risk for each event can bedefined as a function of likelihood and impact:that is,

Risk= function of(Likelihood, Impact)

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Risk Events or consequences that have theprobability of occurring during a project and that aremeasured by their impacts on the project

Components Risk event Risk event probability Risk outcome or consequence

(Amount at stake) Risk event status

(Probability x amount at stake)


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Methodology defines approaches,tools, and data sources that might beused to perform risk management on theproject

Roles & Responsibilities defines thelead, support, and risk managementteam membership for each type of actionin the plan

Budget - $ Timing Describes how often the risk

management process will be performedthroughout the project life cycle.


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Reporting formats - defines how theresults of the risk managementprocesses will be documented, analyzed,and communicated to the project team

and stakeholders Tracking Documents all facets of risk

activities and how the risk process will

be audited

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Risk Identification


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Risk identification includesdetermining which risk mayadversely affect the projectobjective and whatconsequences of each risk

might be if they occur

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Risk Identification


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The most commonapproachidentifying thesource of risk isbrainstorming.

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Brainstorming


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Risk Identification


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The project manager should involve the keyproject team members in identifying potentialsources of risk.

Identifying things that would negativelyimpact achieving the project objectives.

Historical information of past project alsohelpful in identifying possible risks.

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Types

Business (profit or loss) and insurable(loss)

Known known Total certainty Known unknown Degree of uncertainty

Unknown unknown Total uncertainty


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Categories External, unpredictable Regulatory,

etc.

External, predictable Market risks Internal, non-technical Management

Technical Design

Legal Contractual

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Risk Register

Risk

ManagementPlan

ProjectScopeStatement

Organizational ProcessAssets

___________

Inputs1 Tools andTechniques2 Outputs3Risk RegisterUpdates

____________


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RiskProbabilityand Impact

Assessment

Probabilityand ImpactMatrix

Risk DataQualityAssessment

RiskCategorization

Risk Assessment


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Assessing each risk involves determining thelikelihood that the risk event will occurand

the degree of impact the eventwill have onthe project objectives.

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Risk Assessment


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Both of these factors can be assigned arating of High, Medium, or Low.

Project manager, in consultation with

appropriate team member who the mostknowledgeable about the potential risk,should determine a rating for each risk.

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Risk Assessment


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A tool for assessingrisk is a riskassessment matrix.

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Risk Response Planning


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Risk response planning involves developingan action plan to reduce the impact orlikelihood of each risk, establishing a triggerpoint for when to implement the actions toaddress each risk and assigningresponsibilities to specific individuals forimplementing each response plan.

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Risk Response Planning


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A risk response plan can be to Avoidtherisk, Mitigatethe risk, or Acceptthe risk.

A Contingency plan is a predefined set of

actions that would be implemented, if riskevent occurs.

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Mitigation(Corrective action)

Avoidance

(Prevention)

Acceptance

(Accept consequences)

Transference

(Shift Responsibility)

Risk Monitoring


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Risk monitoring involves regular reviewing ofthe risk management matrix throughout theproject.

It is important to evaluate all the risk todetermine if there are any changes to thelikelihood of occurrence or the potentialimpact of any of the risks.

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Risk Monitoring


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Process 11.48Risk 2

Planning


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Risk Register

Risk

ManagementPlan

CostManagementPlan

ScheduleManagementPlan

Organization

al Process

Inputs1 Tools andTechniques2 Outputs3Risk RegisterUpdates

____________


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DataGatheringand

Representation Techniques

QuantitativeRisk Analysisand Modeling

TechniquesExpertJudgment

___________


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Strengths Weaknesses

Opportunities Threats

Internal

External

Build On Eliminate or Reduce

MitigateExploit


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Probability

Likelihood of occurrence. (Number of

occurrences of an event divided by thetotal number of all possible occurrences)


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Statistics Mean Average of the values of events

Mode Value which occurs most often

Median Value in middle of the range ofordered values

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Variance Average of the squared deviations from

the mean

Standard deviation Square Root ofthe Variance

Range Values between upper &

lower limits

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Interviewing project stakeholders andsubject-matter experts to quantify theprobability and consequences of risks on

project objectives The information needed depends upon the

type of probability distributions that will beused


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Probability distribution (Method ofmoments) Calculates project rangeestimates

Expected monetary value Probabilitytimes cost

Three values low (a) , most likely (m),and high (b) with probabilities for each;used to calculate expected value


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Sensitivity Analysis determines whichrisks have the most potential impact on

the project Decision Tree Analysis use of a

diagram that describes a decision

under consideration and theimplications of choosing one or anotherof the available alternatives


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Incorporates probabilities of risks andthe costs or rewards of each logical pathof events and future decisions

Solving the decision tree indicates whichdecision yields the greatest expectedvalue when all the uncertain implications,

costs, rewards, and subsequentdecisions are quantified

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Three values with probabilities; used tocalculate expected values

Optimistic Most likely Pessimistic

e.g. Optimistic 0.2 x $ 100 K = $ 20 K

Most Likely 0.6 x $ 130 K = $ 78 KPessimistic 0.2 x $ 180 K = $ 36 K

Expected Value = $ 134 K


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Project A

Project B

0.5

0.5

0.6

0.4

0.7

0.3

Success

Failure

Success

Failure

What is the probability that Project B willbe selected and will be successful?

Example

Answer: 0.35

High Demand

P b bili 0 3


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Decide not to pursue

$ 0

Production Successful

Probability = 0.7

Probability =0.3

$ 550,000

Production Unsuccessful

Probability = 0.3

Terminate = - $ 200,000

Decide to pursue

Low Demand

Probability = 0.7- $100,000

Expect Value of Pursuing Project A0.7 x 0.3 x $ 550,000 = $ 115,500

0.7 x 0.7 x $ 100,000 = $ 49,000

0.3 x $ 200,000 = $ 60,000

$ 6,500

The expected value of Project A is $6,500. The expected value of

not preceding is $0. Preceding is the lucrative option.


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Simulation Uses a model or copyof a system to analyze the behavior

or performance of the system


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Monte Carlo Perform project many times to provide a

statistical distribution of calculated results

Uses results to quantify the risk of various

schedule alternatives, different project strategies,different paths through the network, and individualactivities

Can be used to assess the range of possible cost

options

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Process 11.5

8Risk

2Planning


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Risk Register

RiskManagementPlan

____________

Inputs1Tools andTechniques2 Outputs3

Risk RegisterUpdates

Risk RelatedContractDecisions

ProjectManagement

Plan UpdatesProjectDocumentUpdates

___________Reference: Figure 11.17.

PMBOK Guide 4th

Ed

Strategies forNegativeRisks or

ThreatsStrategies forPositiveRisks orOpportunities

ContingentResponseStrategies

ExpertJudgment


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Process 11.6

8Risk

4Monitoring& Control


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Risk Register

RiskManagementPlan

WorkPerformanceInformation

PerformanceReports

____________

Inputs1Tools andTechniques2 Outputs3

Risk RegisterUpdates

Organizational ProcessAssetsUpdates

Change

RequestsProjectManagementPlan Updates

ProjectReference: Figure 11.19.

PMBOK Guide 4th

Ed

RiskReassessment

Risk Audits

Variance andTrendAnalysis

TechnicalPerformanceMeasurement

ReserveAnalysis

Stat s


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Hazard Prevention

Likelihood Reduction

Risk Avoidance Risk Transfer

Contingency Planning


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Risk Exposure

Confidence of the risk assessment

Compound Risks

The number of Risks

Cost of Action

Risk Reduction Leverage CostBenefit


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Spectrum of risk



Cost PlusIncentive Fee(CPIF)


Firm Fixed Price

0 100

Cost PlusPercentage ofCosts (CPPC)

100 0


Seller Risk LOW HIGH

Buyer RiskHIGH LOW


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Direct property damage Insurance ofprincipal assets, e.g., equipment, materials,

property, auto Indirect consequential loss Indirect loss

suffered by third party, resulting from actions

by the contractor


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Legal liability Design errors, public bodilyinjury, project-performance failure

Personnel Bodily injury

Wrap-up insurance All the aboveintegrated into one agreement usuallyprovided by the owner

Project Procurement and Risk

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