PROJECT RISK MANAGEMENT

1. PROJECT RISK MANAGEMENT • Project Risk & Contract Management

2. Project Risks “……..as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns – the ones we don’t know we don’t know.” - Donald Rumsfeld: the former US Defense Secretary

3. Project Risk Management - Concepts (1) • Risk – Definition(1) • “…an uncertainty that can have a negative or positive effect on meeting project objectives.” – Schwalbe (2003) • “The possibility of (a project) suffering harm or loss.” PMI(04) • “Uncertainty inherent in plans and the possibility of something happening (i.e. a contingency) that can affect the prospects of achieving business or project goals.” -(BS6079) • “…a measure of the probability and consequence of not achieving a defined project goal.” – Kerzner (2003)

4. Project Risk Management - Concepts (2) • Risk – Definition(2) • From the definition, it is clear that risk has two primary components: • A probability (likelihood) of occurrence of that event • Impact of the event occurring (amount at stake) • Conceptually, risk for each event can be defined as a function of likelihood and impact: Risk = f(likelihood, impact)

5. Project Risk Management -as a knowledge area [PMI(2004)] • Risk Identification • Risk Quantification • Risk Response Development • Risk Response Control

6. Project Risk Management - Concepts (4) • Risk management process (Figure 7.2) • The major components of the risk management process are: (1) risk identification (2) risk assessment (3) risk response planning (risk response development & risk response control)

7. Project Risk Management - Identification (1) • The identification of project risks and exposure to loss is perhaps the most important element of the project risk management process • Unless the sources of possible losses are recognised, it is impossible to consciously choose appropriate, efficient methods for dealing with those losses should they occur

8. Project Risk Management - Identification (3) • Risk can also be identified according to life-cycle phases (total project risk is high in the early life-cycle phases & in the later life-cycle phases, the financial risk is the greatest) – Figure 7-1

9. Project Risk Management - Identification (4) • Any source of information that allows recognition of a potential problem can be used for risk identification. These include, but not limited to: • Life-cycle cost analysis (√) • Plan/WBS decomposition (√) • Schedule analysis (√) • Baseline cost estimates • Assumption analysis • Trade studies/analyses • Models (influence diagrams) • Expert judgment

10. Project Risk Management – Assessment(1) • Risk identification produces a list of potential risks. Not all of these risks deserve attention. Some are trivialandcan be ignored, while others pose serious threats to the welfare of the project. • TheLead Manager needs to develop a method for sifting through the list of risks, eliminating inconsequential or redundant ones and stratifying worthy ones in terms of importance and need for attention.

11. Project Risk Management – Assessment(2) • Scenario analysis is the easiest and most commonly used technique for analyzing risks. Team members assess each risk in terms of: • The undesirable event • All the outcomes of the event’s occurrence • The magnitude or severity of the event’s impact • Chances/probability of the event happening • When the event might occur in the project • Interaction with other parts of this or other projects.

12. Risk Assessment form(1(L)…….5(H)

13. Risk Severe Matrix (2e)

14. Risk Severe Matrix (2f) R – Red zone: major risk Y – Yellow zone: moderate risk G – Green zone: minor risk

15. Risk Severe Matrix • The matrix provides a basis for prioritizing which risks to address • Red zone (R) receive first priority, followed by yellow (Y) zone risks. Green (G) zone risks are typically considered inconsequential and ignored unless their status changes • Failure Mode and Effect Analysis (FMEA) extends the risk severity matrix by including ease of detection in the equation: Impact x Probability x Detection = Risk Value

16. Project Risk Management – Assessment(3) • After performing a risk analysis, it is often necessary to convert the results into risk levels. • Risk ratings are an indication of the potential impact of risk on a project. They are typically a measure of the likelihood of an issue occurring and the consequences of the issue, and often expressed as low (Green) , medium (Yellow), and high (Red).

17. Project Risk Management – Assessment(4) • A representative (“strawman”) set of risk rating is normally followed: • High risk (Red): Substantial impact on cost, schedule, or technical. Substantial action required to alleviate issue. High priority management attention is required. • Moderate risk (Yellow): Some impact on cost, schedule, or technical. Special action may be required to alleviate issue. Additional management attention may be needed. • Low risk (Green): Minimal impact on cost, schedule, or technical. Normal management oversight is sufficient.

18. Project Risk Management – Response Planning(1) • Risk response development • When a risk event is identified and assessed, a decision must be made concerning which response is appropriate for the specific event. • Response to risk can be classified as mitigating, avoiding, transferring, sharing, or retaining.

19. Project Risk Management – Response Planning(11): Risk Response Matrix (Which Project?)

20. Project Risk Management – Response Control • The last step in the risk management process is risk control – 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.

21. Managing Risks Through Contracts • Categorization of Risks: • Political & social risks(war damage, strike, theft, vandalism, etc.) • Natural risk [climatic conditions, geological conditions, other natural catastrophes, etc.] • Economic & legal risk (inflation, shortages, change in law & taxes etc.) • Behaviours risk (employer’s √ /contractor’s/3rd party)