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Quick Recap. Continuation of previous lecture…. - PowerPoint PPT Presentation
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Quick Recap
Monitoring and Controlling
Continuation of previous lecture….
• Lesson 7: Analyzing Risks and Planning Risk ResponsesTopic 7A: Examine a Risk Management Plan Topic 7B: Identify Project Risks and TriggersTopic 7C: Perform Qualitative Risk AnalysisTopic 7D: Perform Quantitative Risk AnalysisTopic 7E: Develop a Risk Response Plan
Outputs
• Sources of risk (i.e., categories)– Stakeholder actions– Estimates– Staffing plans– Common sources of risk:
• Changes in requirements• Design errors, omissions, and misunderstandings• Poorly defined R & R• Insufficiently skilled staff
Outputs
• Potential Risk events– Specific discrete events that might effect the
project– Generally include:
• Probability• Alternative outcomes• Timing• Frequency (more than once?)
Outputs
• Risk Symptoms– Triggers, or trip wires, or indicators– Indirect manifestations of risk events
• Poor morale• Lack of reported progress
• Inputs to other processes– Improved estimating– More training
Risk Quantification
R iskIdentification
11.1
R iskQ uantification
11.2
R isk ResponseD evelopm ent
11.3
R isk ResponseC ontro l
11.4
P ro jec t R iskM anagem ent
11.0
Risk quantification consists of evaluating the risks and risk interactions to assess the range of possible project outcomes.
PHASE 2: RISK QUANTIFICATION
INCREASE THE UNDERSTANDING OF THE PROJECT
IDENTIFY THE ALTERNATIVES AVAILABLE
ENSURE THAT UNCERTAINTIES AND RISKS ARE ADEQUATELY CONSIDERED IN A STRUCTURED AND SYSTEMATIC WAY AND INCORPORATED INTO THE PLANNING AND DEVELOPMENT PROCESS
ESTABLISH THE IMPLICATIONS OF THESE UNCERTAINTIES ON ALL OTHER ASPECTS OF THE PROJECT
GOALS OF QUANTIFICATION (OR ASSESSMENT)
Risk Quantification - Inputs
• Stakeholder risk tolerances• Sources of risk• Potential risk events• Cost estimates• Activity duration estimates
Risk QuantificationTools and Techniques
• Expected monetary value• Statistical sums• Simulation• Decision trees• Expert judgment
RISK ANALYSIS TECHNIQUESBrainstorming - spontaneous contribution of ideas from team
Delphi method - method to derive consensus using expert opinion
Monte carlo - iterative simulation using random numbers to Incorporate probabilistic data and derive a Probability distribution of the final result
Sensitivity analysis - evaluate effect of a change in a single Variable on the entire project
Decision tree analysis - graphical "either / or" choices Utility theory - takes attitude of decision maker into account
Decision theory - Technique to reach decision under uncertainty And risk. Points to best possible course no matter The forecast accuracy
Probability analysis - next page
SIMPLE PROBABILITYSIMPLE PROBABILITY EQUATION:
Pr (Event #1) x Pr (Event #2) = Pr (Both Events)
0.70 X 0.80 = 0.56 OR 56%
NOTE: THIS APPLIES TO INDEPENDENT EVENTS ONLY
OR
P(t) = P(A) * P(B)
PROBABILITY EXAMPLEDATA:
Probability of Scope = 0.70Probability of No Scope = 0.30
Probability of Approval = 0.80Probability of No Approval = 0.20
EXAMPLE:
Pr(Scope) x Pr(Approval) = 0.70 x 0.80 = 0.56Pr(Scope) x Pr(No Approval) = 0.70 x 0.20 = 0.14Pr(No Scope) x Pr(Approval) = 0.30 x 0.80 = 0.24Pr(No Scope) x Pr(No Approval) = 0.30 x 0.20 = 0.06 Total= 1.00
PRACTICAL APPLICATION -- DECISION TREE ANALYSIS
Expected Monetary Value (EMV)
• Product of two values– Risk event probability– Risk event value
• Valuation of the risk event is key– Must include tangible as well as intangible
value– 1 week slippage with minor client impact– 6 week slippage with major client impact
Expected Monitary Value Example
Given the following: Cost Probability
Optimistic $100,000 0.20Most likely $130,000 0.60Pessimistic $180,000 0.20
Expected Value Calculation: Optimistic $100,000 x 0.20 = 20,000 Most likely $130,000 x 0.60 = 78,000 Pessimistic $180,000 x 0.20 = 36,000
Expected Monitary Value $134,000
(*EMV = Opt imistic + 4(most likely) + Pessimistic)6
* formula if probability is not known
EMV Example
• If no probabilities are given, useEMV=(Opt + 4*ML + Pes)/6
• EMV= ($100 +4*$130+$180)*1000/6= $133,333
Descriptive Statistics
• Mean• Mode• Median• Variance• Standard Deviation• Range
Descriptive Statistics Example
Test scores are 10, 20, 25, 40, 45, 45, 50, 55, 55, 60, 60, 60, 65, 65, 65, 70, 70, 70, 70, 70, 75, 80, 80, 85, 90, 90, 90, 95, 100Mean: number obtained by dividing the sum of a set of quantities by the number of quantities in the set. (answer is 1855 / 29=64)Mode: value or item occurring most frequently in a series of observations. (answer is 70 -it occurs 5 times)Median: middle value in a distribution, above and below which lie an equal number of values (answer is 65)Variance: average of the squares of the variations from the mean of a frequency distribution. (answer is 486.4)
Standard deviation: square root of the variance. (answer is 22)Range: measure of the dispersion equal to the difference or interval between the smallest and the largest of the set of quantities. (answer is 90 or 100-10)
Approximations
• Mean = (Opt + 4*ML + Pes)/6• SD = (Max - Min)/6
Exercise
Opt ML Pess EMV SDev Vari
Proj. A 100,000 125,000 180,000 130,000 13,000 169,000,000
Proj.B 80,000 100,000 125,000 100,833 7,500 5,625,000
Proj.C 75,000 130,000 180,000 129,167 17,500 306,250,000
So What?• Normal Distribution
– Mean is expected value– Mean = Mode = Median– Standard deviation is a measure of dispersion
about the mean• 68.27% of cases occur between Mean + SD and
Mean - SD• 95.45% of cases occur between Mean+2SD and
Mean-2SD• 99.73% of cases occur between Mean+3sd and
Mean-3SD
Mean
+ SD + 2SD + 3SD- SD- 2SD- 3SD
Blue = 68%Blue + Green = 95%
Blue + Green + Red = 99.7%
Normal Distribution
34.1% 34.1%
13.6% 13.6% 1.1%1.1%
Mode
Mean
Median
Skewed Normal Distribution
BETA vs. TRIANGULAR DISTRIBUTIONS
EXPECTED VALUE
COST ESTIMATE
PROBABILITY
EXPECTED VALUE
COST ESTIMATE
PROBABILITY
BETA DISTRIBUTION
TRIANGULAR DISTRIBUTION
Variance = [(b - a) / 6]Mean = (a + 4m + b) / 6
2Mean = (a + m + b) / 3
Variance = [(b - a) 2 + (m - a) (m - b)] / 18
Simulation
Simulation uses a representation or model of a system to analyze the behavior or performance of the system.
• Monte Carlo analysis is best known• results used to quantify risk of various schedule
choices
Monte Carlo
• Requires Optimistic, Most Likely, and Pessimistic estimates.
• Uses random number generator to select which value to use
• Calculates the database multiple times to develop a probability distribution of the data
Decision Trees
Aggressive schedule EMV = $110,000Conservative schedule EMV = $7,000Given the following decision tree: Outcome
250 k
100 k
45 k
20 k
EMV150 k
40 k
9 k
16 k
60%
40%
20%
80%
aggressive
conservative
Choiceevent
Choiceevent
Choiceevent
UTILITY THEORY• Definition
– Endeavors to formalize management’s attitude toward risk of the decision maker.
• Types– Risk Seeking– Risk Neutral– Risk Averse
Expert Judgment
Expert judgment can often be applied in lieu of or in addition to the mathematical techniques described above.
Derived from:• team members• others in or outside of organization• published findings• industry averages / statistics
QUALITY RISK
GOALS OF RISK MANAGEMENT- Increase understanding of project- Improve plans, delivery, and id greatest risks- Where to focus attention
REMAINING MAJOR PROJECT RISK AREA ...What if project fails to perform as expected during operational life / product life cycle?
Conformance to quality requirement remembered long after cost and schedule performance.
\ Quality management has most impact on long-term perceived & actual success of project
SCHEDULE RISK
CAN MANAGE “CRITICAL PATH” BUT NOT MANAGE DURATION
REASON --> SCHEDULE RISK
Highest risk path = path with most project completion riskRisk in all activity duration because future is uncertain
LONGEST DURATION ACTIVITY ¹ RISKIESTTherefore, need to id & manage what could contribute to project delay -- could override management of critical path
C
START
FINISH
A D
B
E
MOST MEANACTIVITY LOW LIKELY HIGH EXPECTEDA-B 8 9 10 9B-C 4 5 6 5C-E 0 0 0 0B-E 1 6 7 4.7A-D 4 9 14 9D-E 1 2 7 3.3
SCHEDULE RISK (CONT'D)
SCHEDULE RISK (CONT'D)
START
FINISH
A D
B
E
SUM OF SUM OF SUM OFPATH MOST LIKELY MEANS HIGHS
A-B-C-E 14 14 16A-B-E 15 13.7 17A-D-E 11 12.3 21
MOST RISKY A-B-E A-B-C-E A-D-E
Risk Quantification- Outputs
Opportunities to pursue, threats to respond to
Opportunities to ignore, threats to accept
Risk Response Development
R iskIdentification
11.1
R iskQ uantification
11.2
R isk ResponseD evelopm ent
11.3
R isk ResponseC ontro l
11.4
P ro jec t R iskM anagem ent
11.0
Risk response development defines the enhancement steps for opportunities and responses to threats.
Risk Response Development
• Defines steps for– enhancing opportunities– responding to threats
Types of Responses
• Avoidance - eliminate• Mitigation
– Reduce EMV by reducing probability– Reduce Impact - buy insurance
• Acceptance– Active: develop plan to deal with risk if it
occurs – Passive: Accept risk (e.g., lower profit)
PLANNING ALTERNATIVES
• Project Managers have Several Response Options– Avoidance– Absorption– Adjustment– Deflection– Contingent Planning– A Combination of the Above
AVOIDANCE
• Defined– Characterized by project manager
statements such as: “This alternative is totally unacceptable to me
– You would take the appropriate steps to avoid this situation.
ABSORPTION
• Risk is Recognized-But Not Acted Upon• Accept the Risk AS IS• It’s a Matter of Policy• Retained & Absorbed (by prudential
allowances)• Unrecognized, Unmanaged, or Ignored (by
default)
ADJUSTMENT• Modification of the Project
– Scope– Budget– Schedule– Quality Specification– Combination of the Above
DEFLECTION
• Involves transfer of risk by such means as:– Contracting Out to Another Party– Insurance or Bonding– By Recognizing it in the Contract
CONTINGENT PLANNINGContingent planning is a means to address risks to the Project through a formal process and provide resourcesTo meet the risk events.
It is the establishment of management plans to be invokedIn the event of specified risk events
Examples:
The provision and prudent management of a contingency allowance in the budget
The preparation of schedule alternatives and Work-arounds
Emergency responses to deal with major specific Areas of risk
An assessment of liabilities in the event of a Complete project shut-down
Types of Responses
• Prevent risk from occurring– Reduce the probability that the event will occur– Eliminate means P=0
• Reduce the impact (think “containment”)– Buy insurance (monetary)– Alternative strategies (additional supplier to
PDQ)
CONTRACT STRATEGY
• To Select the Right Form of Contract Requires:– Identification of Specific Risks– Determination of how they should be shared
between the parties, and – The insertion of clear, legal language in the
contract documents to put it into effect.
CONTRACT TYPE vs. RISK
SCOPE OF WORK INFORMATION
UNCERTAINTY
DEGREE OF RISK
SUGGESTED RISKALLOCATION
CONTRACTTYPES CPPF CPIF CPFF FPPI FFP
VERY LITTLE PARTIAL COMPLETE
HIGH MODERATE LOW
HIGH MEDIUM LOW
100%
0%
0%
100%
AGENCY (BUYER)
SELLER (CONTRACTOR)
CONTRACT TYPE vs. RISK (CONT'D)
COST ESTIMATE VALUE
PROBABILITY
80% 90% 95% 100% 110% 120% 140%
+/- 15%: FFP
+/- 50%: CPIF
+/- 25%: CPFF
> 50%: CPPF
Project A Well defined scope and work content. High probability of achieving realistic cost estimate at 100%
Project c Poorly defined scope and content. Low probability of 100% cost estimate
Project B Fairly well defined scope and work content. Fair probability of achieving 100% cost estimate
Suggested types of contract for various spreads
FAST-TRACKING
• Awarding contracts before all the information is complete to reduce the overall time for the project
• Much higher risk category!!• Appropriate contingency allowances must
be increased accordingly.
Risk Response Development - Inputs
Opportunities to pursue, threats to respond to
Opportunities to ignore, threats to accept
Risk Response DevelopmentTools and Techniques
• Procurement– Buy outside skills
• Contingency planning– what to do if the event occurs– containment
• Alternative strategies– Prevention
• Insurance
Risk Response Development - Outputs
• Risk management plan• Inputs to other processes• Contingency plans• Reserves• Contractual agreements
Risk Response Control
R iskIdentification
11.1
R iskQ uantification
11.2
R isk ResponseD evelopm ent
11.3
R isk ResponseC ontro l
11.4
P ro jec t R iskM anagem ent
11.0
Risk response control involves responding to changes in risk over the life of the project.
PHASE 4: RISK RESPONSE
CONTROL• Execute the risk management plan from phase
-Id, quantify and respond to any changes Execute workarounds -- unplanned responses
To negative events -Additional risk response development
•Current project database
-Documenting on-going risks
•build historical databases
Reliable data is hard to find! Should consist of:
-Recorded risk events -Experience on past projects (similar is preferred)
•Post-project assessment and archive update
Risk Response Control
• Respond to the changes in project risk over the life of the project
Risk Response Control - Inputs
• Risk management plan• Actual risk events• Additional risk identification
Risk Response ControlTools and Techniques
• Workarounds– Unplanned responses to unforeseen risks that
actually occur• Additional risk response development
– Revisions to the response, if it proves inadequate
Risk Response Control - Outputs
• Corrective action– Implementing the risk management plan when
the risk occurs• Updates to risk management plan
– Revisions to the risk management plan as circumstances require• Risk never materializes• Probability of occurrence is reduced
Risk Documentation
Historical databaseCurrent project databasePost project assessment and archive update
• Lessons learned• Plan variances• Actuals• Methods, tools and techniques• Case studies
When Should Risk Assessments be Carried Out?
Risk assessments should be carried out as early as possible and then continuously.
Don’t take the risk if...
• the organization cannot afford to lose.• the exposure to the outcome is too great.• the situation (or project) is not worth it.• the odds are not in the project’s favor.• the benefits are not clearly identified.• there appear to be a large number of
acceptable alternatives.
Don’t take the risk if...
• the risk does not achieve the project objective.
• the expected value from baseline assumptions is negative.
• the data is unorganized, without structure or pattern.
• there is not enough data to understand the results.
• a contingency plan for recovery is not in place should the results prove unsatisfactory.
SUMMARY
Projects are launched to take advantage of opportunities,But opportunities are associated with uncertainties whichHave risks attached
Risk can never be 100% eliminated
For the project to be viable, the expected value resultingFrom a favorable probability of gain must be higher thanThe consequences and probability of loss
Therefore, the risks associated with a project must receiveCareful examination in the context of the organization'sWillingness or aversion to taking risks
This is the domain of project risk management, which formsA vital and integral part of project management