Project and Program Risk Management: A Guide to Managing Project Risks and Opportunities

57 Pages·1992·3.317 MB·English

by  Wideman R.M.

Project and Program
hbNIVEE31DAD 3E BELGhtAF4G RISK MANAGEMENT
Gsiito de Esrlidicls de Posyrado y Edt~cactorZi ontmua
A Guide to Managing Project
Risks and Opportunities
Edited By:
R. Max Wideman
Fellow, PMI
A Publication of the Project Management Institute
Four Campus Boulevard
Newtown Square, Pennsylvania 19073 USA
610/356-4600 Fax: [phone]
E-mail: [email protected]
Web: http:/,www.pmi.org
Foreword
Library of Congress Cataloging-in-Publication Data
Edited by: Wideman, R. Max.
Project and program risk management: a guide to managing project risks This publication is the second in a series of nine handbooks devel-
and opportunities/R. Max Wideman oped by the Project Management Institute (PMI). The series is designed
p. cm .-(The PMBOK handbook series: v.no.6) to complement the Project Management Body of Knowledge (PMBOK)
Includes bibliographical references. as codified by PMI.
ISBN 1-880410-00-1 (10 vol. set).-ISBN 1-880410-06-0 (vo1.6) This handbook deals with the function of Risk Management in the
1. Industrial project management. 2. Risk management. I. Title. 11. Series. context of project or program management. It establishes the need for
HD69.P76W54 1992 examining risks and opportunities in project work and describes ap-
658.4'04-dc20 92-3336 proaches which can lead to significant reduction of the risks as well as to
CIP better project performance. This is a sometimes overlooked aspect of
project management which can often result in significant improvements
ISBN 1-880410-06-0 (Volume 6) in the ultimate success of the project.
1-880410-00-1 (10 Volume Set) This handbook should appeal equally to those who are looking for a
summary of the basics of project and program risk management, as well
as to those who are studying for PMI's certification program. In addition,
the material in the handbook will benefit course developers, trainers and
academics who are seeking guidance as to appropriate project and pro-
gram risk management educational content.
In keeping with previous practice, this first printing of the handbook
is being made available as a "Preliminary Issue for Trial Use and Com-
ment." Since the content is tied specifically to the PMBOK, it is important
to ensure that PMI members support the material and its manner of
presentation. I hope, therefore, that readers will take a moment to contrib-
ute constructive suggestions for improving and upgrading the next issue
Copyright 01992 by the Project Management Institute. All rights reserved.
by completing and returning the Comments page at the end of this book.
Printed in the United States of America. No part of this work may be reproduced or transmitted in any
The material in this handbook has been assembled entirely by volun-
form or by any means, electronic, manual, photocopying, recording, or by any information storage
tary PMI member effort and, as anyone knows who has been involved in
and retrieval system, without prior written permission of the publisher.
similar undertakings, requires many hours of dedicated effort. In partic-
ular I would like to acknowledge the efforts of Max Wideman and the
"PMI" is a federally registered trade and service mark; "PMP" and the PMP logo are federally
many people who provided comments and suggestions on the various
registered certification marks; and the PMI logo, "PMBOK" and "Building professionalism in project
drafts. To all those who contributed their thoughts and writings to this
management." are trademarks of Project Management Institute.
first issue, I express our appreciation for a job well done!
PMI books are available at quantity discounts. For more information, please write to the Business
Rodney J. Dawson
Manager, PMI Publishing Division, Forty Colonial Square, Sylva, North Carolina, 28779 USA. Or
President, Project Management Institute
contact your local bookstore.
The paper used in this book complies with the Permanent Paper Standard issued by the National
Information Standards Organization (239.48-1984).
Preface Acknowledgments
Welcome to project and program risk management! Understandably, the risks associated with large and very large pro-
In a very real sense, progress is made by spotting opportunities and jects have received noteworthy attention in the literature, because of the
taking advantage of them. Once identified, the most aggressive way of taking substantial sums of money involved on the one hand, and the political
advantage of such opportunities is by establishing a project. Thus, the whole and professional reputations of the sponsors on the other. On lesser
point of a project is to introduce some change which wiU be beneficial in projects, however, aspects of the project which may be at risk are fre-
financial or other ways to the sponsors and users of the project. quently submerged in an all-encompassing "contingency allowance" de-
However, introducing change means introducing something new, to termined as a result of some previous experience. For many, this approach
venture forth, to take some risks. So risks are the corollary of opportunity. They may be quite satisfactory, yet closer examination of the subject indicates
represent exposure to mischance, hazards, and the possibility of adverse that including risk as a pro-active management function provides project
consequences. They are the down-side of a prom undertaking. While pro* management with an added management opportunity.
management is the best way of manapg opportunity, taking risks has always Project and Program Risk Management furnishes the chance to better
been a fundamental part of the process, and this needs to be pro-actively understand the nature of the project at hand, to involve team members in
managed through the function of Pro* and Program Risk Management. its strengths and weaknesses, and generally to integrate the core functions
Generally, when we speak of taking a risk we tend to think of those of Scope, Quality, Time and Cost with the interactive functions of Human
things which are at long odds, are highly chancy and possibly hazardous. Resources, Contract/Procurement, and lnformation/Communications
Yet many risks we take in everyday life are so commonplace that we scarcely management. For these reasons, PMI early recognized the importance of
gve them a thought. Instead, we treat them as mere uncertainties and react this subject to the overall success of a project, no matter what its size or
to them subconsciously, taking precautions that experience has taught us are area of application, and so identified Project and Program Risk Manage-
only prudent. ment as a separate PMBOK topic.
However, in today's markets with more difficult economic conditions, Once again many PMI members, too numerous to cite all by name,
tougher competition, and ever advancing technology, project uncertainty have enthusiastically volunteered material, suggestions and encourage-
and risk have assumed sigruficantly greater proportions. Indeed, in most ment for the development of this handbook. I would, however, like to
projects, not only are the uncertainties and risks numerous, but they are also mention a few who have been particular contributors or my mentors in
interrelated. This affects project results in complex ways, making it difficult this effort: Mike Curran, David Hamburger, and Bill Hosley for most
for management to be confident in forecasting the final results. helpful explanations, conversations and text; David Hulett for a copy of
Therefore, Project and Program Risk Management is seen as the formal an excellent Orange County Chapter workshop handout on Risk Manage-
process whereby the risks and opportunities are systematically identified, ment; Pat Buckley and Bill Duncan for a change in emphasis; Chris Quaife
assessed and appropriately provided for in the course of project planning for both written contributions and thorough and perceptive comments on
and implementation. It means taking a pro-active stance to cultivate an my original texts; and Davidson Frame for encouragement and testing the
environment in which project and program risks are sigruficantlyr educed, handbook in one of his classes. I am sure that readers will benefit greatly
if not eliminated entirely, and opportunities are cultivated. Project and from their work. Any errors of interpretation or omissions are, of course,
Program Risk Management should encompass the full spectrum of activities my own responsibility.
associated with the handling of project uncertainties. As always, my wife Audrey has been most supportive of this work
As one of project management's integrative functions (see PMBOK and patiently endured through many hours of moans and groans arising
Handbook Volume 1, A Framework for Projecf and Program Management from the effort of putting pen to paper (or more contemporarily, fingers
Integration) Project and Program Risk Management is inextricably tied into to keyboard).
each of the other project management functions, especially the four basic
project constraints of Scope, Quabty, Time and Cost. It is, therefore, a key
R. Max Wideman, Fellow, PMI
function of the project management process. However, management's atti-
Editor
tude towards risk, in many cases, is governed by the extent of their under-
standing of the risk management process, their confidence in the associated
techniques and in the analyhcal results obtained. Others consider the subject
too mathematical, yet many risks relate to people and their attitudes. Hence
the need for this handbook
iii
Contents
Chapter VI Risk Response and Documentation
Response Options . . . . . . . . . . . . . . . VI .l
Foreword . . . . . . . . . . . . . . . . . . . I System Standards . . . . . . . . . . . . . . . VI .l
Preface . . . . . . . . . . . . . . . . . . . ..I.I Insurance . . . . . . . . . . . . . . . . . VI .2
Acknowledgments . . . . . . . . . . . . . . . . . 111 Response Planning . . . . . . . . . . . . . . . VI-3
Data Collection, Application and Documentation . . . . . . . . v1-3
Chapter I Introduction
A . Handbook Purpose and Content . . . . . . . . . . . . 1-1 Chapter VII Management of Contingency Allowances
B . Why Project Risk Management? . . . . . . . . . . . . 1-1
After the Known Risks. What Then? . . . . . . . . . . . VII .l
C . Uncertainty, Opportunity and Risk . . . . . . . . . . . 1-3
Contingency Reserves? . . . . . . . . . . . . . . VII .2
D The Nature of Risk Management . . . . . . . . . . . . 1-4
Application of Project Contingency Allowances . . . . . . . . . VII .3
E. Project Risk Management is Pro-active . . . . . . . . . . 1-4 Contingency Allowances for Project Implementation . . . . . . . VII .3
F. Risk and Decision Makers . . . . . . . . . . . . . 1-5 Implementation Contingency Strategic . . . . . . . . . . VII .4
A Simple Tabular Calculatio . . . . . . . . . . . . . VII .6
Chapter II Integration. General Approach and Definitions
Integrating Risk into Project Management . . . . . . . . . . II .1 Chapter Vlll Managing the Risks of the Project's Environment
The Natural Risk Management Sequence . . . . . . . . . . II .1 What is the Project Environment? . . . . . . . . . . . VIII .1
Risk Management .A n Integrative Function . . . . . . . . . 11-3 Problems are Caused by People . . . . . . . . . . . . Vlll .2
Project Risk Management Definition . . . . . . . . . . . 11 .3 Risk and Safety . . . . . . . . . . . . . VIII-3
Variation of Risk Factors Through the Project Life Cycle . . . . . . 11 .3 Principal Determinants . . . . . . . . . . . . . Vlll .5
Four-Phase Approach . . . . . . . . . . . . . . 11-6
Managing by Stakeholder Groupings and Categories . Vlll .5
The Means and Value of Exercising Positive Influence . . . . . . . V111- 6
Chapter Ill Risk ldentification
Chapter IX Dealing with Risks in Contracts
Risk in Corporate Business Management . . . . . . . . . . 111 .1
Risk in Project Management . . . . . . . . . . . . . 111 .1 Contract Strategy Considerations . . . . . . . . . . . . IX .l
Types of Risk . . . . . . . . . . . . . . . . . 111 .2 Suggested Risk Sharing Principles . . . . . . . . . . . IX .2
Project Risk Identification . . . . . . . . . . . . . 111 .3 Types of Contract . . . . . . . . . . . . . . . IX .3
Project Risk Configuration . . . . . . . . . . . . . 111 .4 Different Contract Risk Implications . . . . . . . . . . . IX .4
Risk Factors . . . . . . . . . . . . . . . . 111 .6 More than One Contract . . . . . . . . . . . . . . IX .4
A Question of Attitudes . . . . . . . . . . . . . . IX-6
Chapter IV Risk Assessment Goals and Methodology
Chapter X SummarylConclusions
Risk Assessment Goals . . . . . . . . . . . . . . IV .1
Assessment Methodology . . . . . . . . . . . . . IV .2 Risk Management .T he Present . . . . . . . . . . . . X- 1
Advantages of Assessment Methodology . . . . . . . . . . IV .6 It's the Attitude That Counts . . . . . . . . . . . . . X-2
The Basics of Probability . . . . . . . . . _ . . . IV .6 Risk Management .T he Future . . . . . . . . . . . . X.2
The Quality Risk . . . . . . . . . . . . . . . IV-9
The Schedule Risk . . . . . . . . . . . . . . . IV-9
Chapter V Computer Applications
Data Storage. Retrieval and Computation . . . . . . . . . . V- 1
PERT and the Probabilistic Model . . . . . . . . . . . V- 1
Range Estimating . . . . . . . . . . . . . . . V-2
Risk Analysis . . . . . . . . . . . . . . . . . V -4
Knowledge-Based Risk Management . . . . . . . . . . . V-5
Illustrations
Appendices
FIGURE Page
A. Typical Project Risks
The Uncertainty Spectrum . . . . . . . . . . . . . 1-2
How Does the Project Manager Know When There is a Project Risk? . A-1
Specific Project Risks . . . . . . . . . . . . A - 1 TheUncertaintylOpportunitylRiskRelationship . . . . . . . . . 1-3
Integrating Risk With Other Project Management Functions . . . . . . 11-2
Typical Life Cycle Profiles - Risk vs. Amount at Stake . . . . . . . 11-5
B. Impact Analysis Methodology Risk Function Breakdown: Four Processes . . . . . . . . . 11-6
Problem Structuring . . . . . . . . . . . . . B - 2 Risk Management: ldentification . . . . . . . . . . . . 111 - 4
Risk Identification and Screening . . . . . . . . . . . . B - 3 Risk Management: Mitigation . . . . . . . . . . . . 111 - 5
Risk Quantification . . . . . . . . . . . . . . B - 4 Comparing Severity of Project Risks . . . . . . . . . . . IV-3
-
Risk Combination and Modeling . . . . . . . . . . . B - 4 Impact Analysis Matrix Sequence . . . . . . . . . . . IV 4
Overall Evaluation . . . . . . . . . . . . . . . B - 6 The Quality Risk: Difference Between Success and Failure . . . . . . IV - 10
Project Risk Report . . . . . . . . . . . . . . . B - 6 Simple Example of Network Completion Risk . . . . . . . . . IV-11
Probability Distributions: Two Projects With the Same Expected Values of Total Costs v-3
Graphical Presentation of Analysis Results . . . . . . . . . v - 4
v -
C. Other Risk Analysis Techniques Presenting Results of Anlaysis: Cumulative Risks vs. Criterion Value - ConstrWon Project 5
Breakdown Structure of Identified Risks . . . . V-6
Brainstorming . . . . . . . . . . . . . . . . C - I
-
Sensitivity Analysis . . . . . . . . . . . . . C .1 Project Environment Process . . . . . . . . . . . . VIII 1
Probability Analysis . . . . . . . . . . . . C - 2 Project Environment: External Influences and Interfaces . . . . . . Vlll - 2
Delphi Method . . . . . . . . . . . . . C - 2 Managing the Environment: Public Relations Concept . . . . . . . Vlll - 7
Monte Carlo . . . . . . . . . . . . . . . . C -3 Contract Type vs. Risk Allocation . . . . . . . . . . . . IX - 2
Decision Tree Analysis . . . . . . . . . . . . . . C .3 Scope Definition - Risk - Contract Selection . . IX - 4
Utility Theory . . . . . . . . . . . . . C - 4 Conceptual Relationship Between Risks, Damage Scenarios and Consequences . B-5
Decision Theory . . . . . . . . . . . . . . . C -4 Simplified Risk Analysis Program Structure . . 8-7
Decision Tree for Two Projects Showing Probabilities Assigned . . . . . C-4
Comparing Severety of Project Risks . . . . D-4
D. Risk Applied to Schedule and Cost
TABLE Page
E. A Glossary of Project and Program Risk Management Terminology 11.1 Typical Functional Distribution of Controllable Risk Items . . . . . . 11 -4
IV.1. Network Activity Summary . . . . . . . . . . . . . IV - 11
IV.2. Network Path Evaluation . . . . . . . . . . . . . IV-11
VII.l Contingency Allocation: Construction Project . . . . . . . . . VII -5
V11.2 Simple Tabular Calculation of Estimating Contingency . . . . . . . VII - 6
IX.l Risk Implicationso f Different Types of Contract (from Client's perspective) . . IX - 5
vii
Risk Management
Chapter Introduction
A. Handbook Purpose and Content
The purpose of this handbook is to provide a simplified under-
standing of the nature of project risk and opportunity, and a system-
atic approach to risk reduction. For brevity and ease of reference, it
is deliberately structured in simple and concise terms, often in bullet
format, or by graphic illustrations.
This handbook is one of a family of nine, designed to
provide a summary level review of each of the major functional
areas of project management. These functional areas are those
codified in the Project Management Institute's Project Manage-
ment Body of Knowledge (PMBOK). This handbook provides a
useful insight into the process of project risk management for
anyone contemplating a project, whether it is a small adminis-
trative project, a large capital works project, or anything in
between. It also provides an introduction for those intending
to study for PMI's Project Management Professional (PMP)
certification exam.
B. Why Project Risk Management?
Corporate management has the responsibility to make for-
mal judgments and appropriate decisions that will lead the
organization to a successful destiny. Ideally, such decisions
should be taken in an environment of total certainty, wherein all
the necessary information is available for making the right
decision, and the outcome can be predicted with a high degree
of confidence. In reality, most decisions are taken without com-
plete information, and therefore give rise to some degree of
uncertainty in the outcome. In the extreme case of complete
absence of information, nothing is known about the outcome
and total uncertainty prevails.
Organizational survival in today's world is achieved by pur-
suing opportunity within this spectrum of uncertainty and projects
are typically launched to take advantage of these opportunities.
Thus, the whole point of undertaking a project is to achieve or
establish something new, to venture, to take chances, so risk has
always been an intrinsic part of project work. However, in today's
markets, with heavy competition, advanced technology and
tough economic conditions, risk taking has assumed significantly
greater proportions.
Chapter I Introduction
Risk Management
The goals of risk management, therefore, are to identlfy proj-
C. Uncertainty, Opportunity and Risk
ect risks and develop strategies which either significantly reduce
them or take steps to avoid them altogether. At the same time, From the foregoing it will be seen that uncertainty, opportu-
steps should be taken to maximize associated opportunities. In nity and risk are closely allied. It can be visualized that unknowns
essence, it involves planning which minimizes the probability and about the future may turn out to be either favorable or unfavor-
net effects of things going wrong, and carefully matches respon- able, but lack of knowledge of future events constitutes uncertainty so
sibility to residual risks which are unavoidably retained. It is a that uncertainty is simply the set of all possible outcomes, both
very constructive and creative process. favorable and unfavorable. In this relationship, the probability of
As a simple example, one way of avoiding a possible traffic those outcomes which are favorable may be viewed as opportunity,
jam while driving on the highway to a particular destination is to while the prob1 ability of those outcomes which are unfavorable
represent risk.
consider alternative forms of transportation. Granted that each
Similarly, most opportunities when pursued carry with them
may have its own particular set of risks, but careful comparison
should identify the best set of alternatives with the lowest overall associated risks and, generally speaking, the greater the opportu-
degree of uncertainty or risk of amving late. However, the impact nity, the greater is the degree of uncertainty and the consequent
of each on the time and cost of the journey must also be taken into associated risk. Thus, opportunity and risk are also tied together
account if the best overall arrangement for a successful arrival is and, indeed, one may be seen as the corollary of the other. This
to be achieved. The selection may well depend on the relative relationship is shown diagrammatically in Figure 1.2.
priorities given to the cost, schedule, and quality of the journey!
If the real objective of the exercise is to hold a meeting, then
perhaps the opportunity could be taken to hold the meeting at a
more favorable intermediate location? VENTURE OUTCOME
In short, the purpose of project risk management is to: (Project) (Products)
Specifically identlfy factors that are likely to impact the project
objectives of Scope, Quality, Time and Cost
Quantify the likely impact of each factor FAVORABLE
Give a baseline for Project Noncontrollables (Opportunity)
Mitigate impacts by exercising influence over Project Control- UNKNOWNS
u i
lable~ (Uncertainty)
The scope for project risk management lies somewhere be- UNFA(RViOskRsA) BLE
tween the two extremes of total certainty and total uncertainty, as
shown in Figure 1.1.
I
THE GOAL: Project Risk Management's function is to move uncertainty away
I
from risk and towards opportunity
PARTIAL COMPLETE
FORMATION INFORMATION INFORMATION
I I
(UNKNOWN (KNOWN
Figure 1.2. The Uncertainty/Opportunity/Risk Relationship
UNKNOWNS) UNKNOWNS) (KNOWNS)
I In the context of project management Project Risk is defined
I as follows:
TOTAL GENERAL SPECIFIC TOTAL
UNCERTAINTY UNCERTAINTY UNCERTAINTY CERTAINTY
Project Risk is the cumulative @ed of the chances of uncertain occur-
rences adversely affecting project objectives.
SCOPE OF PROJECT RISK MANAGEMENT'
In other words, it is the degree of exposure to negative events,
and their probable consequences impacting on project objectives,
as expressed in terms of scope, quality, time and cost.'
'Note: In this range the information to be sought is known
However, just as risks are associated with pursuing opportu-
nities, so opportunities also flow from encountering risks. Indeed,
Figure 1.1 The Uncertainty Spectrum many a risk which occurs in the event can, with a little foresight
Chapter I Introduction Risk Management
and ingenuity, be turned into an opportunity! Unfortunately, all Indeed, the term Project Risk Management itself tends to be
too often risks are either ignored or dealt with in a very arbitrary misleading because management implies complete control of
way so that such opportunities are overlooked. events. On the contrary, project risk management should be seen
The constant goal of project risk management should be to as advanced preparation for possible adverse future events, rather
move uncertainty away from risk and towards opportunity. than responding as they happen. With such advanced planning it
Consequently, when assessing overall impacts of uncertainty on should be possible to select an alternative action plan which will
a project, it is the net project risk which should be determined, i.e., still enable project objectives to be achieved successfully.
the cumulative net effect of the chances of both adverse and Consider this improbable, but quite possible, situation. You
favorable consequences affecting project objectives. are at risk of being shot at. You have four options.
D. The Nature of Risk Management
Reactive:
Generally, when we speak of taking a risk we tend to think only 1. You can move to avoid the bullet;
of those things which are highly chancy or hazardous. Yet many risks 2. You can deflect the bullet; or
are so commonplace in everyday life that we scarcely give them a 3. You can repair the damage done by the bullet.
thought. Instead, we react to them subconsciously, and take precau-
tions that experience has taught us are only prudent. Pro-active:
In crossing the road, we take the precaution of looking both 4. You can take steps to avoid being confronted by the person with
ways and only cross when the road is clear. If we are in a huny, the gun.
we might "take a chance" (increase the risk) by crossing when we
see a sufficient gap in the traffic. If the traffic is heavy, and the risk Crisis management (reactive mode) consists of selecting the
appears to be extreme, then we might walk further to a designated appropriate response. However, if anticipation and planning
crossing area at an intersection with traffic lights, or even to a safer make it possible to avoid the situation in the first place (pro-active
overpass, if there is one (risk reduced by trading off time and mode) then this approach would obviously be better. Unless, of
energy). course, there are compelling reasons to the contrary such as con-
Rarely do we systematically identlfy all the risks involved in ducting a controversial political campaign! The point is: at no time
reaching our destination. Even less do we consider the conse- are you in control of the bullet (the risk event)3
quences should our chances fail to come off except, perhaps, once
F. Risk and Decision Makers
a serious accident has actually occurred. Otherwise, we might
decide never to go anywhere at all! A risk should only be taken when the potential benefit and
When it comes to our own family, however, we are inclined chances of winning exceed the remedial cost of an unsuccessful
to take an entirely different approach. After all, we are now decision and chances of losing by a satisfactory marp.T herefore
4
dealing with something very precious and with a lot of potential. the risk taker should obtain realistic answers to questions such as:
When our children are small, we admonish them not to go
near the road (risk identification and avoidance).W hen they must Why should the risk be taken?
cross the road, say, to get to school, we examine the dangers and What will be gained?
either teach them how to cross safely or direct them to the school What could be lost?
crossing guard (risk assessment and planning or shift of respon- What are the chances of success (and failure)?
sibility). When they get home at the end of the day, we ask them What can be done if the desired result is not achieved?
"how they got on"?-perhaps we can do something more to help Is the potential reward worth the risk?
them for tomorrow (information feedback and corrective action).
We also make a mental note for when our youngest reaches the Risk elements that tend to attract and/or determine the re-
same age (building the data base). Thus, we have established the sponse attitudes of decision makers include:'
basic elements of managing project risk.
Potential frequency of loss
E. Project Risk Management is Pro-active
Amount and reliability of information available
Project managers will recognize the classic systems method- Potential severity of loss
ology outlined in the previous section. This consists of input, Manageability of the risk
process, output and feedback loop, a basic model which is so vital to Vividness of the consequences
the effective control of any project. Yet risk is somehow different. Potential for (adverse) publicity
It has to do with uncertainty, probability or unpredictability, and Ability to measure the consequences
contingent planning. Whose money is it
Chapter I Introduction Risk Management
Severity of the potential loss appears to attract the most Here are some helpful rules-of-thumb for the project
attention because individuals appear to be willing to accept small managec9 Don't take the risk if:
(even frequent) losses, but are averse to a risk which has high
stakes. Even so, a major thrust must be to minimize unwarranted The organization cannot afford to lose;
optimism, prejudice, ignorance or self-interest. Good ways to do The exposure to the outcome is too great;
this include responding to the following i~sues:~ The situation (or the project) is just not worth it;
The odds are not in the project's favor;
Has it been done before?
It is no more than a "fair bet";
How close is the analogy?
The benefits are not identified;
and There appear to be a large number of acceptable alternatives
(The greater the number, the more the uncertainty.);
Seek out corroborative evidence.
The risk does not achieve a project objective;
Get personal interviews with those with the experience.
The expected value from the baseline assumptions is negative
Obtain alternative opinions.
or is negative with small changes in assumptions;
Insist on written assessments, quantitative if possible.
The data is unorganized, without structure or pattern;
There is not enough data to compute the results
Avoid creating additional risk by rushing, understaffing, un-
(Get more data or do research.);
derfunding, or ignoring the obvious. Simply try to adopt well-es-
A contingency plan for recovery is not in place should the
tablished good project management practices, and so escape the
results prove to be less than satisfactory.
well-known adage: "There's never enough time to do it right the
first time, but time enough to do it over if its wrong!"
But sooner or later a decision has to be made. Never lose sight
of the basic reason for taking a risk-to gain a specific reward.
Some typical project rewards (or benefits) include:
Achieving a desired result using limited resources,
Advancing the state-of-the-art,
Meeting a required end date or improving a schedule,
Enhancing profitability,
Increasing a budget or schedule contingency,
Saving money or offsetting a fiscal variance,
Improving the firm's market position, or
Ensuring customer satisfaction.
In each case, the potential reward must be accurately defined
and, if at all possible, measured in common terms such as cost. If a
1. Construction Industry Institute, Management of Project Risks and Uncertainties, The
finite dollar value cannot be assigned to a particular outcome (e.g.,
University of Texas at Austin, October 1989.
customer satisfaction), it may be necessary to assign an arbitrary
2. PMBOK, 3/28/87, p E-2.
value to the intangible benefit for purposes of risk/reward evalua-
3. D.C. Fraser, Risk Minimisation in Giant Projects, International Conference on the
tion. This may be far more difficult than it seems as marketing's
Successful Accomplishment of Giant Projects, London, England, May 1978.
valuation of customer satisfaction, for example, will generally ex-
4. D. Hamburger, The Project Manager: Risk Taker and Contingency Planner, PMJ, June
ceed a judgment made by manufacturing or engineering. Decision
1990, p44.
makers who use information from various sources in evaluating the
5. Construction Industry Institute, Management of Project Risks and Uncertainties, The
risk must temper their bdpdgmentst o ensure objectivity in the
University of Texas at Austin, October 1989, p3-4.
risk assessment So:
6. J.N. Brooke, Leveraged Risk Reduction, Proceedings PMI Seminar/Symposium, Atlanta,
Georgia 1989, p302.
Make the best decision given the state of knowledge--even so,
7. D. Hamburger, The Project Manager: Risk Taker and Contingency Planner, PMJ, June
it may not work out.
1990, p45.
Distinguish between a good decision and a good outcome.
8. D.T. Hulett, PMP Certification Workshop - Risk Management, PMI Orange County
Since it is not possible to be certain of a good outcome, increase
Chapter, 1991, p12.
the probability of good outcomes by making good decis'ions!
9. Ibid., pl and p58.
Risk Management
Chapter II Integration, General Approach and
Definition
A. Integrating Risk into Project Management
Experience on many projects reveals poor performance in
terms of reaching scope, quality, time and cost objectives. Many
of these shortcomings are attributed either to unforeseen events,
which might or might not have been anticipated by more experi-
enced project management, or to foreseen events for which the
risks were not fully accommodated.
Perhaps one of the biggest hurdles is that of management's
attitude to risk itself. Some have little understanding of the con-
cepts, while others lack confidence in the mathematical techniques
and results obtained, preferring to rely alternatively on aggressive
risk taking or undue caution. Or again, inherent risks may simply
be optimistically ignored. In reality, far better decisions with
higher chances of project success are reached by facing these
issues. For some project managers this may represent a new
working environment.
Figure 11.1 shows schematically how the function of project
risk management is inextricably tied into the remaining seven
PMBOK management functions. Note how specific areas of risk
are associated with each of the individual functions as shown on
the diagram. Each should be carefully evaluated as part of the risk
management responsibility.
A long list of potential project risks is provided in Appendix
A. Not all of these risks apply to all projects, of course, but many
do, and failure to manage risk in the manner described in the
following chapters can lead to sipficant and unnecessary losses.
Poor past track records should be significantly improved by a
generally better understanding and application of the project risk
management function.
B. The Natural Project Risk Management Sequence
The greatest degree of uncertainty about the future is encoun-
tered in the concept phase of a project. Directions taken by the
project sponsors in this phase have the greatest influence on the
ultimate scope, quality, time and cost of the project. Also, change
is an inevitable part of the iterative nature of managing projects,
yet its extent and effects are often under-estimated at this time.
Therefore, the need for a process for the realistic appraisal of factors
affecting the accomplishment phases of the project is essential.