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Project Risks
Anil Agashe
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Risks in Projects
What is Risk? Probability or chance that a thing will not turn out as
planned
High certainty of outcome means less risk and vice
versaWhy analyze and quantify risk? Since large sums of money (or effort converted to
money) over a period of time are involved in Projects;
Many Projects embody a firms strategic intent;
Lenders are interested in the Projects ability toservice the debt.
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Risks in Projects
Risks in Projects stem from
Technical uncertainties/ constraints
Schedule uncertainties
Cost uncertainties
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Risks in Projects
High certainty of outcome depends on
knowledge and experience in prior
projects
Unique or first time projects have higher
element of risk
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Risk Management
Risk is a fact of life in Projects. Itsreduction by anticipation and contingencyplanning is the objective of Risk
ManagementRisk Management Main elements
Risk identification
Risk assessment Risk response planning
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Risk Identification
Sources of risk
Internal. Originating inside the project- Hencesome measure of control possible
Two types of internal risks Market risk- Risk of not meeting market requirements
or that of Customers due to inadequately defined
Customer needs, failure to identify changing needs,
unreliable forecast
Technical risk Risk of not meeting time, cost andperformance requirements due to technical problems
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Risk Identification
Source of risk External- Originating external to the project. PM s
have no control over this. Typical risks are changesin: (All these are situation specific!)
Market conditions
Competitor actions
Government regulations/ Political risks
Interest rates
Exchange rate risk (for projects involving foreign exchange)
Resource risk- availability of material and labour
Customer needs and behaviour
Supplier relations
Nature (weather, natural calamities..)
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How to identify risks?
Reports from past projects
List of user needs and requirements- more
clarity, the better
Risk check lists and levels of risk thought
to be associated with risk sources
Collective experience sharing of projectteam members by brain storming
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Risk Assessment
Once the risks have been identified, risk
assessment is done in terms of
Risk likelihood
Risk impact
Risk consequence
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Risk Likelihood
Probability that risk will materialize.
Expressed as a numerical factor between
0 ( impossible to happen) to 1 (certain to
happen)
Low risk Risk likelihood Value 0-0.2
Medium risk Risk likelihood value 0.2-0.5High risk Risk likelihood value 0.5 - 1
Risk likelihood values are assigned based on the
collective judgement and experience of project personnel
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Risk Impact
If a risk materializes, the result is Risk
impact. In project, risk impact is specified
in terms of Excess Time (weeks or
months), Excess Cost (Rupees) andReduction/ degradation in Performance
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Risk Consequence
Risk consequence is a function of Risk
likelihood and Risk Impact
Risk Consequence (Expected Value)= Risk Likelihood x Risk Impact
Example : Say, the Risk Likelihood is 0.4 . If the risk materializes,
it would delay the project by 3 months and increase the cost byRs. 200,000.
The expected value of Risk consequences are
Risk Consequence Time (RT) = 0.4x 3= 1.2 months
Risk Consequence cost (RC) = 0.4x 200,000= Rs 80,000
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Risk Priority
The Project may contain many activities
with risk.
The risk consequence values for these
activities are computed and ranked.
Higher the value, more the priority
Those with higher risk consequence
values are given special attention
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Risk Response Planning
After Risk Identification and Risk
Assessment , Risk Response Planning
addresses the issue of how to deal with
risk
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Types of Risk Response
PlanningTransfer the Risk
Risk transferred in part or in full between Customer to
Contractor or Third Party by means of Contract
incentives, Contract Penalties, Contract Warrantiesattached to Project Cost, Schedules or Performance
or by Insurance
Penalties for delay and degraded performance
Insurance for covering risks
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Types of Risk Response
PlanningReduce Risk (of technical performance)
Minimize System complexity
Employ best technical team
Perform extensive tests and evaluations of
system
Use ofproven technology
Use of Outside specialists and experts forreview and assessment of work
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Types of Risk Response
PlanningReduce risk ( associated with schedules)
Create Master project schedule and follow it strictly
Schedule most risky tasks as early as possible to
allow time for catching up Close monitoring of critical tasks
Deploy best workers on time critical tasks
As far as possible, schedule high risk activities in
parallel rather than in series Provide incentives for over time work
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Types of Risk Response
PlanningContingency Planning
Identify risks
Anticipate what ever might happen
Prepare a detailed plan to cope with it
Accept Risk (Do nothing)
If the cost of avoiding risk exceeds the
benefits then do nothing is a better option.
Mostly for non severe risks
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Risk Analysis Method
Risk Consequence (Expected Value)=
Risk likelihood x Risk impact (outcome)
Risk Consequence Time (RT)= Corrective
Time x Likelihood
Risk Consequence Cost= Corrective cost
x Likelihood
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Example
Suppose the Base line Time Estimate (BTE)(Time estimate without any buffer) for projectcompletion is 30 weeks and Base line CostEstimate (with no buffer cost) is 800000Rs,. Ifthe risk likelihood is 0.3 for the project and if itmaterializes, the project delay is 5 weeks (riskimpact for time) and increase cost by 100000Rs(risk impact for cost ) , find out RT, RC and
Expected Time of Completion & Expected costof Completion
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Example
RT= 5x 0.3 =1.5 weeks
RC= 0.3x 100000= 30000Rs
RT and RC are included as buffer or risk reservein the project schedule and cost
After considering risk, the excepted projectcompletion time (ET) = 30+1.5= 31.5 weeks
After considering risk, the expected projectcompletion cost (EC)= 800000+ 30000=830000Rs
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Example
When the corrective time and cost cannot
be realistically established,
ET= BTE (1+ likelihood)= 30 (1+0.3)= 39
weeks (from previous example)
EC= BCE (1+likelihood)= 800000(1+0.3)=
1040000Rs
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ExampleA project involves following activities. Against the activities are mentioned their
respective Baseline Cost estimate and Baseline Time estimates , the corrective
cost and time and the likelihood of risk.
Activity Predecessor BCE BTE Corrective Cost Corr. Time Risk
Rs Weeks Rs Weeks likelihood
L - 20000 9 4000 2 0.2
V L 16000 8 4000 2 0.3
S L 16000 3 4000 1 0.3
T S 32000 5 8000 2 0.1
J V 18000 3 4000 1 0.1
R V 10000 4 4000 3 0.3U J,T 20000 7 12000 3 0.2
C J,R 15000 6 5000 2 0.3
Calculate the Risk Time and Risk Cost for activities
What is the Expected Time of completion of the project and Expected cost of
completion?
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Completion & Closing of
Projects
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Action items for PM in this phase
1. Documentation
For the customer this is necessary to operate and
maintain the item provided as a result of theproject
For the Project executing team this is a record of
events, experiences , hurdles and corrective
actions taken to build a knowledge data base forfuture projects of similar nature
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Action items for PM in this phase-
Contd
2. Closing down Project accounting system
3. Conducting Project review
Assess the performance of project team members,
procedures for improvement action4. Disposal of Assets
Surplus equipment and materials not needed
anymore
5. Ensuring that all stake holders are satisfied