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Project Management Professional (PMP)® Exam Review

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PROJECT RISK MANAGEMENT

Chapter 11


What is a Risk ?

* An uncertain event or condition that, if it occurs, has a positive or negative effect on one or more project objectives.

* These definitions are taken from the Glossary of the Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK ® Guide) - Fifth Edition, Project Management Institute, Inc., 2013.

1

2

3

4

Scope

Schedule

Cost

Quality

Project ObjectivesUncertainty

A state of having limited knowledge where it is impossible to exactly describe the existing state, a future outcome, or more than one possible outcome.

Cause and Effect

A risk is triggered by one or more causes and it may have one or more impacts.

The effect can be positive or negative.


What is Project Risk Management ?

* Project Risk Management includes the processes of conducting risk management planning, identification, analysis, response planning, and controlling risk on a project.


Objective of Project Risk Management

Decrease negative events probability and Impact

Increase positive events probability and Impact


Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) - Fifth Edition, Project Management Institute, Inc., 2013, Figure 2-9, Page 40.

Risk, Uncertainty & Cost of changes


Known risks

• Identified, analyzed and responses created. (proactive)

• Assign contingency reserve if it can’t be managed proactively.

Unknown risks• Can’t be managed proactively.

• Requires Management reserve.

Issue – an occurred negative risk


Individual project risks

Overall project risk


Risk attitude among organization and stakeholders

Risk appetite – the degree of uncertainty an entity is willing to take

on in anticipation of a reward.*

The organization is willing to accept reasonable risk to the cost on this project.

Risk tolerance – the degree, amount or volume of risk that an organization

or individual will withstand.*

The organization or stakeholder is willing to accept risk of up to 8% increase in the project

cost.

Risk threshold – measures along the level of uncertainty or the level of impact at which a stakeholder may have specific

interest.*

The organization or stakeholder will NOT accept a risk that may increase the project

cost by more than 9%.

Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) - Fifth Edition, Project Management Institute Inc., 2013, Page 311.


“To be successful, an organization should be dedicated to address risk management proactively and consistently throughout the project.”

Positive and negative risks are commonly known as opportunities and threats.

Risk Aversion Risk Taker

Project risk could exist from initiation

till closing.

Risk Neutral

KEY

PO

INTS



Project Risk Management Processes11.1 Plan Risk Management —The process of defining how to conduct risk management activities for a project.*

11.2 Identify Risks—The process of determining which risks may affect the project and documenting their characteristics.*

11.3 Perform Qualitative Risk Analysis—The process of prioritizing risks for further analysis or action by assessing and combining their probability of occurrence and impact. *



Project Risk Management Processes11.4 Perform Quantitative Risk Analysis—The process of numerically analyzing the effect of identified risks on overall project objectives.*

11.5 Plan Risk Responses—The process of developing options and actions to enhance opportunities and to reduce threats to project objectives.*

11.6 Control Risks—The process of implementing risk response plans, tracking identified risks, monitoring residual risks, identifying new risks, and evaluating risk process effectiveness throughout the project.*



11.1 PLAN RISK MANAGEMENT

Project Risk Management


Plan Risk Management


* The process of defining how to conduct risk management activities for a project.



Inputs

1. Project Management Plan

2. Project Charter

3. Stakeholder Register

4. Enterprise Environmental Factors

5. Organizational Process Assets



Plan Risk Management: Tools and Techniques

• Analytical techniques

– Various techniques used to evaluate, analyze, or forecast potential outcomes based on possible variations of project or environmental variables and their relationships with other variables.*





• Expert Judgment

– Judgment provided based upon expertise in an application area, knowledge area, discipline, industry, etc., as appropriate for the activity being performed. Such expertise may be provided by any group or person with specialized education, knowledge, skill, experience, or training.*





• Meetings– Meetings should be a common way to develop risk management plan

with project team members. Meetings can include stakeholders who have vested interested in the project and subject matter experts.

– Several decision can be made this meeting including but not limited to1. Plans to conduct risk management activities2. Assign budget and schedule for risk management3. Assign responsibility in risk management4. Develop templates for risk categories




Plan Risk Management: Outputs

• Risk Management Plan– This will layout the risk management activities structure and

plan.• Methodology

• Roles and responsibilities

• Budgeting

• Timing

• Risk categories

• Definitions of risk probability and impact




Definitions of risk probability and impactDefined Conditions for Impact Scales of a Risk on Major Project Objectives

Project Objectives

Relative or numerical scales are shown

Very low / 0.1 Low / 0.2 Moderate /0.3 High /0.5 Very High /0.8

CostInsignificant cost

increase< 3% cost increase

3% - 5% cost increase

5%-10% cost increase

> 10% cost increase

TimeInsignificant time

increase< 10 days delay 10 to 20 days delay 20 to 30 days delay > 30 days delay

ScopeScope decrease

barely noticeableMinor areas ofscope affected

Major areas ofscope affected

Scope reductionunacceptable to

sponsor

Project end itemis effectively

useless

QualityQuality degradation

barely noticeable

Only very demandingapplicationsare affected

Quality reductionrequires sponsor

approval

Quality reductionunacceptable to

sponsor

Project end itemis effectively

useless

Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) - Fifth Edition, Project Management Institute, Inc., 2013, Table 11.1, Page 318.


Plan Risk Management: Outputs

• Risk Management Plan

– Probability and impact matrix

– Revised stakeholders’ tolerances

– Reporting formats

– Tracking




Risk Threshold

Probability & Impact Matrix

Probability Threats Opportunities

0.9 0.09 0.18 0.27 0.45 0.72 0.72 0.45 0.27 0.18 0.09

0.8 0.08 0.16 0.24 0.40 0.64 0.64 0.4 0.24 0.16 0.08

0.7 0.07 0.14 0.21 0.35 0.56 0.56 0.35 0.21 0.14 0.07

0.6 0.06 0.12 0.18 0.30 0.48 0.48 0.30 0.18 0.12 0.06

0.5 0.05 0.10 0.15 0.25 0.40 0.40 0.25 0.15 0.10 0.05

0.4 0.04 0.08 0.12 0.20 0.32 0.32 0.20 0.12 0.08 0.04

0.3 0.03 0.06 0.09 0.15 0.24 0.24 0.15 0.09 0.06 0.03

0.2 0.02 0.04 0.06 0.10 0.16 0.16 0.10 0.06 0.04 0.02

0.1 0.01 0.02 0.03 0.05 0.08 0.08 0.05 0.03 0.02 0.01

Impact 0.1 0.2 0.3 0.5 0.8 0.8 0.5 0.3 0.2 0.1

Red – High Risk, Yellow – Medium Risk, Green – Low Risk


11.2 IDENTIFY RISKS



Identify Risks

* Identify Risks is the process of determining which risks may affect the project and documenting their characteristics.


This process will help you identify and anticipate uncertain events.


Key Points

Stakeholders outside the project team may provide additional objective information.

This process should involve the project team

Iterative processFrequency of

iteration

New risks may evolve

Participation in each cycle



Identify Risk Process

Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) - Fifth Edition, Project Management Institute, Inc., 2013, figure11-5, Page 319.

Who can help you with identifying risks?Project Manager, Project Team Members,

Risk Management Team (If assigned), Customers, Subject Matter Experts from outside the Project Team, End Users,

other Project Managers, Stakeholders, and Risk Management Experts.


Tools & Techniques

1. Documentation Reviews

2. Information Gathering Techniques

3. Checklist Analysis

4. Assumptions Analysis

5. Diagramming Techniques

6. SWOT Analysis

7. Expert Judgment



1. Documentation reviews

Project Documents

The process of gathering a corpus of information and reviewing it to determine accuracy and completeness.*




2. Information Gathering Techniques

• Brainstorming

• Delphi technique

• Interviewing

• Root cause analysis



Brainstorming

* A general data gathering and creativity technique that can be used to identify risks, ideas, or solutions to issues by using a group of team members or subject matter experts.




Delphi technique 1. An information gathering technique used as a way to reach a consensus of experts on a subject.

2. Experts on the subject participate in this technique anonymously.

3. A facilitator uses a questionnaire to solicit ideas about the important project points related to the subject.

4. The responses are summarized and are then re-circulated to the experts for further comment.

5. Consensus may be reached in a few rounds of this process.

6. The Delphi technique helps reduce bias in the data and keeps any one person from having undue influence on the outcome.*




Interviewing

* A formal or informal approach to elicit information from stakeholders by talking to them directly.




Root Cause Analysis

An analytical technique used to determine the basic underlying reason that causes a risk. A root cause may underlie more than one risk.*




3. Checklist Analysis

Risk identification checklists are developed based on historical information. The checklist should be reviewed during project closure to incorporate new lessons learned and improve it for use on future projects.*




4. Assumptions Analysis

* A technique that explores the accuracy of assumptions and identifies risks to the project from inaccuracy, inconsistency, or incompleteness of assumptions.




5. Diagramming Techniques

• Cause and effect diagrams– * A decomposition technique that helps trace an undesirable

effect back to its root causes.

• System or process flow charts– These show how various elements of a system interrelate and the

mechanism of causation.

• Influence diagrams– * A graphical representation of situations showing causal

influences, time ordering of events, and other relationships among variables and outcomes.




6. SWOT Analysis

Analysis of strengths, weaknesses, opportunities, and threats of an organization, project, or option.*




7. Expert Judgment

Judgment provided based upon expertise in an application area, knowledge area, discipline, industry, etc., as appropriate for the activity being performed. Such expertise may be provided by any group or person with specialized education, knowledge, skill, experience, or training.*




Identify Risks: Outputs

• Risk Register

– A document in which the results of risk analysis and risk response planning are recorded.

• List of identified risks.

• List of potential responses.



11.3 PERFORM QUALITATIVE RISK ANALYSIS



Things to know

It is usually a rapid and cost-effective means of establishing priorities for plan risk responses

Performed regularly throughout the project life cycle

Assesses the priority of identified risks

It enables project managers to reduce the

level of uncertainty

This process can lead into perform quantitative risk

analysis

Focus on high-priority risks.



Perform Qualitative Risk Analysis

* The process of prioritizing risks for further analysis or action by assessing and combining their probability of occurrence and impact.




Perform Qualitative Risk Analysis: Inputs

1. Risk Management Plan

2. Scope Baseline

3. Risk Register





Perform Qualitative Risk Analysis: Tools and Techniques

1. Risk probability and impact assessment

2. Probability and impact matrix

3. Risk data quality assessment

4. Risk categorization

5. Risk urgency assessment

6. Expert judgmentProject Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) - Fifth Edition, Project Management Institute, Inc., 2013, figure11-8, Page 328.


1. Risk probability and impact assessment

• “Risk probability assessment investigates the likelihood that each specific risk will occur. Risk impact assessment investigates the potential effect on a project objective such as schedule, cost, quality, or performance, including both negative effects for threats and positive effects for opportunities.”




2. Probability and Impact Matrix

Evaluation of each risk’s importance and priority for attention is typically conducted using a look-up table or a probability and impact matrix.*

Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) - Fifth Edition, Project Management Institute, Inc., 2013, Figure 11.10, Page 331.

Probability & Impact Matrix

Probability Threats Opportunities

0.9 0.09 0.18 0.27 0.45 0.72 0.72 0.45 0.27 0.18 0.09

0.8 0.08 0.16 0.24 0.40 0.64 0.64 0.4 0.24 0.16 0.08

0.7 0.07 0.14 0.21 0.35 0.56 0.56 0.35 0.21 0.14 0.07

0.6 0.06 0.12 0.18 0.30 0.48 0.48 0.30 0.18 0.12 0.06

0.5 0.05 0.10 0.15 0.25 0.40 0.40 0.25 0.15 0.10 0.05

0.4 0.04 0.08 0.12 0.20 0.32 0.32 0.20 0.12 0.08 0.04

0.3 0.03 0.06 0.09 0.15 0.24 0.24 0.15 0.09 0.06 0.03

0.2 0.02 0.04 0.06 0.10 0.16 0.16 0.10 0.06 0.04 0.02

0.1 0.01 0.02 0.03 0.05 0.08 0.08 0.05 0.03 0.02 0.01

Impact 0.1 0.2 0.3 0.5 0.8 0.8 0.5 0.3 0.2 0.1



3. Risk Data Quality Assessment

* Technique to evaluate the degree to which the data about risks is useful for risk management.




4. Risk Categorization

* Organization by sources of risk (e.g., using the RBS), the area of the project affected (e.g., using the WBS), or other useful category (e.g., project phase) to determine the areas of the project most exposed to the effects of uncertainty.




5. Risk Urgency Assessment

* Review and determination of the timing of actions that may need to occur sooner than other risk items.




6. Expert Judgment

Expert judgment is required to evaluate the probability and impact of each risk.




Perform Qualitative Risk Analysis: Outputs

1. Project Documents Updates

– Project documents that may be updated include, but are not limited to:

– Risk register updates

– Assumptions log updates




11.4 PERFORM QUANTITATIVE RISK ANALYSIS



Perform Quantitative Risk Analysis

* The process of numerically analyzing the effect of identified risks on overall project objectives.




Perform Quantitative Risk Analysis: Inputs


2. Cost Management Plan

3. Schedule Management Plan



6. Risk RegisterProject Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) - Fifth Edition, Project Management Institute, Inc., 2013, figure11-11, Page 334.


Perform Quantitative Risk Analysis: Tools and Techniques

1. Data gathering and representation techniques

2. Quantitative risk analysis and modeling techniques

3. Expert judgment



1. Data gathering and representation techniques

• Interviewing. “Interviewing techniques draw on experience and historical data to quantify the probability and impact of risks on project objectives. The information needed depends upon the type of probability distributions that will be used. For instance, information would be gathered on the optimistic (low), pessimistic (high), and most likely scenarios for some commonly used distributions.”




Probability Distribution

* These definitions are taken from the Glossary of the Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK ® Guide) - Fifth Edition, Project Management Institute, Inc., 2013.Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) - Fifth Edition, Project Management Institute, Inc., 2013, figure11-14, Page 337.


2. Quantitative Risk Analysis and Modeling Techniques

1. Sensitivity analysis

2. Expected monetary value analysis

3. Modeling and simulation



Sensitivity analysis • * A quantitative risk analysis and modeling technique used to help determine which risks have the most potential impact on the project.

• It examines the extent to which the uncertainty of each project element affects the objective being examined when all other uncertain elements are held at their baseline values.

• The typical display of results is in the form of a tornado diagram.




Expected monetary value analysis

Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) - Fifth Edition, Project Management Institute, Inc., 2013, figure 11-16, Page 339.


Modeling and simulation

A project simulation uses a model that translates the specified detailed uncertainties of the project into their potential impact on project objectives. Simulations are typically performed using the Monte Carlo technique.*




3. Expert Judgment





Perform Quantitative Risk Analysis: Outputs

Project Documents Updates

• Probabilistic analysis of the project.

• Probability of achieving cost and time objectives.

• Prioritized list of quantified risks.

• Trends in quantitative risk analysis results.



11.5 PLAN RISK RESPONSES



Identification and assignment of one person (an owner for risk response) to take responsibility for each agreed-to and funded

risk response

Cost-effective in meeting the challenge

Optimum risk response

Follows of qualitative and or

quantitative analysis

Agreed upon by all parties involved

Realistic

Key Points



Plan Risk Responses

* The process of developing options and actions to enhance opportunities and to reduce threats to project objectives.



Plan Risk Responses: Inputs


2. Risk Register



Plan Risk Responses: Tools and Techniques

1. Strategies for negative risks or threats

2. Strategies for positive risks or opportunities

3. Contingent response strategies

4. Expert judgment



1. Strategies for negative risks or threats

• Risk avoidance is a risk response strategy whereby the project team acts to eliminate the threat or protect the project from its impact.Avoid

• Risk transference is a risk response strategy whereby the project team shifts the impact of a threat to a third party, together with ownership of the response.Transfer

• Risk mitigation is a risk response strategy whereby the project team acts to reduce the probability of occurrence or impact of a risk.Mitigate

• Risk acceptance is a risk response strategy whereby the project team decides to acknowledge the risk and not take any action unless the risk occurs.Accept




2. Strategies for Positive Risks or Opportunities

• The exploit strategy may be selected for risks with positive impacts where the organization wishes to ensure that the opportunity is realized. Exploit

• Sharing a positive risk involves allocating some or all of the ownership of the opportunity to a third party who is best able to capture the opportunity for the benefit of the project.

Share

• The enhance strategy is used to increase the probability and/or the positive impacts of an opportunity.Enhance

• Accepting an opportunity is being willing to take advantage of the opportunity if it arises, but not actively pursuing it.Accept




3. Contingent Response Strategies

• Responses provided which may be used in the event that a specific trigger occurs.*




4. Expert Judgment





Plan Risk Responses: Outputs

1. Project Management Plan Updates Schedule management plan Cost management plan Quality management plan Procurement management plan Human resource management plan Scope baseline Schedule baseline Cost baseline

2. Project Documents Updates



Terminologies

Risk Owner

Trigger

Fallback plans

Residual risks

Secondary risks

Contingency reserves

Management Reserves


11.6 CONTROL RISKS



Control Risks

* Control Risks is the process of implementing risk response plans, tracking identified risks, monitoring residual risks, identifying new risks, and evaluating

risk process effectiveness throughout the project.



Things to know

Project work should be continuously monitored for new, changing, and outdated risks.

Risk management policies and procedures are being followed

Project assumptions are still valid.

Contingency reserves for cost or schedule should be adjusted

based on the current risk assessment.

Analysis shows an assessed risk has changed

or can be retired.

Risk response owner reports periodically to the project

manager



Control Risks: Inputs

1. Project Management Plan

2. Risk Register

3. Work Performance Data

4. Work Performance Reports



Control Risks: Tools and Techniques

1. Risk reassessment

2. Risk audits

3. Variance and trend analysis

4. Technical performance measurement

5. Reserve analysis

6. MeetingsProject Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) - Fifth Edition, Project Management Institute, Inc., 2013, figure11-20, Page 349.


1. Risk reassessment

* Risk reassessment is the identification of new risks, reassessment of current risks, and the closing of risks that are outdated.




2. Risk Audit

* Examination and documentation of the effectiveness of risk responses in dealing with identified risks and their root causes, as well as the effectiveness of the risk management process.




3. Variance and trend analysisA technique for determining the cause and degree of difference between the baseline andactual performance. (Variance Analysis)

An analytical technique that uses mathematical models to forecast future outcomes based onhistorical results. (Trend Analysis)




4. Technical performance measurement

“Technical performance measurement compares technical accomplishments during project execution to the schedule of technical achievement.”




5. Reserve analysis

* An analytical technique to determine the essential features and relationships of components in the project management plan to establish a reserve for the schedule duration, budget, estimated cost, or funds fora project.




6. Meetings

“Project risk management should be an agenda item at periodic status meetings. The amount of time required for that item will vary, depending upon the risks that have been identified, their priority, and difficulty of response.”




Control Risks: Outputs

1. Work performance information

2. Change requests

3. Project management plan updates

4. Project documents updates

5. Organizational process assets updates



PROJECT RISK MANAGEMENT

End of Chapter 11