Project Risks

7/31/2019 Project Risks

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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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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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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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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

Documents

Project Risks