Risk and Uncertainty in Project Management

7/28/2019 Risk and Uncertainty in Project Management

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RISK AND UNCERTAINTY IN

PROJECT MANAGEMENT


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That is, the probability that the expected

result will not be achieved.

From conception or identification to

implementation, risks issues arise and do

affect the project in a number of ways.

risks may be due to environmental or

managerial factors


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Types of Risk

Completion Risks

Permitting Risks

Price Risks Resource Risks

Operating Risks

Casualty Risks Technology Risks


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Classification of risks

Measurable Risks

Immeasurable Risks

Manageable Risks Insurable Risks

Investment Risks


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Risk Management Plan

Risk Identification

Risks Quantification

Risk Response Risk Monitoring and Control


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Risk Identification

Risk identification determines what might

happen that could affect the objectives of

the project, and how those things might

happen.

identification process must be

comprehensive


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The process should be structured using

the key elements to examine risks

systematically, in each area of the project

to be addressed

Techniques

brainstorming


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Info for Risk Identification

Historical Data,

Theoretical Analysis,

Empirical Data And Analysis, Informed Opinions Of The Project Team

And Other Experts, And The Concerns Of

Stakeholders To identify and name the risks


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Risk Quantification

Risk need to be quantified in two

dimensions


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Economic

condition

Cash flow

()

Probability

Boom 100,000,000 20% or 0.20

Normal 50,000,000 50% or 0.50

Recession -10,000,000 30% or 0.30


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The Range

The Standard Deviation


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Expected

cashflow for A0.20 x 100,000,000 +

0.5

0x

50,000,0

00+

0.3

0x

-10,000,0

00

Expected

cashflow for A 20,000,000

25,000,0

00

-

3,000,000

Expected

cashflow for A42,000,000


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( )xCoefficient of Variation

E x


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Economic Cashflow

Cashflow

times Deviation Squared Weighted Squared

Condition

s

Probabi

lity Probability Deviation Deviation

Boom

100,000,00

0 0.20 20,000,000 56,500,000

3,192,250 x

10^9 638,450 x 10^9

Normal 50,000,000 0.50 25,000,000 6,500,000 42,250 x 10^9 21,125 x 10^9

Recession -10,000,000 0.30 -3,000,000 -52,000,000

2,704,000 x

10^9 811,200 x 10^9

E(x) 43,500,000 sigma squared 1,516,000 x 10^9

sigma 38,935,845


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Sensitivity Analysis

scenario analysis or simulation analysis

examination of possible cash flows and

returns on an investment when one uncertain

element is altered

"what if?" analysis

Sensitivity analysis illustrates the effects ofchanges in assumptions


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Sensitivity Analysis

can be used to get an idea of a project's

possible future cash flows and their risk.


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Sales

Cost of goods sold and gross profit

Operating expenses

Interest rates

Accounts receivable days

Inventory days

Accounts payable days on hand

Major fixed asset purchases or reductions

Acquisitions or closings


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Risk Response

Strategies

Avoid the risk.

Do something to remove it.

Use another supplier for example.

Transfer the risk.

Make someone else responsible.

Perhaps a supplier can be made responsible for aparticularly risky part of the project.


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Mitigate the risk.

Take actions to lessen the impact or chance of the

risk occurring.

If the risk relates to availability of resources, drawup an agreement and get sign-off for the resource

to be available.

Accept the risk.

The risk might be so small the effort to do anythingis not worth while.


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A risk response plan

Strategy

action items to address the strategy.

what needs to be done,

who is doing it,

when it should be completed.


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Risk Control

continually monitor risks to identify any

change in the status, or if they turn into an

issue.

best to hold regular risk reviews to :

identify actions outstanding,

identify risk probability and impact,

remove risks that have passed,

new risks.


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Incorporating Risk into Discount

Rate

The discount rate itself has an element of

risk

To take account of additional risk; increase

the discount rate Refer to theories guiding choice of discount

rate

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Risk and Uncertainty in Project Management