gray chap07 riskmanagement

8/13/2019 Gray Chap07 Riskmanagement

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Copyright 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 72


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INTRODUCTION



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BASIC DEFINITIONS

Risk

Uncertain or chance events that planning can not

overcome or control. Risk Management

A proactive attempt to recognize and manage internal

events and external threats that affect the likelihood ofa projects success.


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RISK MANAGEMENT QUESTIONS

What can go wrong (risk event).

How to minimize the risk events impact(consequences).

What can be done before an event occurs(anticipation).

What to do when an event occurs(contingency plans).


6/47Copyright 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 76

Risk Managements Benefits

A proactive rather than reactive approach.

Reduces surprises and negativeconsequences.

Prepares the project manager to take

advantage of appropriate risks.

Provides better control over the future.

Improves chances of reaching project

performance objectives within budget and on

time.


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RISK MANAGEMENT PROCESS




The Risk

Management

Process

FIGURE 7.2




Step 1: Risk Identification

Generate a list of possible risks throughbrainstorming, problem identification and risk

profiling.

Macro risks first, then specific events


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i. Scenario Analysis

Done by assigning probability and impact

measure to represent risk event.

Proposed probability value=01.1/ 0.2, 0.3..Proposed impact measure=0,1, 2, 3

These values need to be established upfront as

to what they represent for each category ofevents

eg. for cost (1=insifnificant cost increase, 2=10%

increase, 3=10-20% increase, 4=20-40% increase,

5=>40% increase)

Cost scenario=probabilityXimpactCopyright 2006 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 711


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ii. Risk Assessment Matrix

FIGURE 7.4


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Risk Severity Matrix

FIGURE 7.5


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iv. Probability Analysis

Decision tree analysis

Split decision into project/work alternatives

For all alternatives, assign values and mutuallyexclusive probability of occurrences

Continue splitting work into sub-works and assign

values and mutually exclusive probability ofoccurrences



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v. Semi quantitative scenario analysis

Similar to scenario analysis but using

quantitative as well as qualitative values

Probability = 0.1, 0.2, 0.3Impact value = low, moderate high



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Step 3: Risk Response Development

Mitigating Risk

Reducing the likelihood an adverse event will occur. Reducing impact of adverse event.

Transferring Risk

Paying a premium to pass the risk to another party.Avoiding Risk

Changing the project plan to eliminate the risk or condition.

Sharing Risk Allocating risk to different parties

Retaining Risk

Making a conscious decision to accept the risk.


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Step 4: Risk Response Control

Risk control

Execution of the risk response strategy

Monitoring of triggering events

Initiating contingency plans

Watching for new risks

Establishing a Change Management System

Monitoring, tracking, and reporting risk

Fostering an open organization environment

Repeating risk identification/assessment exercises

Assigning and documenting responsibility for managing risk


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CONTINGENCY PLANNING



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Basic Definitions

Contingency Plan

An alternative plan that will be used if apossible foreseen risk event actually occurs.

that will reduce or mitigate the negativeimpact (consequences) of a risk event.


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Why Contingency Planning Required?

Having no plan may slow managerial

response.Decisions made under pressure can be

potentially dangerous and costly.


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Contingency Planning for Different Risk

Types

Technical Risks

Backup strategies if chosen technology fails.

Assessing whether technical uncertainties can beresolved.

Schedule Risks

Use of slack increases the risk of a late project finish.

Imposed duration dates (absolute project finish date)Compression of project schedules due to a shortened

project duration date.


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Contingency Planning for Different Risk Types

Costs Risks

Time/cost dependency links: costs increase when

problems take longer to solve than expected.rise in input costs (increase if the duration of a project

is increased).

Funding RisksChanges in the supply of funds for the project can

dramatically affect the likelihood of implementation or

successful completion of a project.


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Contingency Funding and Time Buffers

Contingency Funds

i.e Funds to cover project risksidentified and

unknown. Size of funds reflects overall risk of a project

Form1: Budget reserves

Are linked to the identified risks of specific work packages.Form2: Management reserves

Are large funds to be used to cover major unforeseen risks(e.g., change in project scope) of the total project.

Time Buffers

Amounts of time used to compensate for unplanned

delays in the project schedule.


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Change Management Control

Sources of Change

Project scope changes

Implementation of contingency plans

Improvement changes


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Change Management Control

The Change Control Process

Identify proposed changes.

List expected effects of proposed changes on scheduleand budget.

Review, evaluate, and approve or disapprove of changes

formally.

Negotiate and resolve conflicts of change, condit ion, and

cost.

Communicate changes to parties affected.

Assign responsibility for implementing change.

Adjust master schedule and budget.

Track all changes that are to be implemented


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The Change Control

Process

FIGURE 7.8


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Benefits of a Change Control System

1. Inconsequential changes are discouraged by the

formal process.

2. Costs of changes are maintained in a log.

3. Integrity of the WBS and performance measures is

maintained.

4. Allocation and use of budget and managementreserve funds are tracked.

5. Responsibility for implementation is clarified.

6. Effect of changes is visible to all parties involved.7. Implementation of change is monitored.

8. Scope changes will be quickly reflected in baseline

and performance measures.


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PowerPoint Presentation by Charlie CookCopyright 2006 The McGraw-Hill Companies. All rights reserved.

THE MANAGERIAL PROCESS Clifford F. Gray

Eric W. LarsonThird Edition

Chapter 7 Appendix

PERT and PERT Simulation


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PERTPROGRAM EVALUATION REVIEW

TECHNIQUE

Assumes each activity duration has a range

that statistically follows a beta distribution. PERT uses three time estimates for each

activity: optimistic, pessimistic, and a weighted

average to represent activity durations.Knowing the weighted average and variances for each

activity allows the project planner to compute the

probability of meeting different project durations.


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Activity and Project Frequency Distributions

FIGURE A7.1

Tendency for work to

stay late when delayed


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Activity Time Calculations

The weighted average activity t ime is computed by

the following formula:

(7.1)


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Activity Time Calculations (contd)

The variability in the activity t ime estimates is

approximated by the following equations:

The standard deviation for the activity:

The standard deviation for the project:

Note the standard deviation of the activity is squared in this equation;

this is also called variance. This sum includes only activities on the

cri tical path(s) or path being reviewed.

(7.2)

(7.3)

Take note of the

typographical error


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Activity Times and Variances

TABLE A7.1

Sum of sigma te squared = 44


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Probability of Completing the Project

The equation below is used to compute the Z value

found in statistical tables (Z = number of standard

deviations from the mean), which, in turn, tells theprobability of completing the project in the time specified.

(7.4)

Take note of the

typographical error


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THE Z TABLE


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EXAMPLE

A hypothetical project, where:

- the network is as given below

- and we need to estimate the probability that itcan finish earlier than the schedule 67 (TS)days

delivery period.



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CALCULATING THE SHORTEST POSSIBLE

TIME THE CRITICAL PATH

FIGURE A7.2


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CALCULATING THE SHORTEST POSSIBLE

TIME THE CRITICAL PATH (contd)

FIGURE A7.2 (contd)FIGURE A7.2


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Activity Times and Variances

TABLE A7.1

Sum of sigma te squared = 44


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CALCULATION OF PROBABILITY


Z = 67 64/(root of 44)

Z = 3/6.63Z = 0.452

Limiting values:When Ts=64, Z=0.00, P=50%

When Ts=infinity, Z=4, P=100%

When Ts= negative infinity, Z=-4, P=0%


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Possible Project Duration

FIGURE A7.3


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Z Values

TABLE A7.3

Z = 67 64/(root of 44)

Z = 3/6.63

Z = 0.452

Therefore probability of completing the project on the 67

th

days =67.36%. P(not completed on 67th days)=32.64%

gray chap07 riskmanagement

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