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CAPM & PMBOK are registered trademarks of the Project Management Institute, Inc.
Objectives
After completing this
lesson, you will be able
to:
Define risk
Calculate risk
Risk
The definition of Risk is as follows:
Risk is an uncertain event or condition that, if it occurs, has a positive or negative effect on a projects
objectives.[1]
You are currently using a software for managing the teams time sheet. Due to a budget constraint, you
are expected to use a new software. You are apprehensive on using the new software, but on using it, you
realize that the new software is more efficient and has better reporting structure. This is a case of risk
having a positive outcome.
If the Government declares a mandatory holiday to check flu spread, the project timelines may get
hampered and this is an example of risk affecting the project negatively.
Key Terms
Positive risks are known as opportunities and negative risks are known as threats. A risk that can have a positive or
negative risk is called business risk. A risk that can only have a negative consequence is called pure risk. Given below
are other risk related terms:
Understand the key terms of project risk management may be useful while answering the exam.
Exam Tips
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Calculation of Risk
Risks can be managed only if they are measured quantitatively.
Calculation of RiskExample
Calculate the expected monetary value for the given work packages.
Work Package
Probability
Impact
25%
-$10,000
40%
-$2,000
10%
+$20,000
Work Package
Probability
Impact
25%
-$10,000
-$2,500
40%
-$2,000
-$800
10%
+$20,000
+$2,000
TOTAL EMV
-$1,300
Copyright 2014, Simplilearn, All rights reserved.
Risk Categorization
Risks can be classified in various ways. One classification of risk is as follows:
External Risks
Internal Risks
Technical Risks
Project
Management Risks
Arise out of the technology being used. E.g., requirements, technology, and quality
Arise out of project management activities. E.g., estimating, planning, schedule, and
communication
Risks can also be classified on the basis of their origin; scope risks, resource risks, schedule risks, cost risks, and quality
risks.
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Decision Tree
A decision tree is used to analyze risk and its impact on decisions, in the face of uncertainties.
If you need to buy a car, which one would you buy? Which option has a risk over a period of 5 years?
Failure : Probability=10%
Impact= $15,000
Initial cost of buying the new car
= $20,000
Pass : Probability=90%
Impact= $000
Failure : Probability=70%
Impact= $10,000
Pass : Probability=30%
Impact= $000
A
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Risk Reserve
Project cost should include both the known and unknown risks. The various risk reserves are calculated in the order
given below:
Project
Activities
Small,
assigned
project tasks
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Work
Packages
Lowest level
of WBS
Contingency
Reserve
Cost
Baseline
Management
Reserve
Control
Account
Work packages
clubbed to
manage cost
Set of
control
accounts
Reserve for
known
uncertainties
Project cost
for
budgeting
Reserve for
unknown
uncertainties
Project risk management includes the processes of conducting risk management planning, identification, analysis,
response planning, and risk monitoring and controlling on a project.[2]
The key objective of risk management is to increase the probability and or impact of positive events and decrease the
probability and or impact of negative events.
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12
Cynthia is a subject matter expert and the Director of New Store Construction in Small Markets.
Because of her expertise and experience in managing complex store build out for the corporation, she
has been appointed as the manager of a new, large, and complex construction project involving a gas
station. None of the previous construction projects included a gas station and convenience store
component. Since this is a new initiative and way for the company to diversify their business, this
project is business critical, very visible to senior management and can be a career maker or breaker.
The senior management team is anxious to see the project brought to life, but the company lacks a
strong risk management process. They would like Cynthia to prepare a risk response plan and submit it
prior to the projects first milestone in 3 weeks. What should Cynthia do?
Business ScenarioSolution
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Because the company lacks a risk management structure and has handled risk poorly in the past,
Cynthia should first search internally for risk experts. Internal experts would be knowledgeable of risks
that exist within the business as it deals with construction. Then she should identify subject matter
experts external to the organization knowledgeable of risk management as it relates to convenience
stores with a gas station component. Another viable resource would be the historical documents
around risk from previously completed projects, which will also point out other stakeholders and/or
SMEs who can contribute to the risk response planning process. After having the key players in place,
Cynthia can work with them to go through the identification and prioritization process of risk that
leads up to the development of their plan.
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15
Analytical techniques
Expert judgment
Meetings
Project
Objective
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Very Low
0.05
Low
0.1
Moderate
0.2
High
0.4
Very High
0.8
Scope
Barely
noticeable
change
Minor areas
affected
Some important
areas affected
Unacceptable
change in scope
Entire scope
rendered useless
Cost
Insignificant cost
increase
10-20% cost
increase
20-40% cost
increase
Time
Insignificant
change
<5% change to
schedule
5-10% change to
schedule
10-20% schedule
change
>20% schedule
change
Quality
Barely
noticeable
degradation
Few parameters
affected
Needs sponsor
approval
Major quality
compromise
Identify Risks
Identify Risks is the process of determining which risks may affect the project and documenting their characteristics. [4]
It belongs to the Planning Process Group.
Project management
plan
Project documents
Scope baseline
Activity duration
estimates
Stakeholder register
Quality management
plan
Schedule management
plan
Procurement
documents
Human resource
management plan
Organizational process
assets
Legend
Input
Output
Tools & Techniques
Planning Process
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Enterprise
environmental factors
Identify Risks
Risk register
Risk register
Documentation
reviews
Diagramming
Expert judgment
techniques
Information gathering
SWOT analysis
techniques
Assumptions analysis
Checklist analysis
Concept based questions on qualitative risk analysis can be expected in the exam.
Exam Tips
18
!
19
Once the probability and impact matrix is filled, a risk threshold can be defined and a risk becomes a
candidate for active management.
Copyright 2014, Simplilearn, All rights reserved.
Concept based questions on quantitative risk analysis can be expected in the exam.
Exam Tips
20
!
21
Residual risks are those that remain after the risk responses were implemented. Secondary risks arise out
of implementing risk responses.
Copyright 2014, Simplilearn, All rights reserved.
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. [8] It is part of the Monitoring
and Controlling Process Group.
Risk register
Project documents
updates
Work performance
reports
Work performance
information
Control Risks
Organizational process
assets updates
Change request
Legend
Input
Output
Tools & Techniques
Monitoring & Controlling
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Risk audits
Risk re-assessment
Meetings
Reserve analysis
Technical performance
measurement
Copyright 2014, Simplilearn, All rights reserved.
Quiz
23
QUIZ
1
Purchasing insurance coverage for your project equipment is an example of which risk response?
a.
Transfer
b. Mitigation
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c.
Acceptance
d.
Avoidance
QUIZ
1
Purchasing insurance coverage for your project equipment is an example of which risk response?
a.
Transfer
b. Mitigation
c.
Acceptance
d.
Avoidance
Answer: a.
Explanation: It is an example of transfer as the financial risk is transferred to the insurance company.
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QUIZ
2
What action should a project manager first take when an unidentified risk event occurs?
a.
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c.
Redo the risk identification process to get prepared for other known-unknowns
d.
QUIZ
2
What action should a project manager first take when an unidentified risk event occurs?
a.
Redo the risk identification process to get prepared for other known-unknowns
d.
Answer: d.
Explanation: The right project management practice dictates that a work around should be created as a
response to the event.
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You are a project manager with a financial firm that has multinational dealings. You feel the financial
meltdown in one of the client countries could affect your project adversely, so you want to hedge your
risks. Although the probability of occurrence of the event is low, you are advised to play it safe. In
terms of risk attitude, your organization could best be described as?
QUIZ
3
a.
Risk Seeker
b. Risk Averse
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c.
Risk Neutral
d.
Risk Mitigator
You are a project manager with a financial firm that has multinational dealings. You feel the financial
meltdown in one of the client countries could affect your project adversely, so you want to hedge your
risks. Although the probability of occurrence of the event is low, you are advised to play it safe. In
terms of risk attitude, your organization could best be described as?
QUIZ
3
a.
Risk Seeker
b. Risk Averse
c.
Risk Neutral
d.
Risk Mitigator
Answer: b.
Explanation: Someone who doesn't want to take risk is called risk averse and the attitude of the
organization seems to be the same.
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QUIZ
4
a.
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c.
d.
QUIZ
4
a.
d.
Answer: a.
Explanation: Decision tree analysis is a quantitative risk analysis technique that involves a diagram
describing different decisions under consideration and the impact on the project of choosing one over the
another.
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QUIZ
5
a.
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c.
d.
QUIZ
5
a.
d.
Answer: b.
Explanation: Only after the entire scope has been defined in the work breakdown structure (WBS), a
comprehensive risk analysis can be done.
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QUIZ
6
A project manager is managing a short duration pilot project and has started the risk management
planning process. He has identified new risks and prioritized them based on the probability and
impact matrix. The project manager now proceeds to plan responses for the risks without analyzing
the risks numerically. According to you, this decision of project manager is:
a.
b.
c.
d.
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QUIZ
6
A project manager is managing a short duration pilot project and has started the risk management
planning process. He has identified new risks and prioritized them based on the probability and
impact matrix. The project manager now proceeds to plan responses for the risks without analyzing
the risks numerically. According to you, this decision of project manager is:
a.
b.
c.
d.
Answer: d.
Explanation: The amount of rigor in the analysis is dependent upon the duration and complexity of the
project. For a short duration project, it may not be necessary to perform numeric (quantitative) risk
analysis.
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Summary
Here is a quick recap of
what was covered in
this lesson:
Risk is an uncertain event or condition that, that has a positive or negative effect on a
projects objectives
Probability * Impact)
Risk can be classified in various ways. Under one category, risks are classified as external,
internal, technical and project management; and on the basis of origin, risks can be
classified as scope, resource, schedule, cost and quality risks
A decision tree is used to analyze risk and its impact on decisions, in the face of
uncertainties
The six Project Risk Management processes are Plan Risk Management, Identify Risks,
Perform Qualitative Risk Analysis, Perform Quantitative Risk Analysis, Plan Risk
Responses, and Control Risks
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Thank You
CAPM & PMBOK are registered trademarks of the Project Management Institute, Inc.
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References
[1] Definition 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.
[2] Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK Guide) Fifth
Edition, Project Management Institute, Inc., 2013, Page 309.
[3] Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK Guide) Fifth
Edition, Project Management Institute, Inc., 2013, Page 312.
[4] Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK Guide) Fifth
Edition, Project Management Institute, Inc., 2013, Page 318.
[5] Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK Guide) Fifth
Edition, Project Management Institute, Inc., 2013, Page 328.
[6] Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK Guide) Fifth
Edition, Project Management Institute, Inc., 2013, Page 333.
[7] Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK Guide) Fifth
Edition, Project Management Institute, Inc., 2013, Page 342.
[8] Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK Guide) Fifth
Edition, Project Management Institute, Inc., 2013, Page 349.
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