Project Risks

Anil Agashe

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 versa
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 to service the debt.

Why analyze and quantify risk?

Risks in Projects
Risks in Projects stem from

Technical uncertainties/ constraints Schedule uncertainties Cost uncertainties

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

Risk Management
Risk is a fact of life in Projects. Its reduction by anticipation and contingency planning is the objective of Risk Management Risk Management Main elements

Risk identification Risk assessment Risk response planning

Risk Identification
Sources of risk

Internal. Originating inside the project- Hence some 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 and performance requirements due to technical problems

Risk Identification
Source of risk

External- Originating external to the project. PM s have no control over this. Typical risks are changes in: (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..)

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 project team members by brain storming

Risk Assessment
Once the risks have been identified, risk assessment is done in terms of

Risk likelihood Risk impact Risk consequence

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 0.2-0.5 High risk Risk likelihood value 0.5 - 1
Risk likelihood values are assigned based on the collective judgement and experience of project personnel

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) and Reduction/ degradation in Performance

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 by Rs. 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

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

Risk Response Planning

After Risk Identification and Risk Assessment , Risk Response Planning addresses the issue of how to deal with risk

Types of Risk Response Planning

Transfer the Risk

Risk transferred in part or in full between Customer to Contractor or Third Party by means of Contract incentives, Contract Penalties, Contract Warranties attached to Project Cost, Schedules or Performance or by Insurance
Penalties for delay and degraded performance Insurance for covering risks

Types of Risk Response Planning

Reduce Risk (of technical performance)

Minimize System complexity Employ best technical team Perform extensive tests and evaluations of system Use of proven technology Use of Outside specialists and experts for review and assessment of work

Types of Risk Response Planning

Reduce 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

Types of Risk Response Planning

Contingency Planning

Identify risks Anticipate what ever might happen Prepare a detailed plan to cope with it
If the cost of avoiding risk exceeds the benefits then do nothing is a better option. Mostly for non severe risks

Accept Risk (Do nothing)

Risk Management Principles

Risk management plan- Identify major risks, specify methods for allocating time & funds from Risk reserve ( a buffer of money , time and other resources) Continuous monitoring of risks

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

Example
Suppose the Base line Time Estimate (BTE) (Time estimate without any buffer) for project completion is 30 weeks and Base line Cost Estimate (with no buffer cost) is 800000Rs,. If the risk likelihood is 0.3 for the project and if it materializes, the project delay is 5 weeks (risk impact for time) and increase cost by 100000Rs (risk impact for cost ) , find out RT, RC and Expected Time of Completion & Expected cost of Completion

Example
RT= 5x 0.3 =1.5 weeks RC= 0.3x 100000= 30000Rs RT and RC are included as buffer or risk reserve in the project schedule and cost After considering risk, the excepted project completion time (ET) = 30+1.5= 31.5 weeks After considering risk, the expected project completion cost (EC)= 800000+ 30000= 830000Rs

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

Example
A 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 Rs 20000 16000 16000 32000 18000 10000 20000 15000 BTE Corrective Cost Weeks Rs 9 8 3 5 3 4 7 6 4000 4000 4000 8000 4000 4000 12000 5000 Corr. Time Risk Weeks likelihood 2 2 1 2 1 3 3 2 0.2 0.3 0.3 0.1 0.1 0.3 0.2 0.3

L V S T J R U C

L L S V V J,T J,R

Calculate the Risk Time and Risk Cost for activities What is the Expected Time of completion of the project and Expected cost of completion?

Completion & Closing of Projects

Completion & Closing of Projects

Issues

General tendency on the part of in house personnel to abandon & close activities and move on to other tasks in a hurry General tendency on the part of contract workers( paid on time rate basis) to go slow so that their services are retained for longer period

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 the project For the Project executing team this is a record of events, experiences , hurdles and corrective actions taken to build a knowledge data base for future projects of similar nature

Action items for PM in this phaseContd

2. Closing down Project accounting system 3. Conducting Project review

Assess the performance of project team members, procedures for improvement action Surplus equipment and materials not needed anymore

4. Disposal of Assets

5. Ensuring that all stake holders are satisfied