chapter 10- net present value

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Chapter 10

Contemporary Project Management

Kloppenborg


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DIT0090: Project Management

Texas Medical Center

TMC is composed of 49 not-for-profit institutionsdedicated to the highest standards of patient care,

research, and education.

Currently 11 major construction projects are underway.

TMC forms the seventh largest downtown businessdistrict in the United States.

Contractors must have a plan in place detailing how they

are going to secure their construction sites in the event

of a hurricane.


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At the end of this chapter

Describe risk management planning, risk identification,risk analysis, and risk response planning.

Identify and classify risks for a project.

Populate a risk register.

Describe various risk assessment techniques and tell

when each is appropriate to use. Prioritize each risk on a project using an appropriateassessment technique.

Develop and defend at least one strategy for each of thehigh priority risks on a project.

Compare and contrast the various strategies for dealingwith risks.


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The purpose of risk management is to

reduce the overall project risk to a level

that is acceptable to the project sponsorand other stakeholders.


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Plan Risk Management

First understand the projects objectives

Realize what project success is

Plan risk managementthe process of defining how toconduct risk management activities for a project.PMBOK Guide


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Planning requires an understanding of project success

Project success measures include:

Meeting Agreements

Cost, schedule, and specifications met

Customers Success

Needs met, deliverables used, customer

satisfied

Performing Organizations SuccessMarket share, new products, new technology

Project Teams Success

Loyalty, development, satisfaction


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Did the project help the performing organization?

Performing organizationthe enterprise whosepersonnel are most directly involved in doing the work of

the project. PMBOK Guide



Specific Project Stakeholder

Priorities



Risk Management Planning and

Stakeholder Priorities

Understand what the project plan calls for

Understand in what area would the most important

stakeholders like to improve

Understand where stakeholders are willing to sacrifice to

enable improvements



Understanding the Project Risk

A risk is anything that may impact the project teams

ability to achieve the general project success measures

and the specific project stakeholder priorities.

A negative impact poses a threat

threata condition or situation unfavorable to theprojecta risk that will have a negative impact on a

project objective if it occurs. PMBOK Guide


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Understanding the Project Risk

A positive impact poses an opportunity

A project manager proactively seeks to eliminate/reduce

the impact of threats and capitalize on opportunities

opportunitya condition or situation favorable to theproject a risk that will have a positive impact on a

project objective if it occurs. PMBOK Guide


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Risk Management Planning

The risk management plan is useful for communicating

with project stakeholders and for follow up analysis

Risk management planthe document describing howproject risk management will be structured and

performed on a project. PMBOK Guide

Ri k M t Pl G id f


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Risk Management Plan Guidance for

an IT Consulting Company

1. Decide what level of risk premium to charge for the

project. The team must rate factors such as project size,complexity, technology, and type. The combined ratings

will dictate that a risk premium of 0, 10, or 20 percent be

added to the estimated project cost or, for very risky

projects, executive approval is mandated.

2. Mitigate risk external to the firm through contract clauses

and risk internal to the firm through agreements.

3. Manage the risk very carefully through specifically

designed weekly conference call meetings and reports.

Risk management includes guidance on how to

perform three risk management activities:


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Roles and Responsibilities

Encourage wide participation in risk management

activities

The more perspectives considered, the more likely

important risks will be uncovered

Participation in project risk planning encourages buy-in

to a risk management approach

The risk management plan defines who has

responsibility for each risk management activity


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Categories and Definitions

Risks may be considered by association with a specific

project life cycle stage

More project risks are uncovered early in the life of a

project

The cost per risk discovered early is less

Risks discovered late in a project can be expensive


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Risks Over the Project Life Cycle


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Risks may be categorized by their impact on a project

objective (cost, schedule, scope, quality)

Risks may be classified as external/internal to the

organization

Risks may be classified by what is known about each


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International Construction Project

Risk Factors


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Information Systems Project Risk

Factors


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Factors


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Factors


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A known known can be planned and managed with

certainty

Knownunknowns can be identified and may or may not

happen

Identify the risk and establish contingency reserves

Unknownunknowns are true uncertainties

Negotiate a management reserve based on project

manager and key stakeholders understanding of the

project

Cement will

harden

Bad weather

will happen

100-year flood


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Identify Risks

Information gathering

Reviews

Understanding relationships

Risk register

Identify risksthe process of determining which risksmight affect the project and documenting their

characteristics. PMBOK Guide


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Information Gathering

A brainstorming activity considering whatcould go wrong

Use classic rules for brainstorming

Variations and extensions of possiblerisks can help to identify additional risks

Interview stakeholders


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Information Gathering

Use a SWOT analysis Use the Delphi technique

Use a structured review review a variety ofproject and other documents to uncover

possible risks

SWOT analysisan information gathering technique

used to examine the project from perspectives of eachprojects strengths, weaknesses, opportunities, andthreats to increase the breadth of risks considered.PMBOK Guide

Delphi techniquean information gathering techniquesused as a way to reach a consensus of experts on asubject Responses are summarized and recirculated for

further comment. PMBOK Guide


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Reviews


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Understanding Relationships Learn the cause and effect relationships of risk events

Use a flow chart that shows how people, money, data, or

materials flow from one person/location to another

Consider why a certain risk event may happen through

root cause analysis

Why might this happen?

Root cause analysisan information gatheringtechniques used as a way to reach a consensus ofexperts on a subject Responses are summarized and

recirculated for further comment. PMBOK Guide


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Understanding Relationships

Understand triggers

A trigger may be specific to an individual risk

Triggers can be general indications of problems for the

project as a whole

Triggersindications that a risk has occurred or is

about to occur. PMBOK Guide


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Triggers for a Project as a Whole

Project manager displays lack of self-esteem.

Team members do not show enthusiasm for project. Project was started with inadequate time for planning.

Communications are overly general, with little focus.

Reports yield little information about true project status.

Little effort has been given to risk management.


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Risk Register

The primary output of risk identification is the riskregister

The risk register includes risk categories, identified risks,

potential causes, potential responses

The risk register is a living document

Risk registerthe document containing the results of thequalitative risk analysis, quantitative risk analysis, and riskresponse planning. The risk register details all identifiedrisks, including description, category, cause, probability ofoccurring, impact(s) on objectives, proposed responses,

owners, and current status. PMBOK Guide


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Partial Risk Register


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Risk Analysis

Perform qualitative risk analysis

Perform quantitative risk analysis

Risk register updates


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Qualitative Risk Analysis

How likely is a risk to happen?

How big will the impact be?

When is the risk likely to occur?

How easy will it be to notice and correctly interpret thetrigger?

Perform qualitative risk analysisthe process ofprioritizing risks for subsequent further analysis or action

by assessing and combining their probability andimpact. PMBOK Guide


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Qualitative Risk Assessment


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Qualitative Risk Analysis

Determine cause and effect relationships

Part of root cause analysis

It may be easier to change the effect by changing the

underlying cause

Use a cause and effect diagram (fishbone diagram)


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Cause and Effect Diagram


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Cause and Effect Diagram

List the risk as the effect in a box at the head of the fish

Name the big bones

Complete the smaller bones as responses to asking

why the big bones may be a problem


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Perform Quantitative Risk Analysis Bigger, more complex, riskier, more expensive projects

may benefit from the rigor of quantitative structured

techniques

Use when it is critical to predict the probability of

completing a project on-time, on-budget, at the agreed

upon scope and/or agreed upon quality

Quantitative risk analysisthe process of numericallyanalyzing the effect of identified risks on overall project

objectives. PMBOK Guide


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Common Quantitative Risk Analysis

Techniques

Criteria for Selecting a


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Criteria for Selecting aQuantitative Risk Technique

Methodology Use the explicit knowledge of the project team members. Allow quick response.

Help determine project cost and schedule contingency.

Help foster clear communication.

Easy to use and understand.

Ri k R i t U d t


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Risk Register Updates

Add the probability of each risk occurring and its impact

to the register

Document results of quantitative risk analysis in the risk

register


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Plan Risk Responses Strategies for Responding to Risks


Plan risk responsesthe process of developingoptions and actions to enhance opportunities and

reduce threats to project objectives. PMBOK Guide

St t i f R di t Ri k


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Strategies for Responding to Risks

Project risk response strategy decisions must be made

with a thorough understanding of the priorities keystakeholders have for cost, schedule, scope, and quality

Common Project Risk Strategies


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Common Project Risk Strategies

Ri k R i t U d t


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The project manager sees that the risk register is

updated with the results of the response planning

For each risk the response strategy is noted

Assign a single person as the owner of each risk

Include any changes to the project schedule, budget,

resource assignments and communications plan

S


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Summary

All projects have some risks

Risk planning should use an appropriatelevel of detail to plan for major risks

Risk planning begins with an

understanding of project success Risk management planning is part of the

overall project management plan

Risk identification includes gatheringinformation on potential risks


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Summary

Identified risks are documented in a riskregister

Identified risks are next analyzed

Risk response planning involvesdetermining how to respond to each of the

major risks

Risk response strategies include avoid,transfer, mitigate, accept, research, and

exploit

Ri k M t


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Risk Management on a

Satellite Development Project

Planning

Establish the process fordealing with risk and

change

Day-long clinic

Criteria for evaluatingprobabilities of

occurrence

Compared methods to

industry standards

Execution

Integrated approach toidentification, analysis,

and response to risks

Using a risk management

database tool to log each

risk as a record in the

database

PMnAoEampe

Systematically working with the risks of the project allowed usto prepare responses to the risks if and when they occurred.


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Risk Management WorksheetPMnAoEampe

Ri k M t S t llit


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Risk Management on a Satellite

Development Project

Risk management reviews

Review logged risks, actions and impacts of risks

Review prioritized report of all projects risks

Avenue to resolve high-priority risks of the project Identification of potential risks for related projects

PMnAoEampe

chapter 10- net present value

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