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Title: Project Cost Estimation and Management


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Project Risk Management
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PROJECT RISK MANAGEMENT
  • BY
  • Engr. Dr. Attaullah Shah
  • PhD (Civil Engg.) , MSc ( Str Engg.) , MBA , MA (
    Eco) , MSc Envir design
  • BSc Civil Engg (Gold Medal) , Post Grad Dip in
    computer ( Gold medal)
  • Project Director Allama Iqbal Open University
  • Islaamabad Pakisatn.
  • pdaiou_at_yahoo.com
  • pd_at_aiou.edu.pk
  • Cell 92-333-5729809
  • Tel92-51-9057212
  • Fax92-51-9250100

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Some quotes about Risk
  • Great deeds are usually brought at great risks.
    Herodotus
  • If the creator had a purpose in equipping us with
    a neck, he surely meant us to stick it out.
    Arthur Koestler
  • If you don't risk anything, you risk even more.
    Erica Jong
  • If you want to achieve a high goal, you're going
    to have to take some chances. Alberto Salazar

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Decision Making Conditions.
  • Certainty
  • Where a manager can make accurate decision
    because all outcomes are known and distinct.
  • Risk
  • Where the decision maker can estimate the
    likelihood of certain outcome.
  • Uncertainty
  • Neither certainty nor can estimate the
    likelihood of outcomes.

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What is Risk?
  • Risk is a concept that denotes a potential
    negative impact to some characteristic of value
    that may arise from a future event,
  • Risk is often used synonymously with the
    probability of a known loss.
  • The probability that some event will cause an
    undesirable outcome on the financial health of
    your business and/or other business/family goals

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Financial risk management
  • Financial risk management is the practice of
    creating economic value in a firm by using
    financial instruments to manage exposure to risk,
    particularly Credit risk and market risk. Other
    types include Foreign exchange, Shape,
    Volatility, Sector, Liquidity, Inflation risks,
    etc

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Risk and Returns
  • A general investment rule the more risk you are
    willing to take the more your investment can be
    expected to return. Remember investment risk
    means how much returns vary from what you expect.
  • Shares are the riskiest asset class. Share prices
    are volatile meaning they can rise and fall
    significantly in the short term. However, over
    the long term they are often the best performing
    asset class.
  • Cash is the least risky asset class. The returns
    are generally predictable and there is
    practically no risk of capital loss. Returns are
    therefore the lowest.

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Asset class Risk Likely return Form of return Investment time frame
Cash Low Low Interest None
Fixed interest Low to medium Higher than cash Interest 3 to 5 years
Property Medium Lower than shares Rent and capital growth 5 years or more
Shares High High Dividends and capital growth 10 years or more
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Components of Risk Undesirable Outcome
  • Put simply, the Undesirable Outcome is what
    hurts!
  • lower than expected production-
    catastrophically lower production- inability to
    meet cash flow- loss of income- catastrophic
    loss of income- loss of life- loss of buildings
    other resources- loss of health- inability to
    get a permit or loan

Denied
X
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Components of Risk Event (Cause/Source of Risk)
  • The Event is what caused the hurt
  • weather event- injury/death of an employee-
    neighbors action against you- surplus production
    of milk- widespread poor grain production- low
    quality inputs- divorce or disagreement-
    downward slide in general economy- and countless
    more!!!

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Overall Categories of Risk
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Risk Increases the More You Dont Know
All The Potential Outcomes
The Probability of Occurrence
Cost of a Undesirable Outcome
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Five Primary Means of Risk Management
  • Reduce
  • Reduce the probability that the event will occur
  • Reduce the impact if the event does occur
  • Transfer
  • Transfer the cost of an undesirable outcome to
    someone else
  • Avoid
  • Completely avoid potential events thus providing
    a zero probability that they will occur
  • Do Nothing ( Status-quo)
  • Let the risk happen and be ready to bear the
    consequences.

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So, I now know What Risk Management is, but How
do I do it???
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How???
  • Step 1 Be aware, identify the risks you face.
  • Step 2 Evaluate
  • the likelihood that the risk will occur, and
  • how bad the hurt will be if it does occur
  • Step 3 Decide on how you will address the risk
  • reduce, transfer, avoid, nothing, or some
    combination
  • Step 4 Implement
  • What is the most frustrating words used in
    management?? Answer If I had only
  • Step 5 Control
  • Monitor to assure that what you said you would
    do, you did, and that you are getting what you
    want out of your your risk management strategies.

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Project Risk Management
  • Project Risk Management includes the processes
    concerned with conducting risk management
    planning, identification, analysis, responses,
    and monitoring and control on a project.
  • Risk Management Planning deciding how to
    approach, plan, and execute the risk management
    activities for a project.
  • Risk Identification determining which risks
    might affect the project and documenting their
    characteristics.
  • Qualitative Risk Analysis prioritizing risks
    for subsequent further analysis or action by
    assessing and combining their probability of
    occurrence and impact.
  • Quantitative Risk Analysis numerically
    analyzing the effect on overall project
    objectives of identified risks.
  • Risk Response Planning developing options and
    actions to enhance opportunities, and to reduce
    threats to project objectives.
  • Risk Monitoring and Control tracking identified
    risks, monitoring residual risks, identifying new
    risks, executing risk response plans, and
    evaluating their effectiveness throughout the
    project life cycle.

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Risk Management Planning
  • Risk Management Planning is the process of
    deciding how to approach and conduct the risk
    management activities for a project.
  • The Risk Management Planning process should be
    completed early during project planning, since it
    is crucial to successfully performing the other
    processes
  • Planning Meetings and Analysis
  • Project teams hold planning meetings to develop
    the risk management plan. Attendees at these
    meetings may include the project manager,
    selected project team members and stakeholders,
    anyone in the organization with responsibility to
    manage the risk planning and execution
    activities, and others, as needed.

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Components of Project Risk Management Plan
  • Methodology. Defines the approaches, tools, and
    data sources that may be used to perform risk
    management on the project.
  • Roles and responsibilities. Defines the lead,
    support, and risk management team membership for
    each type of activity in the risk management
    plan, assigns people to these roles, and
    clarifies their responsibilities.
  • Budgeting. Assigns resources and estimates costs
    needed for risk management for inclusion in the
    project cost baseline
  • Timing. Defines when and how often the risk
    management process will be performed throughout
    the project life cycle, and establishes risk
    management activities to be included in the
    project schedule.
  • Risk categories. Provides a structure that
    ensures a comprehensive process of systematically
    identifying risk to a consistent level of detail
    and contributes to the effectiveness and quality
    of Risk Identification.
  • Definitions of risk probability and impact. The
    quality and credibility of the Qualitative Risk
    Analysis process requires that different levels
    of the risks probabilities and impacts be
    defined.

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  • 'It is impossible to begin to learn that which
    one thinks one already knows'. Epictetus
  • I am always doing that which I can not do, in
    order that I may learn how to do it." Pablo
    Picasso
  • One of the greatest joys known to man is to take
    a flight into ignorance in search of knowledge.-
    Robert Lynd
  • All our knowledge has its origins in our
    perceptions- Leonardo da Vinci
  • We are what we repeatedly do.- Aristotle.
  • The final obstacle is the belief that there is an
    obstacle. Papaji
  • Imagination is more important than knowledge. For
    while knowledge defines all we currently know and
    understand, imagination points to all we might
    yet discover and create- Einstein

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Risk Breakdown Structure (RBS)
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Probability and impact matrix. Risks are
prioritized according to their potential
implications for meeting the projects
objectives. The typical approach to prioritizing
risks is to use a look-up table or a Probability
and Impact Matrix
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Risk Identification
  • Risk Identification determines which risks might
    affect the project and documents their
    characteristics. Participants in risk
    identification activities can include the
    following, where appropriate project manager,
    project team members, risk management team (if
    assigned), subject matter experts from outside
    the project team, customers, end users, other
    project managers, stakeholders, and risk
    management experts.

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Risk Identification Tools and Techniques
  • Documentation Reviews A structured review may be
    performed of project documentation, including
    plans, assumptions, prior project files, and
    other information.
  • Information Gathering Techniques
  • Brainstorming. The goal of brainstorming is to
    obtain a comprehensive list of project risks.
    often with a multidisciplinary set of experts not
    on the team.
  • Delphi technique. The Delphi technique is a way
    to reach a consensus of experts. Project risk
    experts participate in this technique
    anonymously.
  • Interviewing. Interviewing experienced project
    participants, stakeholders, and subject matter
    experts can identify risks.
  • Root cause identification. This is an inquiry
    into the essential causes of a projects risks.
  • Strengths, weaknesses, opportunities, and threats
    (SWOT) analysis.

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Qualitative Risk Analysis Tools and Techniques
  • Qualitative Risk Analysis includes methods for
    prioritizing the identified risks for further
    action, such as Quantitative Risk Analysis.
    Qualitative Risk Analysis is usually a rapid and
    cost-effective means of establishing priorities
    for Risk Response Planning, and lays the
    foundation for Quantitative Risk Analysis, if
    this is required.
  • Risk Probability and Impact Assessment
  • Risk probability assessment investigates the
    likelihood that each specific risk will occur.
    Risk impact assessment investigates the potential
    effect on a project objective such as time, cost,
    scope, or quality, including both negative
    effects for threats and positive effects for
    opportunities.

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Risk Identification Outputs
  • Risk Register The primary outputs from Risk
    Identification are the initial entries into the
    risk register, which becomes a component of the
    project management plan.
  • List of identified risks. The identified risks,
    including their root causes and uncertain project
    assumptions, are described.
  • List of potential responses. Potential responses
    to a risk may be identified during the Risk
    Identification process.
  • Root causes of risk. These are the fundamental
    conditions or events that may give rise to the
    identified risk.
  • Updated risk categories. The process of
    identifying risks can lead to new risk categories
    being added to the list of risk categories.

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  • Checklist Analysis Risk identification checklists
    can be developed based on historical information
    and knowledge that has been accumulated from
    previous similar projects and from other sources
    of information.
  • Assumptions Analysis Every project is conceived
    and developed based on a set of hypotheses,
    scenarios, or assumptions.
  • Diagramming Techniques
  • Cause-and-effect diagrams
  • System or process flow charts.
  • Influence diagrams.

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  • Risk Data Quality Assessment A qualitative risk
    analysis requires accurate and unbiased data if
    it is to be credible. Analysis of the quality of
    risk data is a technique to evaluate the degree
    to which the data about risks is useful for risk
    management.
  • It involves examining the degree to which the
    risk is understood and the accuracy, quality,
    reliability, and integrity of the data about the
    risk.
  • Risk Categorization Risks to the project can be
    categorized by sources of risk (e.g., using the
    RBS), the area of the project affected (e.g.,
    using the WBS), or other useful category (e.g.
    project phase) to determine areas of the project
    most exposed to the effects of uncertainty.
  • Risk Urgency Assessment Risks requiring near-term
    responses may be considered more urgent to
    address. Indicators of priority can include time
    to effect a risk response, symptoms and warning
    signs, and the risk rating.

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Qualitative Risk Analysis Outputs
  • Risk Register (Updates)
  • The risk register is initiated during the Risk
    Identification process. The risk register is
    updated with information from Qualitative Risk
    Analysis and the updated risk register is
    included in the project management plan.
  • Relative ranking or priority list of project
    risks. The probability and impact matrix can be
    used to classify risks according to their
    individual significance.
  • Risks grouped by categories. Risk categorization
    can reveal common root causes of risk or project
    areas requiring particular attention.
  • List of risks requiring response in the
    near-term. Those risks that require an urgent
    response and those that can be handled at a later
    date may be put into different groups.
  • List of risks for additional analysis and
    response. Some risks might warrant more analysis,
    including Quantitative Risk Analysis, as well as
    response action.
  • Watch lists of low priority risks. Risks that are
    not assessed as important in the Qualitative Risk
    Analysis process can be placed on a watch list
    for continued monitoring.
  • Trends in qualitative risk analysis results.

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Quantitative Risk Analysis
  • Quantify the possible outcomes for the project
    and their probabilities
  • Assess the probability of achieving specific
    project objectives
  • Identify risks requiring the most attention by
    quantifying their relative contribution to
    overall project risk.
  • Identify realistic and achievable cost, schedule,
    or scope targets, given the project risks
  • Determine the best project management decision
    when some conditions or outcomes are uncertain.

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Quantitative Risk Analysis Tools and Techniques
  • Data Gathering and Representation Techniques.
  • Interviewing. Interviewing techniques are used to
    quantify the probability and impact of risks on
    project objectives.
  • Probability distributions.
  • Continuous probability distributions represent
    the uncertainty in values, such as durations of
    schedule activities and costs of project
    components.
  • Expert judgment.
  • Subject matter experts internal or external to
    the organization, such as engineering or
    statistical experts, validate data and techniques.

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Quantitative Risk Analysis and Modeling Techniques
  • Sensitivity analysis.
  • Sensitivity analysis helps to determine which
    risks have the most potential impact on the
    project. It examines the extent to which the
    uncertainty of each project element affects the
    objective being examined when all other uncertain
    elements are held at their baseline values.
  • Expected monetary value analysis.
  • Expected monetary value (EMV) analysis is a
    statistical concept that calculates the average
    outcome when the future includes scenarios that
    may or may not happen (i.e., analysis under
    uncertainty).
  • Decision tree analysis.
  • Decision tree analysis is usually structured
    using a decision tree diagram.
  • Modeling and simulation.
  • A project simulation uses a model that translates
    the uncertainties specified at a detailed level
    of the project into their potential impact on
    project objectives.

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Decision Tree Diagram
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Risk Response Planning
  • Risk Response Planning is the process of
    developing options, and determining actions to
    enhance opportunities and reduce threats to the
    projects objectives.
  • It follows the Qualitative Risk Analysis and
    Quantitative Risk Analysis processes.
  • Strategies for Negative Risks or Threats
  • Avoid. Risk avoidance involves changing the
    project management plan to eliminate the threat
    posed by an adverse risk.
  • Transfer. Risk transference requires shifting the
    negative impact of a threat, along with ownership
    of the response, to a third party.
  • Mitigate. Risk mitigation implies a reduction in
    the probability and/or impact of an adverse risk
    event to an acceptable threshold.

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Risk Response Planning
  • Strategies for Positive Risks or Opportunities
  • Exploit. This strategy may be selected for risks
    with positive impacts where the organization
    wishes to ensure that the opportunity is
    realized.
  • Directly exploiting responses include assigning
    more talented resources to the project to reduce
    the time to completion.
  • Share. Sharing a positive risk involves
    allocating ownership to a third party who is best
    able to capture the opportunity for the benefit
    of the project.
  • Enhance. This strategy modifies the size of an
    opportunity by increasing probability and/or
    positive impacts, and by identifying and
    maximizing key drivers of these positive-impact
    risks.
  • Strategy for Both Threats and Opportunities
  • Acceptance A strategy that is adopted because it
    is seldom possible to eliminate all risk from a
    project.

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Risk Response Planning Tools
  • Contingent Response Strategy
  • Some responses are designed for use only if
    certain events occur.
  • For some risks, it is appropriate for the project
    team to make a response plan that will only be
    executed under certain predefined conditions.

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Risk Response Planning Outputs
  • Risk Register (Updates)
  • Identified risks, their descriptions, area(s) of
    the project (e.g., WBS element) affected, their
    causes (e.g., RBS element), and how they may
    affect project objectives
  • Risk owners and assigned responsibilities
  • Outputs from the Qualitative and Quantitative
    Risk Analysis processes, including prioritized
    lists of project risks and probabilistic analysis
    of the project.
  • Agreed-upon response strategies
  • Specific actions to implement the chosen response
    strategy
  • Symptoms and warning signs of risks occurrence
  • Budget and schedule activities required to
    implement the chosen responses
  • Contingency reserves of time and cost designed to
    provide for stakeholders risk tolerances
  • Contingency plans and triggers that call for
    their execution

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  • Fallback plans for use as a reaction to a risk
    that has occurred, and the primary response
    proves to be inadequate.
  • Residual risks that are expected to remain after
    planned responses have been taken, as well as
    those that have been deliberately accepted.
  • Secondary risks that arise as a direct outcome of
    implementing a risk response.
  • Contingency reserves that are calculated based on
    the quantitative analysis of the project and the
    organizations risk thresholds.

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Risk Monitoring and Control
  • The process of identifying, analyzing, and
    planning for newly arising risks, keeping track
    of the identified risks and those on the
    watchlist, reanalyzing existing risks, monitoring
    trigger conditions for contingency plans,
    monitoring residual risks, and reviewing the
    execution of risk responses while evaluating
    their effectiveness.
  • Risk Reassessment
  • Risk Monitoring and Control often requires
    identification of new risks and reassessment of
    risks. Project risk reassessments should be
    regularly scheduled.
  • Risk Audits
  • Risk audits examine and document the
    effectiveness of risk responses in dealing with
    identified risks and their root causes, as well
    as the effectiveness of the risk management
    process.
  • Variance and Trend Analysis
  • Trends in the projects execution should be
    reviewed using performance data.
  • .

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  • Technical Performance Measurement
  • Technical performance measurement compares
    technical accomplishments during project
    execution to the project management plans
    schedule of technical achievement.
  • Reserve Analysis
  • Throughout execution of the project, some risks
    may occur, with positive or negative impacts on
    budget or schedule contingency reserves.
  • Reserve analysis compares the amount of the
    contingency reserves remaining to the amount of
    risk remaining at any time in the project, in
    order to determine if the remaining reserve is
    adequate.
  • Status Meetings
  • Project risk management can be an agenda item at
    periodic status meetings.
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