Project Risk Management

Prepared by

Ajay Kumar Singhal

Mobile # 98101 53530

All rights reserved. No part of this document may be reproduced or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of Writer.

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Project Risk Management

Construction projects, from inception to closure, encounter unlimited risks. The risks vary from project to project. Project risk management aims at planning and controlling of risks, which might affect the performance of the project.

It involves identifying, analyzing, response planning, monitoring and controlling risks at project site.

Project Constraints :
Time Quantity Cost Scope

What Is A Risk
The chance of an event occurring which would cause actual project circumstances to differ from those assumed when forecasting project benefit and costs. When it is good, we call it opportunity or Positive Risk. When it is bad, we call it threat or Negative Risk.

Risk Management
Risk is the degree of probability of an external event threatening the success of the Project.

Risk Management is the process of identifying, analyzing and drawing up plans to minimize their effect on a Project.

Project risks affect schedule or resources. Product risks affect the quality or performance. Business risks affect the organization.

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Project Risk Management

A systematic approach to control the level of risk to mitigate its effects

Risk Identification Risk Monitoring

Risk Analysis

Risk Analysis Risk Response Risk Planning

Controlled Risk Environment

Risk Identification
It is the process of determining which risks may affect the project and documenting their characteristics. The success of a project depends upon the management of these risk prone changing environments within the framework of project objectives.

1) Acts of God : Flood, Earthquake, Landslide, Wind damage, Epidemic etc. 2) Financial & Economic : Investment risk, Inflation, Availability of funds, Fluctuations in currency exchange rates, Change in tax structures, Change in royalty structure of stone and sand, Effect of time & cost overruns. 3) Political and Legal : Site area is politically motivated, Presence and participation of union labour, Local personnel are to be engaged, Shifts in political leadership, Change in laws and regulations, Import-export restrictions and procedures, ______________________________________________________________________
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Requirement for licenses and permits, Pollution & safety rules.

4) Project Scope: Ill-defined project scope, Frequent change in work scope, No extra work control. 5) Design : Design responsibility, No proper soil investigation, Frequent changes in design during construction, Unrealistic specifications / constructability of design, Poor design and shop drawings. 6) Physical : Inadequate or low quality procurement of resources, Constraints on the availability of labour, Non-availability of the material quality as well as quantity, Long hauling distance material problem, Non-availability of special equipments, spare parts etc, Non-availability of construction water, power, accommodations for labour and staff, Weather conditions; like high temperature / heavy rainfall, Low load carrying capacity of existing culverts / bridges on the route, Unsafe working conditions, Fire, wastage and theft. 7) Contractual : Insufficient time to prepare bid tenders, Unrealistic time schedule, Project schedules anticipate weather that may occur during the execution period, Conflicting conditions of contract, Delay in possession of site, Differing site conditions, Payment problems, Extra works / variations, Claims and disputes, Inability to take timely corrective action. 8) Leadership : No project vision, no team building, Poor motivation, Lack of senior management support, Limited authority / control for Project In-charge, Lack of co-ordination, Insufficient liaison with public services, Barriers in communication / poor communications. ______________________________________________________________________
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9) Organizational : Lack of competent / experience persons in the project team, Wrong selection of project team, No project manual / documented procedures / processes, Project being too complex for the available resources, Inadequate communications infrastructure, Poor quality control, Unsatisfactory conduct of status review meetings, Inability to take timely corrective action.

Risk Analysis
Perform Risk Analysis on all possible significant risks likely to be encountered in a Project. Asses the probability of each risk. Asses the impact if it happens.

Risk Planning
Consider each risk and develop a strategy to manage that risk. Avoidance strategies o The probability that the risk will arise is reduced. Minimization strategies o The impact of the risk on the project or product will be reduced. Contingency plans o If the risk arises, contingency plans are planned to deal with that risk.

Risk Monitoring
Identify new risks. Re-assess each identified risks regularly to decide whether or not it is becoming less or more probable. Also asses whether the effects of the risk have changed. Each key risk should be discussed at management progress review meetings.

Risk Response Method

Elimination o Tendering a very high bid. o Placing conditions on the bid. ______________________________________________________________________
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o Pre-contract negotiations as to which party takes certain risks. o Not biding on the high risk portion of the contract.

Transfer o The activity responsible for the risk may be transferred To a contractor or designer by the Client. To a Sub-contractor by the Contractor.

o The activity may be retained, but the financial risk transferred, i.e. methods such as insurance.

Deferred o Activities can be moved to a later date in the Project when the adverse effects of events may be minimized or reduced.

Retention o Handling risks by the company who is undertaking the project. o Two retention methods, active and passive. Active retention is a deliberate management strategy after a conscious evaluation of the possible losses and costs of alternative ways of handling risks. Passive retention occurs through negligence, ignorance or absence of decision.

Reduction o Continuous effort. o Well-defined specifications. o Detailed site survey. o Detailed design. o Completing design before execution. o Early involvement of trained / expert project group. o Related with improvements of a companys physical, procedural, educational, and training devices. o Improving housekeeping, maintenance, first aid procedures and security. o Education and training within every department.

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Risk Assessment Matrix

A matrix is a two-dimensional array; an array made of rows and columns. In risk management the risk matrix is a mean to visualize these two dimensions in order to display the ranking of a risk. It is made of the impact / consequence / severity of a risk when occurring and the likelihood / probability of a risk to occur. To build the risk matrix, you will divide likelihood and consequences into steps. Find it : Identify What you need to do ? - Consider what can go wrong. - Calculate the risk level. Asses it : Probability / Likelihood How likely is it to happen ? - Usually underestimated, - Consider existing controls, - Work conditions and procedures. Probability Rare Unlikely Possible Likely Almost Certain A remote likelihood. Very unlikely to occur. Unlikely, but possible to occur at some time. Will probably occur in most circumstances. Likely to occur in most circumstances. Meaning Value 1 2 3 4 5

Asses it -

: Impact / Consequences / Severity How severely could it hurt someone / cause damage ? Be realistic. Meaning No injuries, low financial impact. First-aid treatment required, some financial impact. Medical treatment required, high cost. Serious injury, major cost. Death or large number of serious injuries, huge cost. Value 1 2 3 4 5

Impact Negligible Minor Moderate Major Catastrophic

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Asses it

: Risk Matrix = Probability x Impact

Risk Impact Negligible 1 1 2 3 4 5 1 Low 2 Low 3 Low 4 Low 5 Medium Minor 2 2 Low 4 Low 6 Medium 8 Medium 10 Significant Moderate 3 3 Low 6 Medium 9 Significant 12 Significant 15 Major Major 4 4 Low 8 Medium 12 Significant 16 Major 20 Major Catastrophic 5 5 Medium 10 Significant 15 Major 20 Major 25 Major

Risk Probability Rare Unlikely Possible Likely Almost Certain

Risk Based Control Plan Risk Level 1-4 Low Action and Time Scale Acceptable with continued data collection and trending for continuous improvement. Monitoring required ensuring controls are maintained. Manage through routine procedures. Go for economic improvements where possible. Acceptable after review of the operation. Requires continued tracking and recorded action plans. Undertake a risk assessment of the situation / task and implement the appropriate actions. Actions should have a timescale and should be monitored. Where the risk involves work in progress, undertake a risk assessment as soon as possible to ensure the safety of the situation or task. Work should not start until the risk is reduced to an acceptable level. Considerable resources may have to be allocated. Requires Management decision. Unacceptable under existing circumstances requires immediate action. Do not commence the activity until a risk assessment has been completed to ensure the safety of the situation or task. If it is not possible to reduce or eliminate the risk even with unlimited resources, work must remain prohibited. Requires Senior Management decision.

5-8 Medium

9 12 Significant

15 25 Major

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Use Risk Matrix Data for Risk Management Strategy

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Decision Tree Analysis

A decision tree is a tree in which each branch node represents a choice between a number of alternatives, and each leaf node represents a classification or decision. A decision tree is a method you can use to help make good choices, especially decisions that involve high costs and risks. Decision trees use a graphic approach to compare competing alternatives and assign values to those alternatives by combining uncertainties, costs, and payoffs into specific numerical values. Decision Trees are excellent tools for helping you to choose between several courses of action. They provide a highly effective structure within which you can lay out options and investigate the possible outcomes of choosing those options. They also help you to form a balanced picture of the risks and rewards associated with each possible course of action.

Example
A company has asked his two Project Managers to look for the opportunity to develop a new product. Company only has the resources and time to develop one of two projects, or to develop none. Project Managers A and B arrived. After brief introductions, A says that a smoke and fire detector is the best project to make. The detector goes beyond ordinary smoke detectors. It can detect flames as well as smoke. It will cost Rs 1,00,000 to develop, and if it succeeds it will generate revenue of Rs 10,00,000. Not to be outdone, B announces that a motion detector device is the best project to develop. The motion detector, which uses conventional household lighting, will only cost Rs 10,000 to develop. He adds that if it succeeds it will generate revenue of Rs 4,00,000. About the chances for success, the Director of the Business Analysis Department, informs the meeting that the smoke and fire detector has a 50% chance of success, and that the motion detector has an 80% chance of success. Draw the Tree Start by drawing a small square on the left side on a piece of paper. This is called the root node, or root. The root node represents the first set of decision alternatives. For each decision alternative draw a line, or branch, extending to the right from the root node. ______________________________________________________________________
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The first decision (root node) : Label each branch with the decision and its associated investment cost. Write that the smoke and fire detector will cost (- Rs 1,00,000) to develop. Similarly, write that the motion detector will cost (- Rs 10,000) to develop. Write Rs 0 at the third branch corresponding to the alternative to develop neither product. Show the costs as negative values since they represent a preliminary loss.

Chance outcomes : Each product development effort can have one of two outcomes : each project can either succeed or fail. Draw a small circle, or chance node, at the end of the branch for the smoke & fire detector and as well for the motion detector. From each chance node draw two branches towards the right; one branch represents success and the other represents failure.

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Endpoints and payoffs : You can now complete all the branches with endpoints, since there is no further branch information to represent. Draw a small triangle at the end of each branch to represent the endpoint. Write the payoff value at the endpoint. In business applications the payoff is usually a monetary value equal to the anticipated net profit, or return on investment.

Incorporate uncertainty (outcome probability) : We can now incorporate the likelihood of success and failure and use that to analyze the decision alternatives. In above example, the smoke and fire detector has a 50% chance of success, and therefore a 50% chance of failure. The motion detector has an 80% chance of success, and therefore a 20% chance of failure. Write these values on their respective branch lines.

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Find the expected value (EV) : You are now ready to evaluate the relative merits of each decision alternative. Expected value (EV) is the way to combine payoffs and probabilities for each node. The higher the EV, the better a particular decision alternative on average when compared to the other alternatives in the decision tree. Expected value (EV) is the sum of all the combined payoffs and probabilities for each chance node.

Summary : The smoke and fire detector project has a higher EV than the motion detector. You can report the analysis with these summarized presentation points: The smoke and fire detector is the better project to develop, despite the greater risk. The significantly larger anticipated profits make the risk more acceptable than the competing project. The motion detector is less risky, but also significantly less profitable. With the given profit expectations the project does not overcome the expected value of its rival project.

Advantages of using decision trees ______________________________________________________________________

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Decision trees offer advantages over other methods of analyzing alternatives. They are: Graphic. You can represent decision alternatives, possible outcomes, and chance events schematically. Efficient. You can quickly express complex alternatives clearly. You can easily modify a decision tree as new information becomes available. Revealing. You can compare competing alternativeseven without complete informationin terms of risk and probable value. The Expected Value (EV) term combines relative investment costs, anticipated payoffs, and uncertainties into a single numerical value. Complementary. You can use decision trees in conjunction with other project management tools. For example, the decision tree method can help evaluate project schedules.

To contact, e-mail at : ajaysinghal68@yahoo.com

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Project Risk Management