Project Risk and Procurement

Management
Unit 2
 Risk Management
• Project risk management is process of
identifying, analysing, and responding to risk
throughout the life of a project and meet
project objectives.
• Risk management is often ignored in projects
and many projects fail as a result
 Risk Management Planning
• The objective of risk management is to
increase the probability and impact of positive
events (opportunities) and decrease the
probability and impact of negative events
(threats)
 Risk Management Planning Steps
• Risk Identification
• Qualitative Risk Analysis
• Quantitative Risk Analysis
• Risk Response Strategy
• Risk Monitoring and Control
The Cycle of Risk Management
 Risk Identification
• When identifying risks to our project we must
draw on a range of sources of information e.g.
previous projects, lessons learned, expert
opinion etc.
• The identification of risk often using the
project team with the help of expert opinion
through techniques such as brainstorming or a
‘Delphi’ process.
 Qualitative vs. Quantitative Risk
Analysis
• We can use either or both qualitative and
quantitative techniques in analysing
identified risks
• Qualitative risk analysis based on educated
opinion and expert judgement and may use
techniques like the risk matrix
• Quantitative risk analysis is based on statistical
approaches such as Monte Carlo Analysis and
decision trees.
 Qualitative risk analysis
The risk matrix examines identified risks from
the viewpoint of probability (i.e. the chance of
something happening) and consequence (i.e.
the impact if that something happens).
We can assess consequences, probabilities
qualitatively in two ways. We can use:
• Categories – e.g. High, Medium and Low
• Numbers – e.g. values from 1 to 10.
 Categories
Two simple examples:
• Consequences: we will use the category
“High” if the consequence will significantly
affect the project.
• Probability: we will use the category “Low” if
the event can occur but only in extreme cases
Category matrix
 Number Matrix
• We can replace H,M,L with a number for both
probability and consequence and then
multiple the number to get an risk number
• We could use any range of numbers – typically
it may be 1 to 5; or 1 to 10; or even 1 to 100.
The larger the range the more sensitive the
measurement
Number Matrix
 Quantitative risk
• One common form of quantitative risk analysis
is the decision tree which is a visual
representation of the choices, probabilities
and consequences we are facing.
• We have to make assumptions when
producing a decision tree but the process
allows us to bring out into the open these
assumptions so they can be examined.
 Simple Decision Tree Model

MINUS  1Years of tuition: £10000, 1 years of

Room/Board: £10,000; 1 year of Opportunity
Cost of Salary = £25,000 (salary 25,000)
Total = £45,000
Go to Business
School to get my PLUS  Anticipated 5 year salary after
MBA/MSc. Business School = £250,000. (salary now £25k)
£ (business school) = £250,000 - £45,000 =
Go to Work “in the £205,000
Real World”
One year salary = £25,000 (from above), plus
expenses of £20,000 not expended = £45,000
Final five year salary = £125,000

Is this a realistic model? £ (no b-school) = £170,000

What is missing? Go to Business School

 A More Complex Decision Tree
Example
40 % Chance of a Good Economy
Profit = £6M
Expand Factory
Cost = £1.5 M
60% Chance Bad Economy
Profit = £2M

Good Economy (40%)

Profit = £3M
Don’t Expand Factory
Cost = £0 Bad Economy (60%)
Profit = £1M

Expand = (0.4 x £6M) + 0.6 x £2M) = £3.6M – £1.5 =

£2.1M
Not Expand 0.4 x £3M + 0.6 x£1M) = £1.8M

£2.1 > 1.8, therefore you should expand the factory

 Ranking risk
• Once we have identified the risks facing our
project we need to analyse them with
qualitative/quantitative approaches
• We then take the list of risks and using the risk
number or category we can rank them in
order from the most significant to the least.
• With our ranked list of risks we can then
determine risk strategies to deal with these.