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File: LECTURE 7 - Introduction to Risk Management Lecture 7 - Introduction to Risk Management Reading: Kanabar, Chapters 1-6 (you'll read these chapters throughout Weeks 4 and 5). Use the links at the bottom of this page. Assignment and Discussion Schedule To submit assignments and participate in discussions, click on the appropriate icon on the left (course-wide) or at the top of the page (for each week).

Before beginning this lecture, please watch this short video introduction by Larry Watson. Click on the play button to start the video.

Today we start looking at risk management, which is one of the most important areas in project management, as well as in life in general. Literally, all management and decisionmaking are forms of risk management! Also, for those planning to take the PMP exam, historically the questions on risk management have been where candidates make the most mistakes. So you can pick up some additional points by knowing this area. If you look at the PMBOK 2005, Chapter 11 covers project risk management and breaks the Project Risk Management Process into six areas: Risk Management Planning Risk Identification Qualitative Risk Analysis Quantitative Risk Analysis Risk Response Planning Risk Monitoring and Control Following a brief overview, we will address each of these aspects of risk management in the subsequent material.

For the Risk Management component of this course, we have supplied an additional resource, which can be downloaded using the links below: Project Risk Management, A Step-by-Step Guide to Reducing Project Risk by Vijay Kanabar. Click here to download. Project Risk Management, Updates to Risk Management Content. Click here to download.

File: Fundamentals of Risk Management Fundamentals of Risk Management Risk management is not magical—it's something we all do. You "look both ways" before crossing a street (hopefully) so you avoid geting hit by a car. This is one example of risk management – behavioral responses to learned risks. In the business world many projects get hit by the proverbial car because the project did not practice good risk management. In many cases risk management is put in the back set as a nice-to-have. This second-order prioritization is principally due to the lack of understanding of how risk management works. Everyone acknowledges that there are risks associated with actions, but many teams refuse to analyze "what-ifs" believing incorrectly, that risks are unpredictable and therefore addressed ad hoc. You must become a good risk manager, understand what risk analysis and preparation can do for your project and communicate that to the executive team. Fortunately learning how to deal with risk does NOT require luck. Here you will learn the basic steps involved in a creating an effective risk management plan. Keep in mind that learning about and responding to risk does NOT require any luck, but it does require the experience and knowledge of the work that is possessed by your project team. One key concept is that over a project life cycle, the greatest chance of risks occurring are at the beginning of the project and as the project progresses, the chance of risks occurring decreases. The impact of these risks on your schedule and cost also change over a project life cycle; early in the project the risk impact is low and as the project progresses the potential impact of the risk events increases.

File: Defining Risk Defining Risk The dictionary defines it this way: To most people, risk means the chance of a negative occurrence and is typically associated with words like "danger," "hazard," "peril," and "jeopardy." However one should also consider positive risks and so include words such as "contingency," "opportunity," "prospect," and "uncertainty." The PMBOK defines risk as "An uncertain event or condition that, if it occurs, has a positive or a negative effect on a project’s objectives." Remember that risks may also present positive opportunities. Risk, as we will use it, has two major components: it has a measurable chance of occurring, or a probability factor, and it has a potential measurable impact. What is the Difference between “Risk” and “Uncertainty”? Let’s look at this in light of three possible states: certainty, risk, and uncertainty. Certainty implies that we can absolutely predict some outcome in the future. Uncertainty implies that we don’t have a clue, or any knowledge that would assist us in predicting that future outcome. With risk we try to predict that future outcome based on some level of knowledge coupled with the use of probabilities to estimate a measurable expected value of that outcome and its potential impact.

File: An Example Defining Risk: An Example Let’s look at how you may use risk management in your real life. Let’s say you live in the Boston area in a single family house with a current market value of $400,000. You recognize a risk: the house may burn down. What are you likely to do? The first step was actually recognizing the risk. If you have a mortgage on the house, the risk was already recognized by the lender who required you to obtain a fire insurance policy on the house. But what if you don’t have a mortgage? You still recognize the risk. To you, it may be an uncertainty, i.e., you have no clue of the chances of that house actually burning down. But to an insurance company, it is a risk because they can assign the probabilities of your house burning down and due to the “law of large numbers,” they can add your house to a pool of other houses and statistically, they can predict how many houses out of that large pool will burn down and what the total losses will be, and charge each member of the pool a premium which will pay for the losses, as well as provide a profit to the insurance company.

Chances are that you will not choose to accept the whole risk of the house burning down yourself, but if you did, you would save the insurance premiums. Also, chances are you wouldn’t choose to avoid the risk completely by just selling the house and moving into someone else’s house - someone who would then shoulder the financial risk of their house burning down. What you do by purchasing a fire insurance policy is to transfer the financial risk of a loss to an insurance company. However, you are also sharing the risk with them because most likely you have a deductible with your policy. But there is more to the risk than financial consequences. You are probably also concerned about potential injury and loss of life. The actual risks are not transferred to the insurance company, so you probably attempt to mitigate them. You probably have installed smoke detectors, and you may have evacuation plans involving stairways and fire ladders, and if you have children, you may have had training sessions concerning what to do in case of a fire. You probably don’t store lots of flammable or toxic chemicals in the house, and you may have a fire extinguisher on hand. Hopefully you have an inventory and pictures of the contents in case there is a fire (you'll need these in order to assist in justifying your claim). All of these are forms of mitigation —reducing either the likelihood of a fire or its impact.

File: A Closer Look at Risk Management A Closer Look at Risk Management In 1985, T.V. Carver defined risk management as a "method of managing that concentrates on identifying and controlling the areas or events that have a potential of causing unwanted change…it is no more and no less than informed management." Risk events have causes, and if they occur, they have consequences. Risk management attempts to deal with the events, the causes, and the consequences. However, risk management needs to be proactive in recognizing the events, the causes, and the consequences, not just reactive. Therefore, you need a system that plans for the various risk events, identifies and analyzes the causes and impacts, handles and controls the risks if they occur, and monitors the whole process throughout a project.

Once a particular risk is identified, there are options for how to deal with it. They include:

File: Understanding Probability and Impact A Closer Look at Risk Management: Understanding Probability and Impact Many years ago I saw a graph similar to the one on the right, which clearly shows the concepts of measuring the probability of an event occurring like getting bitten by an animal compared to measuring the potential impact of it. This is risk management, and we do it all of the time. We measure situations and make choices like accepting the situation, avoiding or rejecting it, mitigating (reducing) the potential cause, impact, or chances of the situation, or transferring it to another party. So, what’s the potential of getting hurt by the above animals and what might you do about it? Kittens and puppies are cute and relatively harmless—we usually just ACCEPT the risks. Many of you will also say the same about cats and dogs—however, some of the dogs may be Pit Bulls! We may ACCEPT the risks—or AVOID the risks, or even MITIGATE the risks by making sure the dogs are chained or leashed. What about alligators? I've occasionally seen them on some golf courses and although they are potentially very dangerous, they can only sprint for about 30 feet and they can't run and turn at the same time due to the size of their tails. So, if you hit a golf ball near an alligator, you can try to out maneuver it (ACCEPT), drop another golf ball (AVOID), or have the caddy retrieve your ball (TRANSFER). As for a mother bear with cubs—she is one of the most dangerous animals and should be AVOIDED at all costs. The above decisions are based on our analysis of both the potential probability of a situation occurring, analyzing its potential impact, and factoring our own willingness not to accept risks—which is referred to as Risk Aversion.

File: The Status of Risk Management The Status of Risk Management Historically, risk management is a relatively new art and science. It has always been around, but now it is becoming much more recognized and formalized in all areas of business.

Businesses used to be generally reactive: after something happened, they often tried to just buy insurance in case it happened again, or even just accepted the results as a cost of doing business. They worked through outside insurance agents and brokers, or even established internal insurance management departments. Government intervention in areas like workers' compensation, safety (OSHA), product safety, and other labor laws tended to lead to companies buying more insurance. However, as insurance premiums rose, companies realized that they could save money by reducing the likelihood of risks, not just dealing with the financial consequences. So companies started developing internal departments like safety, security, and quality, and many actually developed internal risk management departments. Today, risk management is becoming much more integrated across all aspects of companies because of the interrelated causes and effects of various risks. This is especially true in the field of project management. One additional point: today you will often see the term risk management used in other contexts, such as on Wall Street. Risk management concepts are now commonplace in the financial world in areas such as investment management. Risk management is everywhere.

File: Risk Management from a Project Management Perspective Risk Management from a Project Management Perspective Now, let's move more to the project management perspective on risk management. On page 241 of the PMBOK, please view the diagram showing how PMBOK looks at the whole Project Risk Management Process. Notice the inputs to the first step of the Project Risk Management Process, Risk Management Planning. These are: Enterprise Environmental Factors Organizational Process Assets Project Scope Statement and Project Management Plan The primary purposes of the risk management planning process are to attempt to isolate, minimize, and eliminate risks which may affect the project; determine alternative courses of action to mitigate risks; develop cost and schedule contingency reserves for risks that cannot be eliminated or mitigated; and determine how risk management will be done for the project (Who does what? When? What are the procedures to be followed? What is the role of the organization's Risk Management Department, if any?). NOTE: The Project Manager is ultimately the person responsible for the risk management planning process, even if he or she inherits the project after initial planning is completed.

As Professor Kanabar points out in his book, risk management has often been compared to medicine: Prevention is better than the cure.

File: What to Consider with Risk Management What to Consider with Risk Management One of the first considerations in the risk management planning area is the length, size, and/or the complexity of the project. For short-term, simple projects, planning is usually only needed prior to beginning the project. But as projects increase in time and/or complexity, additional planning may be needed at major milestones and decision points or if a significant unplanned change or event affects the project. The primary enterprise environmental factors are the risk attributes and risk tolerance levels of the organization and the stakeholders. In real life most of us are naturally risk averse, which basically means we tend not to accept risks unless we feel that we will be adequately compensated for taking those risks. However, especially in business environments, we find some people being risk averse, some being risk neutral, and some being risk takers. It is critical to know what levels of risk the stakeholders will accept as well as what attitudes toward risk they expect you to have. Looking at organizational process assets, it is a must to know the roles, responsibilities, and authority levels for anyone in the decision-making process involved in the project. This includes knowing who approves what, and when they need to be accessed. The project scope statement and the project management plan are pretty self explanatory. But the project manager must look around and consider: the overall behavioral environment of the organization (including organizational risks like staff attrition). the organization's attitudes toward both project management and risk management possible overlapping of management functions surrounding the project multiple concurrent or competing projects possible dependence on external participants who cannot be controlled during the project project management team experience, which may indicate risk management training needs, as well as the experience of the project manager himself / herself possible international, cultural, language, and time zone issues technical risks to include unproven or anticipated new technology Additionally, the project manager should be aware of in general terms, both internal and external factors which may present risks to the project. Depending on the project, external factors might include the overall economy, governmental regulations, market demand, inflation, currency exchange rates, raw material shortages, and status of

competitors. Internal factors, other than the organization environment, might be technical, legal, quality, performance, funding availability, labor issues, and the degree of importance being placed on cost and time schedules.

File: Good Risk Management Planning Good Risk Management Planning Good risk management planning helps to develop a risk management strategy which ultimately leads to a good Risk Management Plan (RMP), which is the primary output of the risk management planning process. Another output is the Risk Breakdown Structure (RBS), a sample of which you may see on page 244 of the PMBOK. Additional outputs of the whole project planning process include the project charter, the project scope statement, and the work breakdown structure (WBS) in addition to the risk management plan. In an article in the September 2005 issue of PM Network, the professional magazine of the Project Management Institute, entitled Risking Less by Marcia Jedd, and based on a research paper presented by Chris Felstead, PMP, Chris noted, “At many organizations today, risk management isn’t aggressive enough in planning for contingency or for making big decisions necessary for investing in preparation for those contingencies.” He also pointed out that it is the organization and the stakeholders who bear the brunt of the risks regarding a project. Their involvement in risk decisions and planning fosters greater stakeholder commitment to a project. All of these factors need to be considered for the next phase, which is the actual identification of risks, where we will start the next lecture.

File: Lecture 7 - Summary Lecture 7 - Summary Today we looked at risk management in general and more specifically, the importance of the Risk Management Plan in project management. Next we will concentrate on identifying risks and qualitative risk analysis. Assignment and Discussion Schedule To submit assignments and participate in discussions, click on the appropriate icon on the left (course-wide) or at the top of the page (for each week).

Jump to Navigation Frame Jump to Content Frame Printable View of: Lecture 8 - Risk Identification and Qualitative Risk Analysis Print Save to File File: LECTURE 8 - Risk Identification and Qualitative Risk Analysis Lecture 8 - Risk Identification and Qualitative Risk Analysis Reading: Kanabar, Chapters 1-6 Assignment and Discussion Schedule To submit assignments and participate in discussions, click on the appropriate icon on the left (course-wide) or at the top of the page (for each week).

Before beginning this lecture, please watch this short video introduction by Larry Watson. Click on the play button to start the video.

We will now look at PMBOK’s second and third steps in the Risk Management Planning Process: Risk Identification and Qualitative Risk Analysis. Risk Identification The identification of possible risks is one of the most critical areas of project risk management—if you fail to recognize risks you won’t plan for them. Also, risk identification is not a one-time process—it needs to occur across all aspects of the project lifecycle as shown here: Note that new risks may be identified or come into existence at any point of the project. After the risk management planning meeting, the PM assembles the project team, the stakeholders, and other major players in the project to identify all possible risks that may affect the desired outcome of the project. The Risk Assessment Session, which should be limited to 12-15 participants, has the goal of identifying, qualifying, characterizing and assigning the risks. During the assessment you will ask each member of your project

team will identify one or two issues that "keep you up at night", but it is very important to remember that this is meant to identify, and make plans for, the most important risks.

File: Inputs dRisk Identification: Inputs The PMBOK lists five major inputs to risk identification: Enterprise Environmental Factors, which would include published information from industry studies and commercial databases, benchmarking, and published lists of risk categories. Organizational Process Assets, which would include a review of prior projects from the project files. Project Scope Statement, which may contain assumptions which need to be evaluated regarding their level of possible uncertainty. Risk Management Plan, which contains the roles and responsibilities of the various parties and personnel involved, as confusion in this area can pose additional risks. This plan would also include budget and schedule provisions for risk management functions. Project Management Plan, which deals with the main issues of costs, schedules, quality, etc., can be a good source of identifying risks. Additional input factors might depend on the particular end product of the project, special constraints imposed on the project, and the potential timing of the various risks across the project. Other planning documents already prepared for the project like the project charter, WBS, and initial project estimates are also possible input factors. There are two general kinds of risks which need to be considered. The first group is business risks, which are risks or opportunities which may generate a profit or a loss. The other category is insurable risks, which are risks which only contain the chance of a loss.

File: Tools Risk Identification: Tools The PMBOK then lists several tools and techniques regarding risk identification, including: Documentation reviews Information gathering techniques Checklist analysis Assumptions analysis Diagramming techniques, including Flowcharts, Cause-and-effect diagrams, Network diagrams, and Influence diagrams Other common published methods include:

Data Precision Ranking Assumption Testing for Stability and Consequences Risk Modeling Analogy Comparisons Of these, information gathering techniques are often the most important as well as the most varied. Some of these techniques include: Brainstorming Interviewing Root cause identification SWOT (strengths, weaknesses, opportunities, and threats) analysis Expert judgment analysis Various tools like the Delphi Method, Nominal Group Techniques and the Crawford Slip (you should review these tools if you are unfamiliar with them) File: Risk Categories Risk Categories Remember, the goals are to try and list all possible risks which may impact the project and understand the causes of these risks. First, you have to develop a list of risk categories you are going to use. These may include such risk categories as: Scope risks Cost risks Schedule risks Technical risks Quality risks Performance risks Organizational (internal) risks External risks Stakeholder pressure risks Customer satisfaction risks Project Management risks (lack of skills and/or tools) Environmental risks Other General risks Once your risk categories are developed, you can create risk profiles tailored to your project. An example of a partial risk profile is shown below. The risk profiles provide event descriptions which will be further analyzed in qualitative and quantitative risk analysis.

Another possible output of the risk identification process is to develop a list of risk triggers; these are specific warning signs or events that advise you when to take an action such as implementing contingency plans. You may also do some sensitivity analysis of your identified risks in order to start to see where the most serious impacts of the risks may be and to determine activities affected. In Vijay’s book, he also looks at risk identification from both the top-down approach, which focuses on the overall project development process, and the bottom-up approach, which focuses on individual project processes. Risk identification may also lead you in further qualitative and quantitative sections to consider testing requirements, modeling and simulation alternatives, and sensitivity analysis of alternatives. The final formal output of the risk identification process is the Risk Register, which contains the full list of risks and potential responses to these risks.

File: Risk Identification Summary Risk Identification Summary Remember, the goal of the risk identification process is to have the project team list the major risks across the project that may have a positive or negative impact on the project, to formally document these lists, prioritize them, and identify people who will be responsible for monitoring these risks. Your project team is the source of the knowledge of most project risk. For example, I was involved in a couple of large office relocation projects and as the risk manager of the company, I was involved in the risk management planning and risk identification processes with a very experienced project manager. He posed a risk that I hadn't considered, and he proved to be right to consider it. The overall project plan involved all department managers submitting space requirements as well as breaking down the types of space, such as executive offices, standard offices, conference room, specialized rooms, cubicles, storage areas, etc. Once the size of the expansion was approved by the president, formal plans and drawings were prepared and approved by the department managers, which led to an approved budget and a project schedule. The risk he identified was the potential cost of after-the-fact changes to many of the areas. Why did he consider this a risk? Because, from his previous experiences, he knew that many people cannot look at construction drawings and plans and actually visualize what the final work product will actually look like.

He was right. When the work was basically complete and the managers got to actually see their new spaces, they had all kinds of problems. The ceilings were too high or too low, the doors and window weren’t where they thought they were, the furniture was too big or too small for the space, they could or couldn’t see their secretaries from their desks, etc. If everyone involved was allowed to make major changes after the space had been built and furnished, the cost would have been prohibitive. Looking ahead, how did he factor this risk into the project? First, he reviewed all of the plans with the department managers and had them sign off on the final drawings. Then he had the President issue a memo that any after-the-fact changes had to come out of the individual department budgets, not the project budget. Bottom line: there were some grumblings, but no serious changes! If this risk hadn't been identified and dealt with effectively, the job would have been way over budget as well as late (while people were waiting for the changes).

File: Qualitative Risk Analysis Qualitative Risk Analysis OK. Let’s now go on to the next topic: Qualitative Risk Analysis. Qualitative risk analysis is a quick and cost/time effective method of establishing the priorities of different risks which may later need to be considered for effective risk response planning. The basic inputs of qualitative risk analysis, according to the PMBOK, are: Organization Process Assets (lessons learned) The Project Scope Statement The Risk Management Plan The Risk Register The tools and techniques used in the qualitative risk analysis are: Risk Probability and Impact Assessment, which use expert judgments Probability and Impact Matrix Risk Data Quality Assessment, which challenges the quality of the data Risk Categorization, which helps to determine which areas of the project are most exposed to risk Risk Urgency Assessment, which determines the high-priority risks which must be further addressed and helps prepare watch lists of lower-priority risks The most important and common tools and techniques are the Probability and Impact Assessment and the derived Matrix. Probability and impact of the risk events are defined below:

Probability The number that represents the chance that a particular outcome will occur, expressed as a percentage. All risks would have a probability of greater than zero and less than 100% because if it had a probability of 0, there would be no risk, and if it had a probability of 100%, it would be a certainty. Impact The cost we incur if the risk occurs. Or, putting it a different way, it’s the amount of pain we will feel. We used the term cost, however, the impact may actually be felt on the schedule or the scope as well.

File: Applying Numbers Applying Numbers If we put probability and impact together by looking at Probability X (times) Impact, we can come up with some numerical system for measuring and ranking the possible severity of the risks. Such a scale would measure the overall importance of each risk evaluated in our project and ultimately lead to determining risk strategies. In order to create such a rating scheme, we first need to determine definitions of ranges. For example, if we decide to keep it very simple and define probability and impact as high, medium, or low, what do we mean by high? Or low? If one team member thinks 90% is high but 75% is medium, and another thinks anything over 66% is high, you start to get different meanings of the words. You need to eliminate these biases by establishing relatively clear ranges. At this early stage of risk assessment it makes little sense to concentrate on minutia and instead agree to three ranges, Low, Medium and High. It is important that the team understand what these ranges mean in terms of cost, schedule and quality. Following agreement on defined ranges you can do two things: First, you can develop a risk assessment form like the following example from the Gray and Larson text where you can list the identified risks and rate them by both probability and impact: Note, in this form they also added another rating on detection difficulty. File: A Few Additional Points

A Few Additional Points Qualitative Risk Analysis needs to be revisited throughout the whole project life cycle—it is not a task to be done once and forgotten about. Qualitative Risk Management can lead to possible project termination decisions if the project is deemed too risky. Qualitative Risk Management can factor into decisions involving comparable projects. The primary output of Qualitative Risk Analysis is Risk Register updates. However, it also prioritizes the risks which can then either be analyzed quantitatively or subjected to risk response analysis. Remember to document non-critical risks even if you choose to just accept them as you may want to revisit them throughout the project, and they may also become input items for future projects.

File: Probability and Impact Matrix Probability and Impact Matrix You can also prepare a probability and impact matrix like the one on page 252 of the PMBOK. Note that PMBOK extends its matrix to include opportunities; in real life only the left side of the matrix is usually used to determine ranges of combined probabilities and impacts. Also, the PMBOK example shades some zones in an attempt to show combined low risk areas, medium risk areas, and high risk areas. Another way of accomplishing the same thing is to color-code the zones using the stoplight method of showing low risk areas in green, medium risk areas in yellow, and high risk areas in red. This is actually quite effective and one’s eyes are drawn to the red areas, or possible danger zones. Professor Kanabar has used a similar approach in his book (pages 10 – 12) where a colorcoded the numbers in a matrix and a contour method on the full matrix. Back in Gray and Larson, they also show you an example of a risk severity matrix as follows: Actually, any method that calls attention to the important high-probability/impact risks can be effective because when we deal with risk tolerances, we need to put our efforts in the areas which have a high probability and a high impact. Note that some risks will have a very high probability with a very low impact, like small tools being misplaced or stolen from the job. We try not to be overly concerned with these risks, as what we are really going to do is self-insure against the losses. Other risks may have a very low probability but a very high impact, like what happens if we get hit by a Category 5 hurricane. We also don’t spend a lot of time and effort on these, since they are beyond our control and there is not really much we can do other than to insure

some of our potential losses, which we probably would have done anyway against smaller hurricanes.

File: Lecture 8 - Summary Lecture 8 - Summary In this lecture we looked at risk identification, which is the process of identifying all possible risks (the risks and their causes - not their results) that might affect the project. Then we looked at qualitative risk analysis, which is the prioritization of the risks in order to assess their probability of occurrence and degree of impact in order to determine if further quantitative analysis is required or if a risk response needs to be planned. Next week we will move on to Quantitative Risk Analysis and Risk Response Planning. Assignment and Discussion Schedule To submit assignments and participate in discussions, click on the appropriate icon on the left (course-wide) or at the top of the page (for each week).

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=============================================================== ============= Jump to Navigation Frame Jump to Content Frame Printable View of: Lecture 9 - Quantitative Risk Analysis and Risk Response Analysis Print Save to File File: LECTURE 9 - Quantitative Risk Analysis and Risk Response Analysis Lecture 9 - Quantitative Risk Analysis and Risk Response Analysis Reading: Kanabar, Chapters 1-6 Assignment and Discussion Schedule To submit assignments and participate in discussions, click on the appropriate icon on the left (course-wide) or at the top of the page (for each week).

Before beginning this lecture, please watch this short video introduction by Larry Watson. Click on the play button to start the video.

In this lecture, we want to examine the next two PMBOK steps of risk analysis, Quantitative Risk Analysis and then Risk Response Analysis. Quantitative Risk Analysis is performed on potentially high risks that may substantially impact the project discovered in the Qualitative Risk Analysis (or even in the Risk Identification Process). Not all of the risks identified are analyzed quantitatively as this process can involve additional costs as well as time. Some of the risks identified are deemed trivial, while we may be satisfied with the results of our qualitative analysis for some of the other risks. But for the risks that can potentially make or break a project from a cost, schedule, or performance perspective, we need to do some additional analysis so we can properly plan our risk response strategies. Quantitative Risk Analysis provides numerical ratings to the risks, and this can provide further insights when dealing with the major uncertainties of the project.

File: What the PMBOK Says What the PMBOK Says

To quote the PMBOK, this (quantitative) process uses techniques to: 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 PMBOK lists the inputs to Quantitative Risk Analysis as: Organization Process Assets The Project Scope Statement The Risk Management Plan The Risk Register The Project Management Plan (Schedule and Cost) PMBOK then lists the tools and techniques for Quantitative Risk Analysis as: Data gathering and representation techniques Quantitative risk analysis and modeling techniques We will look at some of these techniques in detail. Included in the data gathering techniques are what is often referred to as three-point estimates (optimistic, realistic, and pessimistic) like the ones you see on page 271 of the PMBOK (Figure 11-10). There are also different kinds of probability distributions (other than normal distributions), as shown in Figure 11-11 on p. 271 of the PMBOK. And there is also the use of expert judgments.

File: Modeling Techniques What the PMBOK Says: Modeling Techniques Under modeling techniques PMBOK lists several, including: Sensitivity Analysis Expected Monetary Value Analysis Decision Tree Analysis Monte Carlo Simulation Cost Risk Simulation

Plus there are additional tools such as PERT, and many risk models and semi-quantitative scenario analyses. Vijay's book does an excellent job of discussing many of these tools, and if you are not readily familiar with them, I strongly recommend that you reread pages 59-81. However, I want to look more closely at expected values, decision trees, and Monte Carlo simulation. Expected value (EMV—not to be confused with EV, or earned value, which we covered in the cost section) is used to calculate the expected monetary value of a risk.

File: Calculating Expected Value Calculating Expected Value A good simple example of how to calculate expected value is to consider the following: You can also look at the EMV approach to consider the whole project. Let's say you are deciding whether to pursue a project to develop a new product. It will cost $100,000 to develop and if it's successful, you estimate it will earn $1,000,000. However, you put the probability of that happening at 5%. You think there is a 35% chance of complete failure (no earnings) and a 60% chance of just breaking even (earning $100,000). Should you go ahead on the project? You have a positive EMV so the answer is yes but not by a large margin. A slight change in the probabilities could easily turn this into a “no.” This appears to be a risky project— not necessarily the project itself, but the potential results of doing it. An additional point about risky projects. Companies have many opportunities to do various projects and some of them may be high risk, moderate risk, or low risk. Obviously, one would expect higher returns from the higher risk projects than from the medium or low risk ones. But it is important that companies also use risk management logic and techniques in evaluating the overall risk levels of all of their projects. If a company always picked the high risk ones and had a bad year, it could put them out of business.

File: Decision Trees Decision Trees In your Project Management text, they show a modified version of EMV called the 10, 50, and 90 percent schedules, shown on page 214, which produces a risk schedule as shown below: A good way of expanding probability concepts is to use decision trees. Decision trees are diagrams which attempt to show decision points and different possibilities resulting from the decisions, as well as considering the probability of each outcome. A good example of decision trees is in Vijay's book on pages 77-78. Another example of a decision tree diagram is shown on page 258 of the PMBOK. Note: Both EMV and decision trees tend to look at the risks associated with the different aspects of a project. Sensitivity analysis tends to look at which risks have the most potential impact on the project as a whole. There is also risk modeling and simulation, which are computer programs designed to estimate the total risk of a project relative to something like the project's total cost or completion date. The most common of these modeling and simulation tools is the Monte Carlo technique.

File: The Monte Carlo Technique The Monte Carlo Technique Monte Carlo is a mathematical technique which is based on probability distributions. It involves multiple iterations, so it is very difficult to calculate without a computer model, but it can be done. This method usually addresses variables like the estimated total cost of the project or the estimated completion date of the project. The answers obtained from the Monte Carlo method give confidence levels on its results, i.e., “We can say with a 95% confidence level that the project will be completed within March 15th, or 42 days after its planned completion date.” It can also show what the probability is of any particular task being along the critical path.

As good as the Monte Carlo method or any of the computer models available are, the results are only as good as the inputs and the user's interpretation of the outputs. The answers set ranges; they don't provide accurate absolute results. There are many online sites that offer sophisticated risk modeling and simulation software for project management. If you want to further explore this area, I recommend you look at http://www.palisade.com. This company has a product called @RISK and you can request a free demo CD which has a trial version on it.

File: Outputs of the Quantitative Risk Analysis Outputs of the Quantitative Risk Analysis The outputs of the Quantitative Risk Analysis are: Risk register updates Probabilistic analysis of the project, including the probability of achieving cost and time objectives Prioritized lists of quantified risks These will be used in the next step, which is Risk Response Planning.

File: Quantitative Risk Analysis Summary Quantitative Risk Analysis Summary Quantitative Risk Analysis is focused on numerical analysis of the probability of occurrences and the impact of the project risks. This analysis allows the project manager to determine how much risk a project has and where in the project it is located in order to decrease the risk, make more informed judgments, determine which risks require a response or a contingency, deal earlier with the high-risk aspects of the project, and document the low risks. But this process also requires the use of educated guesses on probabilities of occurrences and impacts.

Quantitative Risk Analysis helps the project manager identify the most important risks and the greatest threats to the project. But that is not the most important step - good risk response planning is. But quantitative risk analysis does provide insight on possible alternatives and options and a sense of overall risk and opportunity of the project. It also helps justify setting up contingencies in both the schedule and the budget. Now, there is one more part of Quantitative Risk Analysis that I need to mention—some of the mathematical models and computations involve statistics. If this were an in-class course, I would quiz you about your basic knowledge of statistics and if necessary (usually!) review basic statistics. I am not going to do that here other than offer a very simple statement: Comparing Standard Deviation The standard deviation is usually the preferred measure of risk, and when comparing standard deviations—the lower the standard deviation, the lower the risk.

I am not going to make you do moderate statistical calculations like the variance and the standard deviation. However, the PMI exam has been known to ask questions about the standard deviation, and it is possible to estimate the standard deviation quite simply for most basic problems. Vijay has covered this in his book on pages 67 & 68 under the heading of Statistical Sums. I strongly urge you to review this example on travel times as it clearly shows what I have also seen referred to as the 1-4-1 method. PS: If you are completely unfamiliar with standard deviations, you might want to go back into the Cost book and look at pages 283-285 at the beginning of Chapter 20 for an example.

File: Risk Response Planning Risk Response Planning PMBOK defines Risk Response Planning as the process of developing options and determining actions to enhance opportunities and reduce threats to the project's objectives. Also, it takes responsibility for each agreed-to and funded risk response.

The strategies adopted during this phase should be both timely and appropriate for the levels of severity of the risks or threats. This is an important point: you can't necessarily just delay the start of a project while you map out all of your planned responses, and you must keep the financial considerations of your strategies in mind - in other words, if the planned response costs more than the likely cost of the impact from the risk, you probably should just accept the risk. It is also important in the response stage to search out expert opinions on how to deal with the various risks. Information from prior projects and outside experts like insurance brokers can often be of assistance. Also, if the stakeholder or the firm the project manager is employed by has a risk management department, they should be brought in as they may have solutions or recommendations to some of the issues as well as knowing existing policies and procedures regarding the management of the project's risks. Involve the stakeholders in the response strategies. Often the response plans will break the risks into different categories such as technical risks, cost risks, schedule risks, cash flow or funding risks, and general risks. In the response phase, specific personnel are usually assigned to deal with each risk other than those which will be avoided or accepted.

File: The PMBOK on Risk Response Plans The PMBOK on Risk Response Plans PMBOK shows the inputs to the Risk Response Plan, the risk management plan, and the risk register. The next step, tools and techniques, determines how to deal with each risk. Choices include: Some of these choices, such as purchasing insurance, will produce additional costs to the project and must be included in the project budget. Some of the other choices may result in additional costs—if they occur. Therefore, you need to factor a contingency budget or reserve into the project. This budget should be based on numerical possibilities, such as “$5,000 for a two-week delay due to a strike at a major supplier," or “$10,000 which covers a 10% increase in raw materials due to anticipated shortages." In real life, people tend to accept these types of contingencies more readily if they involve metrics rather than just a general statement such as “we need a 10% contingency reserve fund in case things go wrong.”

Note: this contingency or budget reserve covers “known unknowns” and is placed in the project budget and, if it is not used, it goes away at project completion (meaning it’s not a slush-fund available to cover other items or overages). This is different from the management reserve which covers “unknown unknowns,” such as category 5 hurricanes, and needs to be assumed by the stakeholders and budgeted for outside of the project.

File: Lecture 9 - Summary Lecture 9 - Summary For high-risk events, Change. Try and reduce either the probability or the potential impact. For medium-risk events, Contain. Concentrate on the potential impact. For low-risk events, Monitor. Keep an eye on them so they don't develop into a more serious problem. Before a threat materializes, try and eliminate it. Once a threat materializes or continues, use fallback or contingency plans. For large potential losses, Insure them. For small potential losses, self-insure them. The outputs of Risk Response Planning include: Updates to the Risk register Updates to the Project Management Plan Risk Prevention plans Contingency Plans Contingency and Management reserves Risk-related contractual agreements As I stated before, Risk Response Planning (and execution) is one of the most critical parts of the whole risk management process, and the results can make or break companies, projects, and careers. Look no further than Hurricane Katrina for examples of this. Literally all of the problems we have heard discussed on the news relative to Katrina, New Orleans, the Mayor, the Governor of Louisiana, FEMA, etc. are related to risk response planning and execution issues, not the other aspects of risk management. The next lecture will deal with the last aspect of the risk management process, Risk Monitoring and Control as well as with some miscellaneous risk management issues. Assignment and Discussion Schedule To submit assignments and participate in discussions, click on the appropriate icon on the left (course-wide) or at the top of the page (for each week).

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Jump to Navigation Frame Jump to Content Frame Printable View of: Lecture 10 - Risk Monitoring and Control Print Save to File File: Lecture 10 - Risk Monitoring and Control Lecture 10 - Risk Monitoring and Control Reading: Kanabar, Chapters 1-6 Assignment and Discussion Schedule To submit assignments and participate in discussions, click on the appropriate icon on the left (course-wide) or at the top of the page (for each week).

Before beginning this lecture, please watch this short video introduction by Larry Watson. Click on the play button to start the video.

In this lecture we'll review the final step of risk management—Risk Monitoring and Control. Then we will look at a few other points regarding risk management in project management. Risk Monitoring and Control is an ongoing process throughout the life cycle of a project. It involves monitoring the project’s risk triggers to planned risk responses, but it also requires continued assessment of new and changing risks. This means monitoring and controlling is not passive but is an active part of the risk management process. File: What the PMBOK Says What the PMBOK Says Risk Monitoring and Control is defined as the process of: Identifying, analyzing, and planning for newly arising risks Keeping track of the identified risks on the watch list Re-analyzing existing risks Monitoring trigger conditions for contingency plans Monitoring residual risks Reviewing the execution of risk responses while evaluating their effectiveness Other purposes of Risk Monitoring and Control are to determine if: Project assumptions are still valid Assessed risks have changed from their prior states Proper risk management policies and procedures are being followed Cost and schedule contingency reserves need to be modified The the inputs to Risk Monitoring and Control are: Risk management plan Updated risk registers Approved change requests Work performance information Performance reports File: Tools, Techniques, and Outputs What the PMBOK Says: Tools, Techniques, and Outputs The tools and techniques used for Risk Monitoring and Control include: Risk Reassessments, which should be regularly scheduled and are basically updated responses to existing risks and identification and response planning for newly identified risks Risk Audits, which document responses as well as the overall effectiveness of the risk management process Variance and Trend Analyses, such as Earned Value Analysis, which assess the potential impact of threats or opportunities Technical Performance Measurement (TPM), and other metrics

Reserve Analysis, which looks at the amounts used and remaining in the cost or schedule contingency reserves Project Status Meetings, with risk management on their agenda The outputs of the Risk Monitoring and Control process are: Risk Register updates Requested changes, which become part of the Integrated Change Control process and the Direct and Management Project Execution process, both which were covered in your AD 642 course Recommended Corrective Actions, which also affect the two processes mentioned above, as well as the Monitor and Control Project Work processes Recommended Preventive Actions, which are used to bring the project into compliance with the project management plan Organizational Process Assets updates, which can be used for future projects The Project Management Plan As you can see, the outputs of the Risk Monitoring and Control process are ongoing processes that can impact various aspects of both this project and other projects. File: Gray and Larson's Approach Gray and Larson's Approach Interestingly, Gray and Larson (the authors of your Project Management text) didn't even address the Risk Monitoring and Control functions as a separate topic; instead they chose to include them under Risk Response Control (page 225) and Change Control Management (pages 226-229). Some of the key points of Change Control Management include project scope changes, implementation of contingency plans, and improvement changes. A description of the whole Change Management Process is shown below: The Change Control process is diagramed in Gray and Larson in Figure 7-8. The benefits of a Change Control System include: But remember that the PMP exam is based on the PMBOK. Note that risk control does not necessarily attempt to eliminate the sources of risks, but rather to reduce the risk. Some of the possible ways to take risk control actions include: Alternate designs Prototyping Modeling and simulations Mock-ups

Experiments Inspections Use of existing and proven hardware and software File: Being Proactive Being Proactive One of the biggest challenges of dealing with risk events when they occur during a project is that you are now in a reactive mode instead of a proactive one. Most of the rest of the risk management process stresses the proactive aspects. In the monitoring and control stage you often have to manage creatively—like coming up with workarounds. Remember, the successful implementation of contingency plans can save a project. It's a critical part of Risk Monitoring and Control. And the purposes of managing risk and risk response control are also a critical part of the equation leading to successful projects. The section on Risk Control in Professor Kanabar's book mentions a few additional noteworthy topics worth, including the Traffic Light approach (pages 98-99) and the importance of elevating and communicating risk management issues with stakeholders and senior management (pages 100-101). The section entitled "The Last Word" has an excellent summary of the value of risk management summarized for you on the next page. File: The Last Word The Last Word By Vijay Kanabar In today’s rapidly changing, increasingly global, business environment, corporations are faced with new, more challenging opportunities than ever before. With these opportunities comes risk. Risk presents tough decisions that could mean the difference between success and failure. Reengineering and corporate “rightsizing” leave little flexibility when it comes to managing risk. These days, it seems, we end up managing one crisis after another. Executives and managers are charged with managing opportunities (and risks) in spite of dwindling corporate resources, and face the grim reality that down-sizing and reengineering are far more often the manifestations of problem management, than proactive business management. Today, opportunities are judged more stridently than ever before, and successful management of these opportunities is valued almost solely on the strength of results— measurable results. The process by which these results are achieved is an expertise

manager is expected to deliver. The challenge in today’s business climate is simple: Manage more with less and get the result. In the last ten years, we’ve all been close to or part of a business down-sizing or reengineering effort: We’ve pulled back to focus on the core business and divested of unprofitable ventures. We’ve realigned corporate goals to increase shareholder value, and we have even outsourced internal functions like human resources administration or payroll. So what’s left? What will position tomorrow’s market leaders, and how will today’s leaders hold their competitive edge? When we consider the broad-based cost of unmanaged risk and lost opportunity— coupled with thinning human and financial resources—crisis management or fix-onfailure is not an option. The solution for today’s business leaders is clear: Manage your risk. Innovative tools and creative solutions are needed to do this. Companies able to proactively identify and manage risk will have a significant competitive advantage in the marketplace. When risk management is properly understood —and practiced—those who use it can manipulate their business environment to their advantage and position themselves as market leaders. It’s that simple, and it’s that challenging. The diagram below illustrates why it is strategically important to understand your risk position as early as possible. In contrast, risk management directly impacts the future effects of current decisions by addressing risks in the decision-making environment. Project teams learn to identify risks, analyze their choices and make consistent decisions based upon the overall objectives of the enterprise as well as the task at hand. Managing risks becomes an indispensable part of every-day workflow, a step in the enterprise’s critical path. Risk management is the long, hard look before we leap. It has been estimated that problem management consumes over 30% of our resources. The “clean up” effort. To counter this reality, the deployment of a risk management system is designed to: Take a disciplined approach to decision making throughout the ranks of an organization, deliberately and continuously re-focusing and realigning the strategic direction of the company. Communicate risks clearly and effectively across organizations and throughout the enterprise with a common “risk vocabulary.” Provide a repeatable process for analyzing risks that balances well with the strategic direction of the company, well beyond typical cost-benefit analysis, to decide whether or not to launch a project.

Free up precious resources. If you frequently find your staff in crisis or problem management, you have less time and resources available to take on additional opportunities. Identify new opportunities and ensure the risk is commensurate with rewards. Also, if you choose an opportunity with high risk and high return, your chances of success are greatly enhanced using a risk system. Utilize organizational strengths for identifying and managing risks, rather than relying on individual heroics to rescue a project or program. Eliminate the root causes of risk. While we can never eliminate risk itself, persistent attention to the causes of risk can help surface the underlying roots that create it. Help you out-manage your competition. With a risk management system in place, you will have a strategic advantage over organizations that insist on remaining in crisis management or fix-on-failure. Many companies are discovering risk management as a means to effectively manage business in a rapidly changing environment. Where there is change, there is significant opportunity and risk. Your Investment in Risk Management Your investment in risk management (typically 2-4% of your project costs) compares favorably with cost overruns and lost opportunity costs, which often reach more than 50%. So, while the investment in risk management is comparatively small, the potential gains are enormous. File: Lecture 10 - Summary Lecture 10 - Summary In summary, there are many benefits from performing good risk management on a project. Risk management has often been viewed as a "Nice to have (but not essential)" of project management. In reality, assessing and planning for risk is one of the most important aspects of project management. To be successful in project management you need to master the risk management process by leading your team(s) through a risk assessment and applying those results in your project plan and schedule. During execution and monitoring you will need to check in with your risk owners and track and control changes so that the realized risk prompts the appropriate risk response. Luck always favors the prepared—and being prepared means implementing risk management methodology best practices and developing the necessary skills a buy-in so you can assist your team!

Few projects, if any, go exactly according to plan. The risk management process does require some time and effort, and requires contingency planning. However, the risk assessment process provides your team with the opportunity to voice their concerns and provides a realistic response to possible events. General Dwight D. Eisenhower said, " In preparing for battle I have always found that plans are useless, but planning is indispensable." One should interpret this to mean, Because all management is really risk management. This completes our review of risk management for project management. Next week we will move on to Continuity, which is contract management and procurement. Assignment and Discussion Schedule To submit assignments and participate in discussions, click on the appropriate icon on the left (course-wide) or at the top of the page (for each week).

Print Save to File ================================================ Jump to Navigation Frame Jump to Content Frame Printable View of: Lecture 11 - Continuity Management Print Save to File File: LECTURE 11 - Continuity Management Lecture 11 - Continuity Management Reading: Emerson, Chapters 4-9 (pages 75 through 175) Assignment and Discussion Schedule To submit assignments and participate in discussions, click on the appropriate icon on the left (course-wide) or at the top of the page (for each week).

Before beginning this lecture, please watch this short video introduction by Larry Watson. Click on the play button to start the video.

Now we start the last part of the course, labeled continuity management, which encompasses procurement and contracts – specifically, the various types and the possible risks associated with them. This lecture will deal with contracts themselves and will offer an overview of procurement. The next lecture will deal with the various types of contracts and their risks as well as some miscellaneous areas. But I am going to approach this lecture much differently from the preceding ones. In almost 30 years of teaching graduate business and project management courses I have learned that unless you are an attorney or you have an undergraduate degree in business, you probably never had a business law course. Therefore, your real knowledge of contracts is very limited. So, my approach is to first review the basics of contracts in our legal environment, as you need an understanding of the risks, limitations, and possible consequences of entering into contracts. Failure on your part to understand contracts can be very costly, and may delay or destroy otherwise good projects.

File: Basic Information Basic Information I am not an attorney, therefore, I'm not going to teach you business law. But I can direct you to sources which provide some good, basic information regarding contracts, and that is why I assigned you the reading of chapters 4-9, pages 75-175 of the Barron's Business Law book. It provides a very good overview of contracts and is well worth reading— even if you think you are somewhat experienced in this area. I will review some of the key points of the chapters, but leave most of the details and definitions for you to review. In the real world, you must function as a project manager in the environment you happen to be in—whether you are employed by a large multinational firm, a contractor, a governmental entity, or whatever. Entering into contracts, especially complex ones can be very tricky. In some business environments, you will be mandated to submit all potential contracts through either an internal legal department or through an outside legal council for review and approval. This may also happen through procurement policies and procedures, which we will address later. In any case, I strongly recommend that you take advantage of any legal review or advice you can obtain before entering into contracts—especially large ones, or ones involving new technology or custom-designed and hand-made items. Always think about “what

could go wrong” (Risk Management) and how deeply it could affect the project in terms of cost, delays, or even cancellation. The more risk you perceive, the more important a legal review is upfront.

File: Contracts Contracts OK - Let’s look at Chapter 4 - Nature, Classification, and Formation of Contracts. So What is a Contract? It is a legally enforceable agreement, either expressed or implied.

There are four essential elements required for a contract to be valid: For contracts to be valid, there must be an offer and an acceptance. The acceptance is unconditional because if it were conditional, it would be a counteroffer—which then needs to be accepted unconditionally by the other party. There is a Statute of Limitations, which is usually three to six years, depending on the state in which the contract is executed; the exception to this is sales contracts, which are covered under the Uniform Commercial Code (UCC) and are limited to a four-year period.

File: Mistakes and Fraud What a Contract Is: Mistakes and Fraud Chapter 5, Reality of the Contract, deals with mistakes and fraud. In order to obtain a finding of fraud, there are five elements, all of which must be present: Misrepresentation of a material fact Made knowingly With intent to defraud Justifiability relied upon Causing injury to the other party Fraud is both a tort, leading to a civil finding (monetary damages) and a crime, leading to criminal actions including jail and fines. Also, if the fraud is aggravated or malicious, it can lead to punitive damages which may be up to triple the amount of the actual damages. If fraud can be proven in a court of law, the defrauded party can either rescind the contract or affirm the contract and bring legal actions to recover damages. Contracts entered into under coercion, duress, or undue influence, or unconscionably [Well, this is better than “under unconscionability,” but I am at a complete loss as to what he is actually trying to say here], may be voided by the victim.

File: Other Aspects What a Contract Is: Other Aspects Chapter 6, Capacity of the Parties and Legality of the Subject Matter, deals with who can legally enter into a contract and when a contract can't legally even exist because of its subject matter. This includes agreements that violate state and federal statutes and public policy. Chapter 7 covers the Statute of Frauds, which basically says that certain agreements must be in writing, or at least have some written evidence of the agreement. In the case of the UCC, all sales contracts for a price of $500 or more must be in writing. As laws from the various states are different, many contracts and legal documents contain a clause that the UCC shall govern the particular agreement. The chapter also discusses the Parol Evidence rule (which prohibits any outside information which contradicts a written agreement), the Privity Doctrine (must be party

to a contract), and Assignments of Rights. It is important to understand that the rights and duties contained in a contract may be assigned to third parties (such as subcontractors) unless assignment is prohibited in the contract. Chapter 8 covers Discharge, Damages, and Other Remedies. A contract is automatically discharged, or terminated, by successful performance. Additionally, contracts may be terminated by breach, mutual rescission, release, payment in full, and operations of the law. However, if a contract is breached, damages may ensue; damages refer to the compensation due to the non-breaching party to recover any financial loss incurred or injury caused by the breach of the contract. There are both compensatory and punitive damages; punitive damages are only available if there was fraud or gross negligence. Additionally, parties to a contract may seek specific permission to compel the other party to complete the contract, or parties may seek injunctions to prohibit actions which may lead to a breach of contract. Chapter 9 deals with Special Problems Concerning Sales Contracts and gets into Article 2 of the UCC, which basically sets higher standards of conduct for merchants. International sales contracts may be governed by the Convention on Contracts for the International Sale of Goods (CISG) if both countries involved in the transaction have ratified the CIGS agreement. Seeing that more than one set of rules or laws may apply to a sales transaction, the contract should clearly state which set of rules and laws govern the transaction. The chapter also discusses non-sales transactions (bailment, lease, and gift), shipper's contracts, title to the goods, and buyer's and seller's remedies.

File: Other Aspects (Continued) What a Contract Is: Other Aspects (Continued) For our purposes, I assigned only the above six chapters for this course. However, there are other parts of the book which may be of interest to you, including the Commercial

Relations section (Chapters 10-13), Chapter 16 on corporate powers, Chapter 19 on torts, and Chapter 24 on employment law. Some of you might want to eventually review the whole book. But what you will really gain from the book and our discussion is the importance of knowing when you need to know about the law and its possible consequences—which is usually before you get into trouble! Don't be afraid to seek out legal advice when you think it may be necessary, especially regarding contracts. In the United States, I believe we have both the most lawyers per capita and over three times the number of lawyers per capita as the next closest developed country. Our motto seems to be that anyone can sue anyone at any time for any reason—and even win! Also, there is something called the deep pockets effect, which can cause you to have to pay damages just because a jury feels sorry for the other party and thinks that because you may be a large and successful company or individual, you can afford to pay the other party. Remember, with contracts, it's better to be safe than sorry!

File: Procurement Procurement The other issue I want to discuss now is the procurement function in general. When you leave work and you are hungry you have many choices: you could stop at a grocery store and shop for supper or you could eat out—at a fancy restaurant or a fastfood joint. And you can pay by check or debit or credit card. However, even though you may be the Project Manager at work, you may not always have the ability or the authority to make such choices. You must function in your business environment and part of that environment involves learning the procurement policies and procedures (and related payment policies and procedures) of your employer, the stakeholders, and other parties involved in the project. You cannot successfully operate in a vacuum. Procurement management includes the processes which manage the acquisition of products and services, both internally and externally, for the project, including any related contract management functions. Procurement management includes the decisions on such things as make or buy decisions and the actual processes of going about acquiring resources for the project. The procurement management function usually includes:

planning bidding selecting vendors administering the process closing out the procurement process If you are the Project Manager for a company, the company usually has in place some overall policies and procedures. In addition, there already will be established levels of authority stating who within the company can commit the company to purchases or contracts, who can approve or recommend such purchases or contracts up to certain dollar amounts, and who has the authority to authorize what amount of payments and under what terms. You, as a company employee, must learn these company policies and procedures and integrate your project as such. If you are new to a company, this is one of the first areas you want to become familiar so there won't be any delays or problems with your project that could have been avoided.

File: Policies Procurement: Policies In addition to getting to know your “boss” on a project, you may want to seek out the Purchasing Manager and the Accounts Payable Manager (or whatever functional titles these positions have) and learn the policies, procedures, guidelines, and rules you have to live with. Some of these might include: Preferred vendors: vendors you have to use because of special pricing or previous performance history Payment terms: if the company's policy is to always pay in 30 days, you can't commit to payment in 10 days Approval levels: your Corporate Board of Directors may set certain authorization levels as to what dollar amounts certain corporate officers or employees may authorize Paperwork requirements: companies develop internal control systems to both protect and monitor the use of company assets, including the purchasing and payment functions If you are involved as a Project Manager for a contractor, or you are in a situation where there are partners or multiple parties involved in the project, the above issues can become even more complex. The procurement, purchasing, and payment functions, responsibilities, duties, and authority levels must be worked out in advance with the stakeholders and all of the parties involved. Again, “chain of command” issues need to be resolved before there are problems or power struggles.

Next lecture we will deal with the use of various types of contracts which can be used to manage risk, as well as addressing some closing points on continuity, risk management, and the course in general. Assignment and Discussion Schedule To submit assignments and participate in discussions, click on the appropriate icon on the left (course-wide) or at the top of the page (for each week).

Print Save to File ====================================================== Jump to Navigation Frame Jump to Content Frame Printable View of: Lecture 12 - Project Procurement Management Print Save to File File: LECTURE 12 - Project Procurement Management Lecture 12 - Project Procurement Management Reading: PMBOK, Chapter 12 Assignment and Discussion Schedule To submit assignments and participate in discussions, click on the appropriate icon on the left (course-wide) or at the top of the page (for each week). ►Important Notice for Week 7: Since the Final Exam is a closed-book format; the lecture content of this course will be unaccessible during the exam period.

Before beginning this lecture, please watch this short video introduction by Larry Watson. Click on the play button to start the video.

This is the final portion of lecture for the course will deal mainly with the PMBOK views of Project Procurement Management. For those of you who are familiar with the older version of the PMBOK, the process steps are very similar but there have been some major terminology changes. Words like “procure,” “solicit,” and “solicitation” have been removed because they may have negative connotations in various areas of the world. Also, the new PMBOK differentiates the project team as a potential “buyer” of goods and services versus being a “seller” of goods and services. Contract administration has also been expanded to include a process on seller performance evaluation. PMBOK defines Project Procurement Management as the process used to purchase or acquire the products, services, or results needed from outside the project team to perform the work. It goes further to include that the organization can be either the buyer or seller of the product, service, or results under contract. It also includes contract administration.

File: Project Processes Project Processes There are six parts to the Project Procurement Process, which are shown on page 273 of the PMBOK. These processes interact with each other throughout the project, as well as with many of the processes in the other Knowledge Areas. Let's look at these six parts. Plan Purchases and Acquisitions This is the first step of the Project Procurement Process and it identifies which products and services are needed from outside of the project organization. Plan Purchases and Acquisitions Inputs include: Enterprise environmental factors Organizational process assets Project scope statement Work breakdown structure WBS dictionary

The Project Management Plan, including the risk register, risk-related contractual agreements, resource requirements, Project schedule, activity cost estimates, and the cost baseline The Plan Purchases and Acquisitions tools and techniques include: Make-or-buy analysis (which we covered in the cost portion of the course) Expert judgment Contract types (which we will look at in detail a little later as this is the really important part of this topic) The outputs of the Plan Purchases and Acquisitions include: Procurement management plan Contract statement of work Make-or-changes Plan Contracting The second phase of the Project Procurement Process is the Plan Contracting. The Plan Contracting Inputs include: Procurement management plan Contract statement of work Make-or-buy decisions The Project Management Plan, including the risk register, risk-related contractual agreements, activity resource requirements, project schedule, activity cost estimates, and the cost baseline The Plan Contracting tools and techniques include: Standard forms, which include items like standard contracts, non-disclosure agreements, criteria checklists, etc. Expert judgment The Plan Contracting outputs include: Procurement documents Evaluation criteria Contract statement of work updates File: Request Seller Responses Project Processes: Request Seller Responses The third step of the Project Procurement Process is Request Seller Responses, which is the bidding and proposal process. The inputs to the Request Seller Response include: Organizational process assets

Procurement management plan Procurement documents The Request Seller Responses tools and techniques include: Bidder conferences Advertising Qualified sellers' list Contract Statement of Work (SOW). This tool describes in detail the actual goods or services to be included in the contract, thus allowing all bidders to bid accordingly. The outputs of Request Seller Responses include: Qualified sellers' list Procurement document package Proposals Select Sellers The fourth part of the Project Procurement Process is Select Sellers, or the action or decision-making phase. Select Sellers inputs include: Organizational process assets Procurement management plan Evaluation criteria Procurement document package Proposals Qualified sellers' list Project management plan The Select Sellers tools and techniques include: Weighting systems Interdependent estimates Screening system Contract negotiation Seller rating system Expert judgment Proposal evaluation techniques The Select Sellers outputs include: Selected sellers Contract(s) Contract management plan Resource availability Procurement management plan updates Requested changes

File: Contract Administration Project Processes: Contract Administration The fifth part of the Project Procurement Process is Contract Administration. It should be noted that in many large organizations or in complex projects, the Contract Administration function may be handled by a separate department outside of the project team. However, the project manager will still have interface and oversight responsibilities involving the contract administration. Contract Administration inputs include: Contract(s) Contract management plan Selected sellers Performance reports Approved change requests Work performance information Contract Administration tools and techniques include: Contract change control system Buyer-conducted performance review Inspections and audits Performance reporting Payment systems Claims administration Records management system Information technology Contract Administration outputs include: Control documentation Requested changes Recommended corrective action Organizational process assets updates, including correspondence, payment schedules and requests, and seller performance evaluation documentation Project management plan updates, including the procurement management plan and the contract management plan File: Contract Closure Project Processes: Contract Closure The sixth and final step in the Project Procurement Process is Contract Closure, which supports the Close Project process. Contract Closure inputs include:

Procurement management plans Contract management plans Contract documentation Contract closure procedure Contract Closure tools and techniques include: Procurements audits Records management systems Contract Closure outputs include: Closed contracts Organizational process assets updates, including Contract files, Deliverable acceptance, and Lessons Learned documentation File: What This All Means What This All Means Project Processes: What This All Means Now, have you got all that memorized? Well, you really don't have to. As I stated earlier, the Procurement Management Processes not only interact with each other throughout the project, but they also interact with other Project Management Knowledge areas throughout the project. Consequently it appears that there are a lot of inputs and outputs to the Procurement Management Process steps. If you step back and look at them again, you'll find that most of them are very logical.

File: Types of Contracts Types of Contracts Now, let's go back and look at some of the different types of contracts. There is a strong correlation between risks and contracts; certain types of contracts can be used as a risk reduction tool. Or one can add various terms and conditions to contracts to make them less risky. In fact, you could even contractually outsource potentially high risk aspects of a project. In any contractual arrangement, there is always risk present. The real question is who becomes responsible for what aspects of the risk through the terms of the contract. I am going to use the terms “buyer” and "seller" to discuss the contracts: the company doing the project is the "buyer" and the other party to the contract, the contractor, is the "seller." First, let's look at the two extremes: Fixed-Price (sometimes also referred to as firm fixed price or lump sum) versus Cost-Plus (sometimes referred to as time and materials). We'll also look at the key elements of a contract, which usually contain the risks; these typically involve three areas—costs, time, and satisfactory performance.

File: Fixed-Price and Cost-Plus Types of Contracts: Fixed-Price Fixed-Price contracts typically involve an agreed-upon price, delivery or completion date, and a stated or assumed level of quality or performance. Once the contract is executed, basically all of the risks are on the seller. These types of contracts usually work best when the products are commodity-like, or are well-defined parts or components. The advantages of fixed-price for the buyer are that they know what the cost will be, when to reasonably expect delivery and what the expected performance or quality will be. The disadvantages to the buyer may include not being able to request changes or customization once the contract is signed (as there are no incentives for the seller to agree). In this type of contract the seller basically keeps all of the risks; the seller has already agreed to all of the terms, so he has to deliver. If things like increases in raw material prices, higher energy and delivery costs, or poor estimating on his part, affect the contract, the seller has to eat any resulting costs and either make a lower profit or even incur a loss. Fixed-Price contracts are usually easy to bid, and consequently, bidders who really want the job know that they have to make a reasonably low bid to be considered for it. Cost-Plus At the other end of the spectrum is the Cost-Plus contract. Under a full Cost-Plus contract, the seller is reimbursed for all direct allowable costs incurred, and usually an additional percentage of these costs which covers the overhead, or indirect costs, and the profit. In this arrangement, the buyer basically assumes all of the risks. If the project takes longer or goes over budget, it is the buyer's problem. There is no particular incentive for the seller to reduce the costs other than possibly his reputation. There are basically 3 types of cost reimbursement or Cost-Plus fee (CPF) contracts: Cost-Plus a percentage of cost (CPPC) Cost-Plus a fixed fee (CPFF) Cost-Plus incentive fees, if earned (CPIF) File: Modifications Types of Contracts: Modifications Note: we can modify both of these types of contracts by adding additional terms and conditions, such as penalties and incentives, which will transfer part of the risk to the other party. For example, we could take a Fixed-Price contract and add an incentive bonus to it if the seller delivers either early or on time, or if the quality or performance exceeds

specifications. We could also tag penalties onto a Fixed-Price contract if the seller is late or if there are quality or performance issues. With Cost-Plus contracts we could make them Cost-Plus-Fixed Fee, meaning we reimburse the seller for all direct costs, but pay a flat fee instead of a percentage to cover his indirect costs and profit. We could also make them Cost-Plus-Incentive - Fee, where the fee would vary depending on the delivery, quality, performance, and cost criteria of the contracted item. Notice that all of these modifications to the contracts result in some manner of sharing the risks, as well as the potential opportunities of the situation. At the very center of such a sharing situation is the concept of forming a joint venture to share equally in all of the risks and opportunities. A few other ways that these contracts may be modified include: Guaranteed maximum and minimum fees Shared savings Redetermination (after the fact adjustments) Economic price adjustments Incentive targets Profit ceilings or floors Warranties and guarantees File: An Additional Point Types of Contracts: An Additional Point One additional point about these contracts. All of the above examples and discussions apply to the most common type of contract, which is often referred to as a completion contract because there is a definitive delivery or end to the contract. Another type of contract, which is often referred to as a term contract, is one that is required to deliver a specific level of effort, not an actual end product. With Fixed-Price contracts, sellers assume all of the risks; therefore, it is only reasonable that they should be compensated for these risks and earn a higher comparable profit than with other types of contracts. Conversely, with Cost-Plus contracts, buyers assume all of the risks; therefore they will expect the seller to work for a lower potential profit. All of the other types of contracts, with their various risk sharing arrangements should theoretically move the buyer's costs and the seller's profits accordingly. In Vijay's Risk Management book, he showed the following chart which pretty well defines the contract/risk tradeoffs:

So you have many choices on how to potentially structure contractual relationships depending on the aspects of the project and the importance of the risk characteristics of cost, time, quality, and/or performance. Also, if the project situation is reversed and you are the seller, remember that the customer, or buyer, is a stakeholder and may want to work with you contractually on risk transfer or risk sharing.

File: Common Terms Types of Contracts: Common Terms As there is no actual textbook on the procurement section of this course, I've included below a list of common terms and their basic definitions, related to contracts and procurement:

File: Course Summary Course Summary In this course, we dealt with the quantitative and qualitative aspects of the decisionmaking that goes into project management. However, no matter how well a project is planned, how it is executed can be an entirely different story. In times of crisis, uncertainty, and adverse conditions, the stakeholders and the project team look to the Project Manager to provide stability and good decision-making to put or keep the project on track. Solid cost management, risk management, and procurement management skills have elevated an average Project Manager into a great Project Manager. I hope some of this course will help you become one. Good Luck! Please click the play button to hear some parting comments from Larry Watson.

Assignment and Discussion Schedule To submit assignments and participate in discussions, click on the appropriate icon on the left (course-wide) or at the top of the page (for each week).

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