CHAPTER ONE

THE CONCEPT OF PROJECT RISK

 Executives are facing increasingly complex challenges throughout their endeavor towards success. These
environmental challenges have existed before, but not to the degree that they do today.

• In the past, executives have attempted to ease the impact of these environmental conditions by embarking on
massive cost-reduction programs. The usual results of these programs have been early retirement, layoffs, and a
reduction in manpower through attrition(መድክም).

• Almost all of today’s executives are in agreement that the solution to the majority of corporate problems involves
obtaining better control and use of existing corporate resources, looking internally rather than externally for the
solution. As part of the attempt to achieve an internal solution, executives are taking a hard look at the ways
corporate activities are managed. Project management is one of the techniques under consideration.

• The project management approach is relatively modern. It is characterized by methods of restructuring management
and adapting special management techniques, with the purpose of obtaining better control and use of existing
resources.

• For many companies, establishing industry leadership means assuming a higher level of risk due to the uncertainties
associated with navigating unchartered territories. Developing new capabilities in today’s environment is risky
business by nature, especially if a company wants to establish or maintain a leadership position. However, risk taking
does not mean taking chances. It involves understanding the risk-reward ratio, then managing the risks associated
with a project.

• Every project is risky, meaning there is a chance things won’t turn out exactly as planned. Project outcomes happen as
a result of many things, including some that are unpredictable and over which project managers have little control.

• Project risk is a function of the uniqueness of a project and the experience of the project team. When activities are
routine or have been performed many times before, managers can anticipate the range of potential outcomes and
manipulate aspects of the system design and project plan to achieve the desired outcomes. But when the project is
unique or the team is inexperienced, the potential outcomes are more uncertain, making it difficult to anticipate
problems or know how to avoid them.

Project risk defined

Project risk is defined in different forms by several authors with some differences in the wordings used. The essence, however,
is very similar. Some of the definitions are shown below:

 Risk is a condition in which there is a possibility of an adverse deviation from a desired outcome that is
expected or hoped for.

 Project risk refers to those dangerous activities or factors that, if they occur, will increase the probability
that the project’s goals of time, cost, and performance will not be met.

 Risk in projects is referred to as the risk of failure , which implies that a project might fall short of schedule,
budget, or technical performance goals by a significant margin.

 Project risk is an uncertain event or condition that, if it occurs, has a positive or negative effect on a project
objective

 A combination of the probability of a defined threat or opportunity (Likelihood) and the magnitude of the
consequences of the occurrence (Impact) defines a Risk Index”

Project uncertainty Vs project risk

The “risk versus uncertainty” debate is long-running and far from resolved at present. Although the two are closely related,
quite many authors make a distinction between the two terms.
It might be every project manager’s wish that the results and implications of project decisions are known at the time of the
decision (i.e., the future is known, and it is known with certainty). That is, the probability of success for each project under
evaluation is considered to be 100%. In reality, such conditions simply do not exist. In practice, different project executions will
inherit different degrees of associated uncertainty and consequently different degrees of risk.

• Risk refers to situations where a project has a number of possible alternative outcomes, but the probability of each
outcome is known or can be estimated.

• Uncertainty refers to the doubt as to the occurrence of a certain desired outcome. It is more of subjective belief.
Subjective in a sense that it is based on the knowledge and attitudes of the person viewing the situation and as the
result different subjective uncertainties are possible for different individuals under identical circumstances of the
external world.

• Risk and uncertainty are complementary concepts.

Risk and probability

• Risk analysis is a systematic process to estimate and/or rate the level of risk for identified and approved risks. This
involves estimating the probability of occurrence and consequence of occurrence and converting the results to a
corresponding risk level.

• Risks can be prioritized for further quantitative analysis and planning risk responses based on their risk rating. Ratings
are assigned to risks based on their assessed probability and impact. Evaluation of each risk’s importance and priority
for attention is typically conducted using a look-up table or a probability and impact matrix.

• Such a matrix specifies combinations of probability and impact that lead to rating the risks as low, moderate, or high
priority. Descriptive terms or numeric values can be used depending on organizational preference.

• Each risk is rated on its probability of occurrence and impact on an objective if it does occur. The organization should
determine which combinations of probability and impact result in a classification of high risk, moderate risk, and low
risk.

Classification of project risk

• To be successful, an organization should be committed to address risk management proactively and consistently
throughout the project. A conscious choice should be made at all levels of the organization to actively identify and
pursue effective risk management during the life of the project. Project risk could exist at the moment a project is
initiated. Moving forward on a project without a proactive focus on risk management is likely to lead to more
problems arising from unmanaged threats.

• There are many suggestions for classifying projects risks, which, however, reflect different underlying concepts and
conclusions. A critical observation is that all these approaches focus on a specific aspect of risk, which is used as the
criterion for the classification; this criterion would be the nature of the risk or the timing of occurrence or the
mitigation measures used, etc. This leaves outside of consideration other aspects that may be of significant
importance.

• The classification approach merges two different criteria for classifying risks: (a) according to the source of origin in
the project’s context and (b) according to their nature. Therefore, when a risk is introduced as a variable in risk
assessment, it bears concurrently more than one facets (i.e., nature and source of origin), thus increasing the
accuracy of the assessment.

• Three main categories were identified, according to the criterion of the risks’ nature, namely financial, technical, and
legal, and five categories, according to the criterion of source of origin for each risk in the project’s framework,
namely state-rooted, concessionaire-rooted, market-rooted, contract package-rooted, and miscellaneous.

Financial Risks
 • A financial risk is related to a project’s failure due to a financial or economic cause. A cause of this nature is related to
the funding of the project and the commercial, competition, loan, and demand issues, etc. (e.g. cost overruns,
taxation, imposition of restrictions, etc.).

Technical Risks

• A technical risk is related to a project’s failure due to a technical cause. Failure is considered as a shortfall in
succeeding to meet the project’s requirements. Technical cause is anything associated with the process of the
project’s development and operation. Therefore, the category of technical risks comprises all the aspects that may
endanger project’s success

Legal Risks

• A legal risk is related to a project’s failure due to deficiencies in the legal and institutional framework. The institutional
framework comprises: (a) organizational issues of both the country where the project is established and the
concessionaire and (b) political issues.

State-rooted Risks

• The entity of the state is a very critical parameter in the development of a project and a significant source of risks. A
state-rooted risk is related to a project’s failure due to actions or omissions by governmental and public agencies.

Concessionaire-rooted Risks

• The entity of the concessionaire is the most important factor for the development of a project and a significant source
of risks. A concessionaire-rooted risk is related to a project’s failure due to issues that are in control of the
concessionaire and the rest entities involved in the project excluding the state.

Market-rooted Risks

• The environment wherein the project will operate is another important parameter. A project represents an
investment for all the stakeholders involved; as an investment it is affected by the characteristics (e.g., the structure
and maturity) of the construction industry market but also the overall market as well. A market rooted risk is related
to a project’s failure due to issues that are related to the market wherein the project is developed.

Contract package-rooted Risks

• The contract package of a BOT project is a complex and large framework of agreements and other legal documents
that govern the development and operation of a project. This complexity and possible inadequacies in the structuring
of the contract package may be a very good reason for the generation of risks. Therefore, a contract package-rooted
risk is related to a project’s failure due to deficiencies or misinterpretations of the project’s contract package

CHAPTER TWO

• In the early days of project management on many commercial programs, the majority of project decisions heavily
favored cost and schedule. This favoritism occurred because we knew more about cost and scheduling than we did
about technical risks. Technology forecasting was very rarely performed other than by extrapolating past technical
knowledge into the present.

• Today, the state of the art of technology forecasting is being pushed to the limits on many projects. For projects with
a time duration of less than one year, we normally assume that the environment is known and stable, particularly the
technological environment. For projects over a year or so in length, technology forecasting must be considered.

• Moreover, today’s competition for technical achievement has become fierce. Companies have gone through life-cycle
phases of centralizing all activities, especially management functions, but are decentralizing technical expertise.
 • By the mid-1980s, many companies recognized the need to integrate technical risks with cost and schedule risks and
other activities (e.g., quality). Risk management processes were developed and implemented where risk information
was made available to key decision-makers.

Definition of risk management

• Risk management is the act or practice of dealing with risk. It includes planning for risk, identifying risks, analyzing
risks, developing risk response strategies, and monitoring and controlling risks to determine how they have changed.

• Risk management is not a separate project office activity assigned to a risk management department but rather is one
aspect of sound project management. Risk management should be closely coupled with key project processes,
including but not limited to: overall project management, systems engineering, configuration management, cost,
design/engineering, earned value, manufacturing, quality, schedule, scope, and test.

• Proper risk management is proactive rather than reactive, positive rather than negative, and seeks to increase the
probability of project success. As an example, an item in a network (e.g., router) requires that a new technology be
developed. The schedule indicates six months for this development, but project engineers think that nine months is
much more likely. If the project manager is proactive, he might develop a risk response plan right now. If the project
manager is reactive (e.g., a “problem solver”), then he may do nothing until the problem actually occurs.

• Project risk is the potential failure to deliver the benefits promised when a project is initiated. By understanding and
containing the risk on a project, the project manager is able to manage in a proactive manner. Without good risk
management practices and tools, the project manager will be forced into crisis management activities as problem
after problem presents itself, forcing a team to constantly react to the problem of the day (or hour). As one well-
known author stated, “If you don’t actively attack the risks, the risks will actively attack you.”

Understanding the level of risk associated with a project is crucial to the project manager for several reasons. First, by knowing
the level of risk associated with a project, a project manager will have an understanding of the amount of schedule and budget
reserve (risk reserve) needed to protect the project from uncertainty. Second, risk management is a focusing mechanism that
provides guidance as to where critical project resources are needed—the highest risk events require adequate resources to
avoid or mitigate them. Finally, good risk management practices enable informed risk-based decision making

• Having knowledge of the potential downside or risk of a particular decision, as well as the facts driving the decision,
improves the decision process by allowing the project manager and team to weigh potential alternatives, or trade-
offs, to optimize the reward-risk ratio.

Project risk management process

• Risk management is a preventive practice that allows the project manager to identify potential problems before they
occur and put corrective action in place to avoid or lessen the impact of the risk. Ultimately, this behavior allows the
project team to accelerate through the project cycle at a much faster pace.

• It is important that a risk management strategy be established early in a project and that risk be continually addressed
throughout the project life cycle. Risk management includes several related actions, including risk: planning,
identification, analysis, response (handling), and monitoring and control.

Project Risk Management processes includes the following components:

– Plan Risk Management—The process of defining how to conduct risk management activities for a project.

– Identify Risks—The process of determining which risks may affect the project and documenting their
characteristics.

– Perform Qualitative Risk Analysis—The process of prioritizing risks for further analysis or action by
assessing and combining their probability of occurrence and impact.

– Perform Quantitative Risk Analysis—The process of numerically analyzing the effect of identified risks on
overall project objectives.
 – Plan Risk Responses—The process of developing options and actions to enhance opportunities and to
reduce threats to project objectives.

– Control Risks—The process of implementing risk response plans, tracking identified risks, monitoring
residual risks, identifying new risks, and evaluating risk process effectiveness throughout the project.

Risk management plan

• Making decisions is perhaps one of the toughest jobs that project managers have to take on. Decision making
wouldn’t be very challenging in a situation of total certainty, where all information that is needed for decision making
is already available and the outcomes of decisions are predictable. Project managers’ lives, however, are much more
complex, and most of their decisions are made with incomplete information and uncertain outcomes. This is the
realm of project risk management.

• The risk management plan is a document developed in the beginning of the project that provides a framework for
dealing with risk throughout the project’s life. Included in the plan is a general description of the approach used to
identify, assess, manage, and monitor project risk events.

It should include information such as the:

• Risk management methodology. Identify and describe approaches, tools, and data sources that may be used
to handle risks.

• Roles and responsibilities. Define who does what in risk management on the project, from project team
members to members of the company’s risk management teams.

• Budgeting and timing. Specify the budget for risk management for the project, as well as the frequency of
the risk management processes.

• Tools. Describe which specific tools for qualitative and quantitative risk analysis to use and when to use
them.

• Reporting and monitoring. Define how risk will be reported and communicated to the project stakeholders,
how risk events and triggers will be monitored throughout the project cycle, and how the information will
be preserved for purposes of lessons learned.

Risk identification

• This section of the plan describes the process for identifying all the potential risks that may influence the success of
the project. It should describe the methods for how the risks are identified and the format in which the risks are
recorded.

• When identifying risks, several things have to be taken into account. First, risks vary across the project life cycle.
Typically, risk levels tend to be relatively high early in the project because so much is unknown. Similarly, later in the
project many of the unknowns are turned into known and risk levels are relatively lower.

• Also, some risks occur only in certain project stages; for example, risks related to project acceptance tests are typically
encountered near the end of the project. Sometimes, even assumptions may become a source of risk.

• The dynamic nature of risk makes the identification process iterative, requiring that once risks are identified early in
the project, they need to be continuously reviewed, with appropriate adjustments.

• Second, risk events rarely strike independently. Rather, they tend to interact with other risk events, combining into
larger risks. Looking for such interactive possibilities is important in risk identification. Finally, since risks come in all
types of packages, planners should conduct risk identification in a systematic way so that no stone is left unturned
internally in the project and externally in the environment, including management of stakeholders. A huge help in this
respect may be received from risk categorization.

Perform risk analysis

• Once risks have been identified, it is important to determine both the probability that each of the risks will occur, and
the impact to the project if they occur. In order to determine the severity of the risks identified, a probability and
impact factor has to be assigned to each risk. This process allows the project manager to prioritize risks based on the
effect they may have on a project.

Assess Risk Qualitatively and Prioritize

• In the qualitative assessment, we tend to use a nonnumeric probability scale—for example, a five-level scale, where 1
= very unlikely, 2 = low likelihood, 3 = likely, 4 = highly likely, and 5 = near certain.

• If you don’t have much experience or data to reliably assess quantitative probabilities qualitative scales are
sufficiently good. Consequently, you will qualitatively assess each risk’s probability on this nonnumeric scale. The next
step is to assess the impact of each risk, again on a discrete scale. One example is a scale such as 1 = very low impact,
2 = low impact, 3 = medium impact, 4 = high impact, and 5 = very high impact. To illustrate its use, let’s assume that a
risk to be assessed has three impacts: Project costs can increase, schedule can slip, and performance of the capability
can be reduced.

Assess Risk Quantitatively

• Quantitative risk assessment numerically analyzes the probability of each risk, its consequences on project objectives,
and the extent of overall project risk. It can be used separately or together with qualitative assessment.

• The process begins from the results of the earlier risk identification step. For each of the identified risks, you need to
quantify the probability of occurrence by asking, “What is the probability that this risk will happen?” “Ninety
percent,” the team decides.

• The next step is to determine the risk impact. “What will happen if this risk occurs?” is the question that should be
asked. While the impact may be expressed in almost any units, from percentage of lost market share to loss of
revenue, the real emphasis here is to estimate schedule or cost severity of the risk. For example, if the highest priority
project objective is schedule, then the risk event status would be calculated in terms of time.

Risk Event Status = Risk Probability × Impact

= 90% × 60days

= 54 days

Determine risk response

• Once risks have been qualitatively or quantitatively assessed, the project ream must determine how to address the
risks that have the greatest potential for impacting the project. This section of the risk management plan explains the
response options and actions that are available to the project team in managing the risks.

• Any suitable risk response action essentially falls into one of the four broad categories of response strategies:
avoidance, transference, mitigation, and acceptance of risk.

Risk avoidance

• Changing the project plan or condition to eliminate the selected risk event is risk avoidance. For instance, if faced with
the risk of not having an available expert to perform a quality business process analysis, the risk can avoided by hiring
such an expert.

Risk transfer

• Risk transfer simply involves shifting consequences of a risk event to a third party, along with the ownership of the
response. If, for example, projects within a firm have historically been exposed to a risk of slow quality testing from
their internal capabilities, the risk can be transferred to a third party by hiring a professional firm to do the testing.

Risk mitigation
• The intent of risk mitigation is to lower the probability or impact (or both) of an unfavorable risk event to an
acceptable threshold. A fairly common risk for many projects is the potential decision delays caused by the busy
schedules of the executive sponsor. This risk can be mitigated a number of ways, such as reducing the number of
major milestone decision points or the delegation of decision authority to one of the executive’s direct reports.

Risk acceptance

• For those risks that are not among the highest-ranked risks, or for risks that have no other viable response strategy, a
risk acceptance strategy is used. This implies that project managers have decided to not change the project plan or
are unable to articulate a feasible response action to deal with a risk

Risk Monitoring

• Most of a project managers attention with respect to risk management tends to focus on the activities associated
with risk identification, risk assessment, and risk response planning. Where project managers historically spend less
time and focus are the activities associated with risk monitoring. Not uncommon, project managers therefore
continue to be surprise when a risk event they had identified earlier, but were not monitoring, suddenly turns into an
issue. To protect against this, diligent risk monitoring must be a part of every project manager’s activities and he or
she must have tools in their PM Toolbox to effectively perform this function.

There are four primary elements involved with risk monitoring activities:

 Systematically track the status of risks previously identified;

 identify, document, and assess any new risks that emerge;

 Effectively manage the risk reserve; and

 capture lessons learned for future risk identification and assessment efforts.
 Yardistick International college
Program of Postgraduate studies
MBA program
Change and Innovations Management Individual Assignment (max.mark 25%)
General instruction
 Take a practical and actual organizational example in Ethiopia’s context in
explaining each question!
1. Because “change is inevitable”, resistance to change is also expected. what
does this mean and why it is inevitable? How resistance to change will be
managed? What are the mechanisms used in Making the Change Process
Effective? Briefly elucidate by taking practical organization that has
brought visible change.
2. Compare and contrast between the concepts of schools of thoughts related
to individual, group and system change. Which one is the most appealing
perspective in a current situation of an organizational change and why?
3. Discuss the human dimensions of change; Effective Leadership theories and
styles for effective management of change in business organizations.
4. What is organizational learning? How it is related with change in an
organization?
5. Discuss the theories and models of organizational change.
6. Clearly elucidate on the following points:
a. Types of Innovation and Rationale of Innovation
b. Driving and Restraining forces of Innovation
c. Innovation Diffusion and Adoption
d. Innovation Decision-Making Process
e. First Movers Advantage

Prepare a report of your analysis (Maximum of 12 and minimum of 6 pages without

preliminary and reference pages)
Submission date: after three consecutive weeks from today.
 YARDSTICK INTERNATIONAL COLLAGE

SCHOOL OF POST GRAGUATE PROGRAM

DEPARTMENT OF PROJECT MANAGEMENT
2020 SECOND SEMESTER
PROJECT PLANNING AND ANALYSIS (PMgt 631) MODEL EXAM
Name___________________________________ ID___________ Program____________
DIRECTION: WRITE BRIEF AND SHORT ANSWER FOR EACH OF THE FOLLOWING
QUESTIONS ( Note that: you should submit your answer within two weeks (meaning in
fifteen days) online through email: zeghab58@gmail.com)

1. What is a project? What are its characteristic features?

2. What is the attributes of successful project?
3. What is s-curve?
4. What is the difference between project and program?
5. Describe the major aspects in project identification phase?
6. The process of project preparation phase involves generally three steps. What are these steps? Explain each in short?
7. What is logical frame? Describe its vertical and horizontal elements?
8. What are the major steps in planning process?
9. Describe project feasibility analysis and project appraisal?
10. What are the different aspects of project feasibility analysis and appraisal?
11. List in order and describe in short each phase of project or program cycle?
12. Why it is essential to undertake technical analysis in the feasibility study? What are the aspects of technical analysis?
13. What is the major difference between pre-feasibility and feasibility study?
14. What is NPV? What is IRR? What decision rule is applied in project appraisal?
15. What is project management?
16. List and explain in short the different types of project cost and benefit analysis tools that are used during financial analysis?
17. What is the difference between financial analysis and economic analysis in cost and benefit calculation of a project?
18. What is the difference between sensitivity and scenario analysis?
19. In marketing analysis, opinion polling and life cycle segmentation analysis are the commonly used method to estimate the demand for
a product. Explain briefly these two demand estimation methods?
20. What is the similarity and difference between project monitoring and evaluation?
21. Explain the principle, the types and stages of evaluation?
22. For the following simple cash flow, complete the table (shaded part) and determine the net benefit in each year

Simple financial cash flow for X project ( in million Birr)

Cost Year1 Year2 Year3 Year 4 Year 5

Fixed Assets          
Pipes 400 500 300 0 -70
pumps 50 100 90 0 -30
Storage tanks 140 230 160 0 -100
Jack hammers 20 10 0 0 -5

Construction 200 250 190 0 0

Total Fixed Cost
Working Capital 20 30 40 0 -90
Total capital cost
Operation cost          
 Project management 80 100 120 90 90
Fuel 5 7 8 10 10
Maintenance 30 40 50 50 50

Total cost
Benefits (sales revenue) 0 200 250 500 500
Net Benefits ( Benefit - Costs)

23. Rank the following hypothetical projects based on their performance

Consider the following hypothetical project  

Investment Year I Year II
Initial cost Rank by inspection
projects return return
A 10000 10000    
B 10000 10000 1100  
C 10000 5762 7762  
D 10000 7762 5762  

24. If a project requires an original out lay of birr 3200 and is expected to produce a stream of cash proceeds of birr 800 per year for 10
years, what would be its payback period?
25. A company wishes to invest Birr 5000 in a machine that will yield an income stream of Birr 800 per year for the next 8 years. If the
future incomes are discounted at a rate of 6% per year, find whether the investment is worthwhile or not? (Show your steps clearly)

MANAGERIAL ECONOMICS ASSIGNMENT

1. Demand i. Define demand and the law of demand ii. Discuss the factors that affect demand, and the
direction of change iii. Discuss the three major types of demand, and explain how the elasticity
knowledge important for managerial decision

2. Supply i. Define supply and state the law of supply ii. Discuss the factors that affect supply, and the
direction of change

3. Market equilibrium i. What does it mean by market equilibrium? ii. Illustrate graphically the effect of
an Increase in Demand and an Increase in Supply by equal magnitude. iii. Illustrate graphically the effect
of An Increase in Demand and a Decrease in Supply iv. Illustrate graphically the effect of A Decrease in
Demand and a Decrease in Supply v. Illustrate graphically the effect of A Decrease in Demand and an
Increase in Supply

4. Production and cost i. .Production isoquants; definition, types, isoquant map, ii. Isocosts; definition,
isocost map,. iii. Definition.: - source of economies of scale. - internal economies of scale. - external
economies of scale. - Learning curve effects.

5. Monopoly i. Definition. ii. Characteristics of monopoly. iii. Causes of monopoly. iv. The social costs of
monopoly. 6. Price Discrimination. i. Definition. ii. First degree price discrimination. iii. Second degree
price discrimination. iv. Third degree price discrimination.