Project Risk

Management

Project Management
Lecture No. 3
 Course Outline
w  Introduction
w  Objectives
w  Risk Identification
w  Risk Evaluations
w  Risk Allocation
w  Risk Mitigation
w  PMBOK - Risk Management
w  Summary
 Introduction
Ø  Risks and uncertainties are associated with specific events
or activities which can be individually identified;
Ø  A risk event implies that there is a range of outcomes of the
event and each outcome has a probability of occurrence;
Ø  Many common construction risks offer the prospect of
either loss or gain: for example, productivity of labour and
plant, variation and inflation. These are of high
probability and may be of low or high impact;
Ø  Some risks will have adverse consequences, for example
hazards, bankruptcy, war, sea or flood damage. These may
be of low or high probability but high impact
 Introduction
Section RISK IDENTIFICATION

• "Who is involved in risk assessment and why?"

• "What specific types of risk affect a project?"

Section RISK EVALUATION

• "Is a specific risk likely to occur in a projects life?"

• "What is the likely impact should it occur?"

Section RISK ALLOCATION

• "Should specific risks be the responsibility of

predefined parties?"

Section RISK MITIGATION

• "Is it possible to share risk with others? Who?"

Section REVIEW

• "Should your original risk assessment be revised?"

 Introduction
IDENTIFY RISK

COULD THIS RISK AFFECT No NO FURTHER

THE OUTCOME OF YOUR CURRENT
PORTION OF THE PROJECT CONSIDERATION

Yes
Reassess after
some time

EVALUATE THE IMPACT OR Negligible effect

EFFECT ON THE PROJECT
(RISK EVALUATION)

Risk considered important

DECIDE W HO IS RESPONSIBLE
FOR THIS RISK
(RISK ALLOCATION)

IF RESPONSIBLE FOR A RISK,

ARE YOU GOING TO TRANSFER
ANY OF THIS TO OTHERS
(RISK MITIGATION)
 Objectives
1 Understand and identify the various types
of risks that affect a project
1 Know the processes involved in risk
evaluation and allocation
1 A ppreciate various aspects of risk
mitigation including insurance
 Risk Identification
w  Key factors in risk assessment:
–  phase of a project
–  interests and responsibilities of the party for
whom the assessment is to be undertaken.
 Risk Identification
J Physical
n Loss or damage by fire, earthquake, flood,
accidents and landslide.
J Environmental
n Ecological damage, pollution and waste
treatment.
n Public inquiry..
 Risk Identification
J Design
Ü New technology, innovative applications, reliability
and safety.
Ü Detail, precision and appropriateness of specification.
Ü Design risks arising from surveys and investigation.
Ü Likelihood of change to the agreed design.
Ü Interaction of design with method of construction
 Risk Identification
J Logistics
Ü Loss or damage in the transportation of
materials and equipment.
Ü Availability of specialised resources —
expertise, designers, contractors, suppliers,
plant, scarce construction skills and materials.
Ü Organisational interface.
 Risk Identification
J Financial
Ü Availability of funds and adequacy of insurance.
Ü Adequate provision of cash flow.
Ü Losses due to contractors, suppliers.
Ü Exchange rate fluctuation and inflation.
Ü Taxation.
Ü Interest rates.
Ü Cost of debt financing
 Risk Identification
J Legal
Ü  Liability of acts of others, direct liabilities.
Ü  Local law, legal differences between home country and home
countries of suppliers, contractors, designers.

J Legislation
Ü  Changes caused by legislation or Government

J Security of intellectual property

J Tenure of Land and Operation
 Risk Identification
J Political
Ü  Political risks in countries of owner and suppliers, contractors,
war, revolution and changes in law.
Ü  Uncertainty of government policies

J Construction
Ü  Feasibility of construction methods, safety.
Ü  Industrial relations.
Ü  Extent of change from original design.
Ü  Climate.
Ü  Quality and availability of management and supervision.
Ü  Latent conditions
 Risk Identification
J Operational
Ü Fluctuations in market demand for product and
service.
Ü Maintenance needs.
Ü Fitness for purpose.
Ü Safety of operation.
Ü Plant availability, throughput.
Ü Management
 Breakdown Structure of Identified Risks

Economic Contractual Political Construction Management

Risk Risk Risk Risk Risk
 Breakdown Structure of Identified Risks

Economic Contractual Political Construction Management

Risk Risk Risk Risk Risk

Energy Financial Currency

Inflation
shortage uncertainty fluctuation

Labor Owner

Material Contractor

Equipment Designer
 Breakdown Structure of Identified Risks

Economic Contractual Political Construction Management

Risk Risk Risk Risk Risk

Failure of Delay Coordination Change Labor

payment disputes failure order disputes

Owner Owner Delay

Contractor Contractor Design

changes
 Breakdown Structure of Identified Risks

Economic Contractual Political Construction Management

Risk Risk Risk Risk Risk

Environmental Public Government act

disorder & regulation

Air Demonstration Permit

Noise War Tax rate

changes

Water
 Breakdown Structure of Identified Risks

Economic Contractual Political Construction Management

Risk Risk Risk Risk Risk

Uncertainty Defective Uncertainty in Uncertainty Quantity Delayed site

in labor construction equipment in material variation access

Availability Availability Storage

Permit

Skill Breakdown Protection

Title

Availability
 Breakdown Structure of Identified Risks

Economic Contractual Political Construction Management

Risk Risk Risk Risk Risk

Productivity Quality Safety Mistakes Management Variation in

control competence quality

Labor

Equipment
 Risk Identification
Conception

Initia l
DEVELOPE R/ development
FINANCIER OWNE R LEGISLATION

Design &
CONSULTANT MAJOR SUPPLIERS OF construction
CONSTRUCTOR MACHI NERY

VENDORS

Operation
SUB-CONSTRUCTOR

OPERATOR

Completion
 Risk Evaluation
w  Evaluating the input of specific risks to a
project depends on:
Ø the probability of a specific risk occurring,
termed frequency, and
Ø the impact of a risk on the project should it
occur.
w  Risk Index = Frequency x Impact
 Risk Evaluation

2
Probability

Ac
ce
pt
ab 3
le
ri s
1 k

Project Impact
 Risk Evaluation
w  characteristics to be considered:
n  The analysis should focus primarily on direct financial
damage rather than disruption of service or death and injury.
n  The level of uncertainty in any output estimates should be
assessable.
n  The accuracy of analysis should be matched to the accuracy
of data and stage of the project.
n  The cost and effort in undertaking the analysis should be low
enough that it is absorbed within the administrative budget of
the project.
 Risk Allocation
w  The overall cost of a project is likely to rise
if project risks are not allocated according
to who has control.
w  The appropriate stage of a project to start
dealing with risk is at the outset. This
enables allocation of the risk to those with
most control over it at every phase of the
project.
 Risk Allocation
w  The potential for return to investors needs
to be commensurate with the level of risk
to which they are exposed.
w  From a public perspective government has
an obligation to protect the community to
both financial and social risks of a project
 Risk Mitigation
w  You need not be totally liable for your nominated
risk responsibilities.
w  The major options available are:
ü  Shed the responsibility to a third party, e.g. sub-contractor
ü  Bear the risk as part of your opportunity for profit
ü  Reduce the likelihood of the event occurring or its impact on the
project through:
ü  detailed, efficient management (i.e. planning, organisation,
leadership and control, refer Module 1 for more details)
ü  contingency planning
ü  Reduce your financial exposure through prudent insurance cover.
 Risk Mitigation
w  Available insurance
–  Project financing

–  Debt financing

–  Currency fluctuation

–  Construction risks
 Review
w  continually review the status of project risk, regardless of
how exposure to risk is handled.
w  The risk index of various hazards changes as a project
proceeds.
w  Review enables new procedures to be adopted as
appropriate, contingency plans developed and the levels of
insurance adjusted.
w  It is important that review occurs regularly to enable
action to be taken to reduce the risk index of potential
events.
w  If you wait until uncertainty is upon you the best you can
hope to achieve is to "fight fires", (attempt to correct
problems as they arise). This approach generally leads to
increased cost and delays.
Evaluasi Risiko Secara Kwalitatif
n  Tahap 1 dari proses ini mencakup
pengidentifikasian risiko-risiko yang
mungkin terjadi dan mengevaluasi
kemungkinan (probabilitas) dan akibat dati
setiap risiko.
n  Kemungkinan terjadinya risiko
dikwantifikasi menggunakan penjelasan
pada tabel 1.
Evaluasi Risiko Secara Kwalitatif
Tabel 1 Ukuran kwalitatif dari kemungkinan terjadinya risiko
Tingkatan Keterangan Penjelasan
A H a m p i r Peristiwanya diharapkan terjadi dalam
pasti setiap kondisi
B S a n g a t Peristiwanya kemungkinan akan
mungkin terjadi dalam setiap kondisi
C C u k u p Peristiwanya akan terjadi pada suatu
mungkin waktu
D Kemungkina Peristiwanya dapat terjadi pada suatu
n kecil waktu
E Jarang Peristiwanya hanya mungkin terjadi
pada kondisi yang luar biasa
 Evaluasi Risiko Secara Kwalitatif
Tabel 2 Ukuran-ukuran kwalitatif dari dari akibat atau dampak
Tingkatan Keterangan Penjelasan
1 Tidak penting Tidak ada cedera, kerugian finansial kecil
2 Kecil Pemberian pertolongan pertama, pembebasan
dilokasi dengan segera, kerugian finansial medium

3 Sedang Perawatan medis diperlukan, pembebasan dilokasi

dengan bantuan dari luar, kerugian finansial tinggi

4 Besar Cedera yang berat, kehilangan kemampuan produksi,

pembebasan dari lokasi akibat yang merusakkan,
kerugian finansial yang besar

5 Fatal Kematian, pembebasan lokasi dengan akibat yang

merusakkan, kerugian finansial yang sangat besar
 Evaluasi Risiko Secara Kwalitatif
Tabel 3 Matriks analisis risiko secara kwalitatif
Akibat/Dampak
Kemungkinan
terjadinya Risiko Tidak penting Kecil Sedang Besar Fatal
1 2 3 4 5
A (Hampir pasti) S S H H H
B (Sangat mungkin) M S S H H
C (Cukup mungkin) L M S H H
D (Kemungkinan kecil) L L M S H
E (Jarang) L L M S S

H = risiko tinggi, penelitian rinci dan manajemen diperlukan pada tingkat senior
S = risiko yang berarti, diperlukan perhatian manajemen senior
M = risiko sedang, tanggung jawab manajemen harus dijelaskan
L = risiko rendah, ditangani oleh prosedur rutin
 PMBOK - Risk Management
w  Risk Management Planning
–  the process of deciding how to approach and plan the
risk management activities of the project
w  Risk identification
–  determining which risk might affect the project and
documenting their priorities
w  Qualitative risk analysis
–  performing a qualitative analysis of risks and
condition to prioritize their effects on project
objectives
 PMBOK - Risk Management
w  Quantitative risk analysis
–  measuring probabilities and consequences of risks and
estimating their implication on project objectives
w  Risk response planning
–  developing procedures and techniques to enhance
opportunities and reduce threats to project’s
objectives
w  Risk monitoring and control
–  monitoring residual risk, identifying new risks,
executing risk reduction plan, and evaluating their
effectiveness throughout the project lifecycle
 Risk Management Planning
Inputs Techniques Outputs
• Project charter
• Organization’s risk • Planning meeting • Risk management
management policy plan
• Define roles and
responsibilities
• Stakeholders risk
tolerances
• Template for the
organization’s risk
management plan
• WBS
 Risk Identification
Inputs Techniques Outputs

• Risk management • Documentation • Risks

plan review
• Triggers
• Project planning • Information-
• Inputs to other
output gathering techniques
process
• Risk categories • Check lists
• Historical • Assumption analysis
information
• Diagramming
techniques
 Qualitative Risk Analysis
Inputs Techniques Outputs
• Risk management • Risk probability and • Overall risk
plan impact ranking for the
project
• Identified risks • Probability/impact
risk rating matrix • List of prioritized
• Project status
risks
• Project assumption
• Project type
testing • List of risks for
• Data precision additional analysis
• Data precision
and management
• Scales of ranking
probability & impact • Trend in qualitative
risk analysis results
• Assumptions
 Quantitative Risk Analysis
Inputs Techniques Outputs
• Risk management • Interviewing • Prioritized list of
plan quantified risks
• Sensitivity analysis
• Identified risks • Probabilistic
• List of prioritized • Decision tree
analysis of the
risks analysis
project
• List of risks for • Simulation
• Probability of
additional analysis
achieving cost &
and management
time objectives
• Historical
• Trend in
information
quantitative risk
• Expert judgment
analysis results
• Assumptions
 Risk Response Planning
Inputs Techniques Outputs
• Risk management plan • Avoidance • Risk response
• List of prioritized risks plan
• Risk ranking of the • Transference
project • Risk residual
• Probabilistic analysis of • Mitigation • Secondary risks
the project • Contractual
• Probability of achieving
• Acceptance
arrangement
cost & time objectives • 
• List of potential • Contingency
responses amount reserves
• Risk thresholds needed
• Risk owners • Inputs to other
• Common risk causes
processes
• Trend in qualitative
& quantitative risk • Inputs to a revised
analysis results project plan
 Risk Monitoring & Control
Inputs Techniques Outputs
• Risk management • Project risks response • Work around plan
plan audit • Corrective action
• Risk response plan • Periodic project risk • Project change
review request
• Project
communication • Earned value analysis • Updates to the risk
response plan
• Additional risks • Technical
• Risk database
identification and performance analysis
analysis • Updates to the risk
• Additional risk identification
• Scope changes response planning checklist