University of Wah,

Department of Electrical Engineering

Document No: UW/EE/AF/REV00

UNIVERSITY OF WAH
WAH ENGINEERING COLLEGE
Electrical Engineering Department
Assignment # 03
Course Title: Engineering Economics and Management Course Code: MS-224
Semester: 4th (A) Course Teacher: Ijaz Husnain
Total Marks: 10 Time: 01 week, Till March 25, 2019
Student Name: AMIR HAMZA KHAN Reg. No. UW-17-EE-BSC-004

Assignment Title:
Project risk and uncertainty
Course Learning Outcome Program Learning Outcome Learning
Domain

CLO-2 PLO-12 Cognitive-3

PLO-6: Engineering and Society: An ability to apply reasoning informed by contextual knowledge to
assess societal, health, safety, legal and cultural issues and the consequent responsibilities relevant to
professional engineering practice and solution to complex engineering problems.
CLO-1: Understand the fundamentals of economics to assess the social issues.

Question#01: PLO-06, CLO-01 Marks 10

What do you understand by Break-Even Analysis, describe methods to overcome/prevent project risk
and uncertainty?
Break-Even Point:
In economics, the break-even point (BEP) is the point at which cost or expenses and revenue are equal: there
is no net loss or gain.
The break-even point (BEP) or break-even level represents the sales amount—in either unit (quantity) or
revenue (sales) terms—that is required to cover total costs, consisting of both fixed and variable costs to the
company. Total profit at the break-even point is zero. It is only possible for a firm to pass the break-even
point if the dollar value of sales is higher than the variable cost per unit. This means that the selling price of
the good must be higher than what the company paid for the good or its components for them to cover the
initial price they paid (variable and fixed costs). Once they surpass the break-even price, the company can
start making a profit.

Purpose:
 The main purpose of break-even analysis is to determine the minimum output that must be exceeded
for a business to profit.
 Identifying a break-even point helps provide a dynamic view of the relationships between sales, costs,
and profits. For example, expressing break-even sales as a percentage of actual sales can help managers
understand when to expect to break even (by linking the percent to when in the week or month this percent
of sales might occur).
 Break-even analysis can also provide data that can be useful to the marketing department of a
business as well, as it provides financial goals that the business can pass on to marketers so they can try to
increase sales.

Example of Break Even Analysis:

Colin is the managerial accountant in charge of Company A, which sells water bottles. He previously
determined that the fixed costs of Company A consist of property taxes, a lease, and executive salaries,
which add up to $100,000. The variable costs associated with producing one water bottle is $2 per unit. The
water bottle is sold at a premium price of $12. To determine the break even point of Company A’s premium
water bottle:

“Break even quantity” = $100,000 / ($12 – $2)

= $10,000 (Ans.)

Therefore, given the fixed costs, variable costs, and selling price of the water bottles, Company A would
need to sell 10,000 units of water bottles to break even.

Margin of Safety:

In break-even analysis, margin of safety is the extent by which actual or projected sales exceed the break-
even sales.
Margin of safety = (current output - breakeven output)
Margin of safety% = (current output - breakeven output)/current output] × 100

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Project Risk & Uncertainty:
Risk primarily deals with future events that can be foreseen and their probabilities calculated while
uncertainty deals with the present.
The fundamentals of project risk management consist of three important activities:
 Identifying risks.
 Assessing the severity of threats.
 & Responding appropriately in ways that prevent risks from derailing the project.

Because of the significance of risk, every project manager must have a risk management plan in place that
will preserve the project from internal and external threats.
The collection of data concerning risk may vary depending on the nature and scope of a project, so
addressing risk in the planning stage is essential to achieving desirable outcomes.
Uncertainties are introduced into project management when some present factors are not properly
understood and therefore are not as easily prepared to be dealt with by team members.

Methods of Analyzing Project Risk & Uncertainty:

Managing projects without addressing the fundamental risks that threaten them can be disastrous. To help
with the analysis of risk as part of project management, frameworks have been developed that help to provide
structure for the process. Following are the three methods of Risk Analysis:

 The Risk Analysis and Management of Projects (RAMP)

 Shape, Harness, And Manage Project Uncertainty (SHAMPU):
 Risk Factor Analysis (RFA)

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 1. Risk Analysis and Management of Projects (RAMP):
The Risk Analysis and Management of Projects (RAMP) method of risk assessment was developed in the
United Kingdom. It works to document and reduce the impact of risk using the framework defined for the
project as those risks are incurred by the project.
During RAMP assessment analysis is scheduled throughout the life cycle of a project and tends to focus on
financial concerns as impacted by project uncertainty. RAMP approaches risk on several levels and
combined elements from other frameworks to codify four actions that include the launch of a project, a
systematic review of uncertainties that affect the project, management of risk, and project termination.
The stages of RAMP involve the identification of risks to the project, an analysis of the impact of those
risks and their likelihood, an enumeration of the options available for addressing those risks. RAMP
calls for the mitigation of uncertainties that affect the project and the control of factors that cannot be
adequately addressed.

2. Shape, Harness, And Manage Project Uncertainty (SHAMPU):

This is a generic framework that consists of nine steps (define, focus, identify, structure, ownership,
estimate, evaluate, plan, and manage) for assessing the risk organized by the outline set forth in the
acronym as follows.
 Shape. Express the foundation of risk assessment by defining and focusing the project. An effective
strategic view of the project will shape the approach the project manager takes to uncertainty. By
influencing project strategy with risk management in mind, the entire project will be efficiently shaped in
a way that provides for the natural assessment of risk. This stage also includes the analysis of the quality
of risks affecting the project. Here the uncertainties are identified, categorized, and assigned to specific
owners. Finally, the shape phase of risk assessment calls for the estimation of the variability of risk and
the evaluation of their implications.

 Harness. This stage of risk assessment is tactical and leverages the strategic shape of risk assessment
and the "six W's" to get a handle on identifying risk in ways that complement the strategic plan. Once the
tactical plan is in place management is needed to address uncertainty relevant to the project throughout its
life cycle.

SHAMPU is a generic framework for risk assessment and is a good starting point for those who are getting
started with project planning with the principles of risk assessment in mind.

3. Risk Factor Analysis (RFA):

Risk Factor Analysis (RFA) is one of the many methods of risk analysis that follows a qualitative
approach. This type of system is a comprehensive way to identify factors that can affect the quality of the
outcome of a project while helping managers get new perspectives that can help them survive qualitative
risks.
It is a flexible system that can be adapted to a wide variety of scenarios with differing qualitative risks.
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Examples of uncertainties that RFA may deal with include risks that affect project cost such as labor and

materials and scheduling such as the availability of facilities and personnel. Technical risks that involve the
maturity level of technology applied to the project.
Once every uncertainty is ranked and totaled for each category of risk, potential strategies for reducing risk
are developed.

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