PLANNING TO HANDLE RISK

What can be done to deal

with the identified risk
events?
RISK RESPONSE PLANNING

concerned with how best to handle risk events that can arise

prepare people for action.

Advantages.
• Enables the people affected by a risk event to respond it quickly, thereby
minimizing damage that the risk event can cause
• Enables people to deal with them intelligently.
RISK RESPONSE PLANNING FRAMEWORK
Offered by the Project Management Institute in its A Guide
to the Project Management Body of Knowledge (2000).
1. Risk avoidance,

2. Risk mitigation,

3. Risk transfer, and

4. Risk acceptance.
 RISK RESPONSE PLANNING FRAMEWORK
Offered by the British Prince2 project management methodology, Managing
Successful Projects with Prince2, 2002
Prevention,
• countermeasures to stop the threat or problem from arising, or to prevent it from having any impact on
the project or business.  risk avoidance concept.
Reduction,
• reduce the likelihood that risk will develop or limit the impact to acceptable levels  risk mitigation
concept
Transfer the risk to a third party,
• through insurance or penalty clauses in contracts risk transfer concept
Contingency,
• actions are planned and organized to come into force as and when the risk occurs  risk acceptance
concept.)
 RISK RESPONSE PLANNING FRAMEWORK
Standards Australia’s Risk Management: AS/NZS 4360:1999, the national risk
management standards adopted by Australia and New Zealand
actions to reduce or control likelihood
• conducting audits; structuring contracts effectively; undertaking formal reviews of
requirements, specifications, designs, engineering, and operations; preventive
maintenance; implementing effective project management; implementing solid quality
assurance efforts; training personnel; designing organizations to operate effectively;
and implementing effective supervision
procedures to reduce or control consequences
• procedures as implementing contingency plans, establishing clear contracts,
implementing disaster recovery plans, planning to handle fraud, and establishing
public relations strategies.
RISK TREATMENT METHODOLOGY
risk response plans should be developed to
lessen or eliminate
the likelihood of untoward events arising.
If you want to reduce the risk of motor-vehicle theft, don’t park in high crime
areas

the impact of risk events.

If you don’t want to miss your favorite TV shows during a power blackout, you can
purchase a battery operated television.
 don’t do things that will get you in
RISK AVOIDANCE trouble

concerned with lessening the likelihood that individuals and groups will
encounter damaging risk events.
Its underlying premise is not to do things that will get you in trouble.
For example, if a risk impact analysis suggests that by adding a new module to a software routine you will increase
the likelihood that the system will crash by 500 percent, don’t add the new module.

Ex : don’t hold a grand opening on a day when few customers will show up.
Reschedule it for a more propitious moment.
has a negative side  can lead to situations where individuals and
organizations grow so risk averse that they won’t make any decisions that can
result in negative consequences.  need to take occasional risks
RISK MITIGATION
Mitigate -- Try to lessen risks in two senses
• Take steps to lessen likelihood that a risk event will arise.
• Take steps to lessen negative impacts resulting from untoward risk events.

Risk mitigation is commonly employed in quality management

Risk mitigation is also the underlying premise of preventive

maintenance. By taking routine steps to keep a piece of equipment
in good working order
RISK AVOID VS RISK MITIGATION
risk avoidance
• Eliminate the source of the
problem entirely.
• This may be done by
refusing to carry out work
that is risky, or it may entail
replanning a work effort to
eliminate risk sources.
risk mitigation
• temper the sources.
• Rather than bypass
potential risk events
entirely, take steps to
temper them with a view of
reducing the probability of
their occurrence or
reducing their impact.
RISK TRANSFER

shift the burden of dealing with risk events to

someone else

concerned with dealing with impacts of risk events

once untoward events arise

Three well-known risk transfer mechanisms are

insurance, contracts, and warranties
 INSURANCE
With insurance, pay a premium to protect ourselves and our assets from
unfortunate circumstances.

Some standard areas of insurance coverage :

• Direct property losses—ex, losses to property caused by fire, flood, and earthquake
• Indirect property losses—ex loss of income tied to interrupted business operations and
costs associated with implementing disaster recovery procedures
• Liability—ex dealing with lawsuits from the public for personal injury or property
damage
• Personnel-related losses—ex expenses incurred in relation to injuries suffered by
employees on the job
• Performance-related losses—ex loss of income when a job is not completed
CONTRACTS
Focus on the fact that they are agreements between two or more parties,
defining the roles and responsibilities of each party.
- “If contractor does not deliver 1,000 widgets to buyer by April 13, contractor will
pay a penalty of $2,000 per day for each working day of delay in delivering all
1,000 widgets.”

The way contracts are structured has powerful risk management consequences.
- “The contract may specify that the contractor will deliver 1,000 widgets to the
buyer by April 13 at a price of $120,000.” 
If it costs her $130,000 to produce the 1,000 widgets, she will lose $10,000 on
the contract
TWO APPROACH OF CONTRACT

the firm fixed price contract approach - a lump-sum contract

• the contractor agrees to supply defined goods or services to the buyer by
a specific date and for a specific price
cost-plus (or cost-reimbursable) approach.
• employed on work efforts that are hard to define, such as IT projects and
research and development projects.
• Contractors are reimbursed for expenses they incur.
VARIATION COST-PLUS CONTRACTS
provide incentives to contractors to keep costs under control.
cost-plus incentive fee contracts (CPIF),
• a written cost and time schedule is laid out where the contractor is provided bonuses for
early delivery of goods on or below budget
cost-plus award fee contracts (CPAF),
• an award fee pool is set aside for the purpose of rewarding the contractor for good
performance
cost-plus fixed fee contracts (CPFF).
• buyer and contractor negotiate a profit (that is, a fee) to be paid for the work before any
work has begun.  the buyer may agree to pay a fee of $70,000 on a $1 million contract.
If the contract is executed for $900,000, the contractor is paid the $70,000 fee. If it is
executed for $1.1 million, the contractor is paid a $70,000 fee.
CONTRACTS AS “PERFORMANCE BASED”
the statements of work contained in the contract document focus
on defining what the contracted effort should be producing.

Statements on how deliverables should be produced should be

avoided.

The idea is to focus on writing contracts that have clearly defined

deliverables and work effort so as to avoid the confusion and
conflict that invariably accompany vaguely stated documents.
WARRANTIES

are a type of contract.

the seller warrants that her goods or services will perform according to
specifications for a defined period of time.

The warranty agreement specifies the obligations of the seller in the

event that the goods or services do not perform properly.

What warranties do, then, is transfer risk from the buyer to the seller.
RISK ACCEPTANCE

life is filled with risk and we need to move on

with our lives and go about our business, risky
or not.

establish contingency reserves to deal with

untoward events
CONTINGENCY RESERVES

We have an idea of what we need to contend with

dealing with known-unknowns  we know that a particular risk event can

occur but do not know the details about its occurrence.

Simply knowing what the risk event is that we can encounter allows us to
prepare for it.

Nevertheless, situations may arise that can throw off our best plans.
UNK-UNKS
total surprises go  an abbreviation of unknown-unknowns.

we cannot earmark contingency reserves to deal with them.

what we can do is to set aside what is called a management reserve.

Management reserves usually take the form of funds set aside to deal with surprises.  on large U.S.
defense projects, it is common practice to establish a management reserve of 5 percent of the
contract price to cover unanticipated problems that lie within the scope of work.
CONTINGENCY RESERVES

A significant challenge facing risk managers is to determine what level of

contingency or management reserves to set aside.

There are practical and economic constraints on how much reserves should
be established

The level of reserves that should be established is tied to the consequences

of not being able to meet one’s obligations in the event of the occurrence
of an untoward event
CALCULATING CONTINGENCY RESERVES

• planners computing how much money

budget should be set aside to deal with
contingencies unanticipated slip-ups that drive up project
and operations costs.

schedule • attention focuses on how much padding

should be put into the estimates of task
contingencies duration.
 BUDGET CONTINGENCY
Most contingency reserves for project budgets are ad hoc.

Many organizations simply set aside a standard percentage of

project budget, say, 5 or 10 percent, to handle contingency needs. 
realistic estimate of the cost of a work effort is $120,000, the
organization may tack on an additional $12,000 for contingency
reserves.

Organizations that are serious about computing contingency reserves

take a more scientific approach.
EXAMPLE OF BUDGET CONTINGENCY
 Estimating task durations is to estimate a
reasonable expected duration and then to add
SCHEDULE RESERVES safety to the estimate to make sure that the task
does not encounter schedule slippage.

Eliyahu Goldratt, author of the best-selling work, Critical Chain

(1997) argument that
• Workers who find themselves overscheduled in their jobs tend to put off tasks
until the last possible moment, because they are already occupied trying to
meet other impossible deadlines. Those who do not have much work to do tend
to drag out work assignments to look busy. They too begin work on their chores
at the last moment. For both overworked and underworked employees, in
holding off doing a job until the last minute, they tend to underestimate how
much time is needed to complete the effort. Consequently, this contributes to
small schedule slippages in executing their chores.
END OF THE CHAPTER -THANK YOU