Risk and Contingency

Erich Kreidler
 Risk Management – Point of View
Risk is inherent to projects and no amount of
planning can overcome risk and its potential
consequences. Risk Management recognizes and
manages potential trouble spots that may occur
when the project is implemented.

Risk management indentifies as many risk events as

possible (what can go wrong), minimizes their
impact (what can be done about the event before
the project begins), manages the responses to those
events that do materialize (contingency plans) and
provides contingency funds to cover risk events that
actually materialize

Source: Project Management, 4E, Cliff F Gray

RISK ASSESSMENT – WHY?

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Complexityofof
Requirements? Stability
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ofRequirements?
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Skill Requirements?
Skill Requirements?
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PROJECT RISK MANAGEMENT (PMBOK)
Definitio
ns
RISK and CONTINGENCY (PMBOK)

Risk. An uncertain event or condition that, if it occurs, has a

positive or negative effect on a project’s objectives.

Contingency. Response to risk.

Reserve. A provision in the project management plan to

mitigate cost and/or schedule risk. Often used with a modifier
(e.g., management reserve, contingency reserve) to provide
further detail on what types of risk are meant to be mitigated.

Risk Contingency Planning [Technique]. A risk

response planning technique that develops a plan that identifies
alternative strategies to be used to ensure project success if
specified risk events occur.
RISK IMPACTS TRIPLE CONSTRAINT (TIME,
COST, PERFORMANCE, QUALITY)

Inefficiency Time -- project

Miscommunication completion driven by
Mistakes critical path
 What drives critical path?
Motivation  Long-lead HW
Training  Process
Subcontractor delays  Permits
 Qualification tests
Currency fluctuations  ...
Personnel actions
Personnel absences
PROPERTIES OF RISK

Future
Probabilistic
Impact or loss
Time-dependent
May provide opportunities
TYPES OF RISK
Technical performance
Schedule
Cost
Field support
Security
Other
Risk
Identification
How do you identify risks?
Brainstorming
Prior projects (history)
Parametric models
Delphi/Nominal Group Technique
Experts
Standards
The Risk Breakdown Structure
SOME ELEMENTS OF PROJECT RISK (ROSENAU)
SOME ELEMENTS OF PROJECT RISK (ROSENAU)
LIFE CYCLE RISK ANALYSIS (KERZNER)

Life Cycle Phases

Preliminary and
Project Approval Execution Closure
Detailed Planning

Total Project Risk

Amount at
Stake Amount
risk at Stake
Typical Risk Events pre Phase
• Unavailable • No risk • Un-skilled labor • Poor Quality
subject matter management plan
experts • Material • Un-acceptable to
• Hasty planning availability customer
• Poor definition of
problem • Poor spec • Strikes • As-built changes

• No feasibility • Unclear SOW • Weather • Cash flow

study problems
• No Mgmt Support • Changes in scope
• Unclear
objectives
• Inexperience • Regulatory
team requirements
• Buy-in (by
competitive
• OSHA/EPA
bidding) compliance

• No control
systems in place
Risk Analysis
TOOLS AND TECHNIQUES FOR RISK ANALYSIS

Interviewing, expert, consultant

Risk analysis charts
Sensitivity analysis
Decision tree analysis
Simulation
RISK ANALYSIS CHART

Severe 1

High 2

Moderate

Low

Trivial 4 3

0 100
Probability of Occurrence
RISK ANALYSIS (KERZNER)
SAMPLE RISK CHART (Pete Badzey)

Beginning Risk
5
Assessment (3.5-4)

4
• Risk chart shows
Mitigation Task 1
Analysis initial ranking
Severity

3 • Shows steps in
Mitigation Task 2 management
Test
2
plan to reduce to
acceptable level
Mitigation Task 3
Design Mod • Can be changed
1 dynamically as
the risk is
managed
1 2 3 4 5
Desired Probabilit Ref. Systems Engineering and
End State (1-1)
y Analysis, 3rd Ed, Blanchard and
Fabrycky, Prentice Hall, 1998, pgs 657-
661
PROBABILITY (KERZNER)

Almost Likely
Highly Likely
Very Good Chance

Likely
Probable
We Believe
Better than Even What uncertainty
We Doubt statement means to
Improvable different people
Unlikely

Probably Not
Little Chance
Almost no Chance
Highly Unlikely

Chances are Slight

0 10 20 30 40 50 60 70 80 90 100
Assigned Probability Percentage
QUANTIFY RISK
QUALITATIVE RATING IMPACTS FOR A RISK
DECISION TREE ANALYSIS (PMBOK)
COST RISK SIMULATION (PMBOK)
RISK ASSESSMENT (THOMSETT)
Risk Management
and Response
Planning
HOW DO YOU MANAGE RISK?

Control
• Identify the Risk
significant
risks • Risk
• Analyze the management
risks planning
• Prioritize • Risk resolution
Assess • Risk
monitoring
the Risks
CONCEPT OF OPTIMIZING (ROSENAU)
RISK MANAGEMENT PLAN
Documents procedures for managing risk
Covers
 Who is responsible for managing risk
 How initial identification and quantification will be maintained
 Contingency plan implementation
 Reserve allocation
RMP may be
 Formal or informal
 Detailed or broad-based/general
 Based on needs of project
RISK MITIGATION/RESPONSE
After risk identified and assessed, four types of
actions
 Reduce risk, e.g., parallel innovation processes
 Transfer risk to another party (costs $), e.g., insurance
 Retain risk
 Some very large risks, e.g., earthquakes, cannot be reduced,
probability is low, so accept
 Add budget reserve
 Ignore
 Share/allocate portions to other parties, e.g., Airbus R&D
among countries
RISK RESPONSE MATRIX
RISK RESPONSE MATRIX
Thanks!