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Marking Scheme Assoc. Prof. Samiappan Marappan email@example.com
Instruction to candidates 1. Part A : Answer Both Questions 2. Part B : Answer Any Three Questions 3. Time Allowed : 3 hours
000 units of a product rather than purchasing them from a vendor at $66.30 2 20 0. The production line will handle exactly 6. calculate the premium for: i.04 per 100 units per $1 of replacement cost. (b) Your company has asked you to determine the ﬁnancial risks of manufacturing 6. However.EMRM5103-Project Risk Management Final Examination September. 2009 Part A Question 1 (a) You have $1.000 200.000.10 200.000 Medium 0.000.000 Production cost 399.000.80 Total cost 399.000 No Damage 99.000 worth of equipment at the job site and wish to minimize your risk of direct property damage by taking out an insurance policy. determine the ﬁnancial risk and whether the make or buy option is best. The insurance company provides you with their statistical data as shown below: Damage Type Probability(%) Loss Amount in $ Total 0.000 0 Total Expected Value 200 320 200 0 720 giving 1.020. as shown below: % defective 0 1 2 3 4 Probability of occurrenec (%) 40 30 20 6 4 Defective items must be removed and replaced at a cost of $145/defective unit.02 1. 100 percent of units purchased from vendors are defect-free. Hence.50 per unit.000 400.9980 Loss Amount in $ 1.10 99.0002 0.80.000 Defects cost Nil 904. Your manufacturing personnel inform you that some of the units may be defective. The production cost is $60/unit.80 Sam . for losses in excess of $200. cover against losses in excess of $200.8 0 Assuming that the insurance company adds on $300 for handling and proﬁt and uses expected value to calculate premiums. i.000.08 0. leading to a premium of $820.000.08 400.04 × 60 × 145 = 904.000.000 360. Solution: (a) The expected value of losses is: Damage Type Total Medium Low No Damage Hence. the premium for full cover against any loss = $(720 + 300) = $1.000 units and requires a one-time setup cost of $50. and using the expected-value model. ii. the coditional expected loss is $520.00 410.0010 0. Construct a payoﬀ table. full cover against any loss ii.0008 0. (b) The cost of replacing the expected number of defectives( assuming that this process does not produce further defects ) is: % defective Probability of occurrenec (%) Expected Cost (%) 0 40 0 1 30 0.000 Low 0.16 Probability(%) 0.8 Probability 0.18 4 4 0.904.02 0.000. The payoﬀ table is: Option Setup cost Buy Nil Make 50. the total cost is 1.40 3 6 0.
the dependencies between those tasks.0 Std. a project manager has obtained the following Project Risk Register for costs. One method used to develop the list of tasks is to create what is known as a work breakdown structure. The development of a project plan is predicated on having a clear and detailed understanding of both the tasks involved. 2009 It is clear that the buy option is superior.2 Mean Std. resource availability must be determined in order to assign each task or group of tasks to the appropiate worker. In addition.15.15 4. WBS Item Aleatoric Risk Mean 3. The major aleatoric uncertainties should also be held in the PRR.0 0. it must record the dstributional aspects of all major aleatoric risks. the likelihood of completing the project within this budgeted cost.2 5.EMRM5103-Project Risk Management Final Examination September.0 are set aside in addition to the mean costs.2 Risk 1 Prob = 0.15 and 4. cost. Question 2 (a) Discuss the use of Project Risk Registers (PRR) in project risk management.25 Mean Std. scope and quality). Additionally. respectively for the mean and standard deviation of the total cost distribution for the project. the assessment of their root causes.5 0. Importantly.30 5. explain how the manager arrived at the stated values of 13.7 1. it includes the risk triggers. response strategies for high priority risks. (b) As part of the Project Deﬁnition exercise. stating clearly all your assumptions. since it reﬂects the lack of knowledge at the start of a project and the gradual resolution of those uncertainties. time.05 13.1 4.3 0.0 1. describe the insight provided by the PRR iii.Dev 1. explain the following terms: • WBS Item • Aleatoric Risk • Epistemic Risk ii.0 0.Dev 2.2 Risk 3 Prob = 0.15 101 102 103 In the contexts of the above PRR. i. the estimated length of time each task will take. areas of the project aﬀected (WBS elements). the analysis of their likelihood of occurring and impact if they occur and the criteria used to make those assessments and the overall risk rating of each identiﬁed risk by objective (e. and the assigned risk owner who will monitor the risk. if contingency funds of 5.3 Expected Value 3. However.1 Mean Std Deviation Figure 1: Cost risk based on PRR Epistemic Risk Risk 2 Prob = 0.g.0 0.Dev 1. and the sequence in which those tasks have to be performed.80 4. iv. (b) i. Sam Page 2 of 8 .Dev 1. the PRR must contain all the important epistemic risks. estimate. Solution: (a) The Risk Register documents the identiﬁed risks. for it to play a more eﬀective role.1 Mean Std.
• Each item has a cost. 10. • thus. Epistemic risk is one about which we donot have credible information and often belong to the realm of the unknown unknowns. 2009 A work breakdown structure (WBS) is a hierarchic decomposition or breakdown of a project or major activity into successive levels.. major risks often cut across activities and work packages. we are required to = calculate 18. the expected value is obatained by summing the following items: • the mean of the aleatoric risk that aﬀects it.30 The individual Expected Values are then summed to obtain the aggregate mean of 13.15.2 + 0. 10. However.1. • the product of the probability of occurrence and the mean of each of the epistemic risk that has an impact on the WBS item. C ∼ N (13.g.g.00 = Pr Z ≤ 4. 50 ). • There are three major risks with their particular probability of occurrence and each will aﬀect the cost of some of the WBS items to a degree-which itself has some uncertainty. (e) Assuming that the total cost random variable.3. in whcih each level is a ﬁner breakdown of the preceding one.albeit very simplistically. Its impact on the project deliverables become known only after project initiation and the passage of time (c) The following insights are provided by the PRR: • Cost estimates are not to be treated deterministically. the standard deviation cannot be determined by straight summation as what has been done for the mean. it too has to be treated probabilistically. 30.15 C − 13. Each item at the next level is numbered within the number of its parent item (e. and a spread of costs has been assessed for each one. 10.15 − 13.EMRM5103-Project Risk Management Final Examination September. 10. Aleatoric risk is one about which suﬃcient information is available to represent the possible variations in its outcome by some probability distribution.4). 40. leading often to mathematical intractability. 10.0 = 3. for the WBS Item 101.15) = Pr 4. and this is modelled.1 × 1.15.15 5.15 4. iii.2. the expected value = 3. Tools of probability theory then might be used in quantifying the risk’s impact on project deliverables.15 ≤ Pr(C ≤ 18. Here. (d) For each WBS item. the possible correlation amongst the loss distributions vitiates independence. Like the other project parameters. • the uncertainties in the WBS items are now not independent. Each item at a speciﬁc level of a WBS is numbered consecutively (e. The only way forward is to use Monte Carlo simulation. In ﬁnal form a WBS is very similar in structure and layout to a document outline.15).. 4.15 Sam Page 3 of 8 . 10. ii.
Here are several factors that can inﬂuence our response to a risk. identiﬁes who is responsible for the risk issue. Risk handling must be compatible with the RMP and any additional guidance the program manager provides. The approval and funding of handling options and speciﬁc approaches should be done by the project manager or Risk Management Board (or equivalent) and be part of the process that establishes the program cost. The magnitude of these costs are circumstance-dependent. and what eﬀect does that have on the overall program schedule? Sam Page 4 of 8 . Once the acquisition strategy includes the risk handling strategy for each selected risk issue. (c) State the guiding principles in the choice of appropriate risk handling options. Solution: (a) Risk handling includes speciﬁc methods and techniques to deal with known risks. who selects the appropriate one(s) for implementation. including but not limited to: • Amount and quality of information on the actual hazards that caused the risk (descriptive uncertainty) • Amount and quality of information on the magnitude of the damage (measurement uncertainty) • Amount and quality of information on probability of occurrence • Personal beneﬁt to project manager for accepting the risk (voluntary risk) • Risk forced upon project manager (involuntary risk) • Confusion and avoidability of the risk • The existence of cost-eﬀective alternatives (equitable risks) • The existence of high-cost alternatives or possibly lack of options (inequitable risks) • Length of exposure to the risk (b) Risk handling options and the implemented approaches have broad cost implications.EMRM5103-Project Risk Management Final Examination September. 2009 Part B Question 3 (a) Describe the Risk Handling process. The evaluators who assess risk should begin the process by identifying risks and developing handling options and approaches to propose to the program manager. The selected handling option and approach for each selected risk issue should be included in the program’s acquisition strategy.g. Personnel who evaluate candidate risk handling options may use the following criteria as starting points for evaluation: • Can the option be feasibly implemented and still meet the user’s needs? • What is the expected eﬀectiveness of the handling option in reducing program risk to an acceptable level? • Is the option aﬀordable in terms of dollars and other resources (e. the cost and schedule impacts can be identiﬁed and included in the program plan and schedule. (b) Identify the risk handling options available to a risk manager. A critical part of risk handling involves reﬁning and selecting the most appropriate handling option(s) and speciﬁc approach(es) for selected risk issues (often those with medium or higher risk levels). if any. and performance and schedule goals. and test facilities)? • Is time available to develop and implement the option. use of critical materials. It involves planning and execution with the objective of reducing risks to an acceptable level. and provides an estimate of the cost and schedule associated with reducing the risk.. respectively.
it eliminates the sources of high or possibly medium risk and replaces them with a lower risk solution. speciﬁcations. without engaging in any special eﬀorts to control it. and it may inﬂuence cost objectives. prime contractor). Although the control option (often called mitigation) is commonly used in many high technology programs. It may also be used later in the development phase when test results indicate that some requirements cannot be met. – Ensure that necessary administrative actions are taken to identify a management reserve to accomplish those management actions. or payment bonds). it should not automatically be chosen. (Risk transfer is also not deﬂecting a risk issue because insuﬃcient information exists about it.. It should be considered as part of the requirements analysis process. • Risk control (i. This includes identifying the speciﬁc management actions (such as retesting.e..g. It manages the risk in a manner that reduces the likelihood and/or consequence of its occurrence on the program. All four options should be evaluated. The options for handling risk fall into the following categories: • Risk assumption (i. An example is the transfer of a function from hardware implementation to software implementation or vice versa.. government) and the seller (e. risk control. risk avoidance. and time) that will be needed to overcome a risk if it materializes. it is most suited for those situations that have been classiﬁed as low risk.e. people. and/or practices to reduce risk to an acceptable level. retention) Risk assumption is an acknowledgment of the existence of a particular risk situation and a conscious decision to accept the associated level of risk.. bid. Risk transfer is a form of risk sharing and not risk abrogation on the part of the buyer or seller. requirements. Simply stated. as such. thereby reducing the overall system and/or lower-level risk.. bonding (e. The key to successful risk assumption is twofold: – Identify the resources (e. This risk handling option recognizes that not all identiﬁed program risks warrant special handling. • Risk transfer Risk transfer may reallocate risk from one part of the system to another.EMRM5103-Project Risk Management Final Examination September. and schedule impact. money. performance. and risk transfer. warranties. 2009 • What eﬀect does the option have on the system’s technical performance? (c) Risk handling options include: risk assumption. and the best one chosen for each risk issue. • Risk avoidance: This involves a change in the concept. a general cost and schedule reserve may be set aside to deal with any problems that may occur as a result of various risk assumption decisions. This option may add to the cost of a program..) The eﬀectiveness of risk transfer depends on the use of successful system design techniques. and the potential cost and/or schedule impact would be severe. and additional time for further design activities) that may occur. This method may be used in parallel with the up-front requirements analysis. Other examples of risk transfer include the use of insurance. and similar agreements.g.g. or within the buyer or seller teams.g. and the selected approach should provide an optimal mix among the candidate approaches of risk reduction. Sam Page 5 of 8 . cost eﬀectiveness. However. It may also redistribute risks between the buyer (e. supported by cost/requirement trade-oﬀ studies. prevention or mitigation): Risk control does not attempt to eliminate the source of the risk but seeks to reduce or mitigate the risk.
Solution: The work involves managing the project according to the risk response plan and is likely to involve the following actions: • Look for the occurrence of risk triggers • Montor residual risks • Identify. 2009 Question 4 You are the project manager for a project and you have done proper project management and have assigned risk response owners.EMRM5103-Project Risk Management Final Examination September. List the activities that you would undertake in managing risk while the project work is ongoing. have in place various contingency plans. analyze and plan for new risks that come to light as the project work proceeds • Ensure the execution of risk management plans • Evaluate the eﬀectiveness of risk mangement plans • Develop new risk responses • Collect and communicate risk status • Communicate with stakeholders about risks • Determine if assumptions are still valid • Ensure proper risk management procedures are being followed • Revisit the watchlist to see if additional risk responses need to be determined • Implement corrective actions to adjust to the severity of actual risk events • Look for any unexpected eﬀects or consequences of risk events • Reevaluate risk identiﬁcation. and scheduled other such activities as appropriate at the project initiation stage. qualitative and quantitative risk analysis when the project deviates from the baseline • Update risk management and response plans • Look at the need to recommend corrective actions and change requests to see if they lead to identifying more risks • Make changes to the project management plan when new risk responses are developed • Create a database of risk data that may be used throughout the organization on other projects • Perform variance and trend analysis on project performance data • Use contingency reserves and adjust for changes Sam Page 6 of 8 .
EMRM5103-Project Risk Management Final Examination September. causing complex dynamic behaviour. The overall project complexity can be characterised by two dimensions. a product development project which is already structurally complex. The two sub-dimensions of structural complexity lead to a complex system in which the whole is more than the sum of the parts. say. Forrester. they cause perturbations and dynamics to be set up within the structurally complex systems. each of which have two sub-dimensions. feedback. on its own might not cause complexitybut add uncertainty in goals to. said that such systems are likely to exhibit counter-intuitive behaviour. it is very diﬃcult to intuitively infer the behaviour of the system from the behaviour of the sub-elements. exceeded budgets. and changes and perturbations cause cross-impacts. Uncertainty in goals (say). shown in Figure 2. dynamics eﬀects and behaviour much too complex for simple intuitive understandingin fact. when uncertainties arise. However. depending on at which stage the modeller is working)! Size : Number of elements Interaction in complex ways: Total is more than sum of parts Structural Complexity Complexity in Projects Uncertainty Size : Interdependence of elements Uncertainty in goals Structural complexity compounded by uncertainty Uncertainty in methods Figure 2: Dimensions of Project Complexity Sam Page 7 of 8 . We have developed abilities in comprehending and managing such systems when they are reasonably known and deterministic. 2009 Question 5 Contemporary project management practice is characterised by: late delivery. Solution: The validity of the statement has its roots in project complexity. Provide a critique of the above statement within the contexts of project risk management. or what has happened. inventor of System Dynamics. In these systems. we need models to comprehend what is happening (or what might happen. In fact. reduced functionality and questioned quality. either in the goals or the methods.
One obvious instance that frequently occurs in practice is the need to combine discrete and continuous uncertainties. or weather windows in deep-sea oil work etc. and dependency information. they are all started from the node or branch. either probabilistic (where one path or another in the network is taken depending on a probabilistic event. and in some cases the initials of the personnel assigned. the PERT chart will note that all tasks up to that point terminate at the review node. PERT enables a simple deterministic network analysis and looks at two questions: • How long is the project going to take? • Which are the most important (i. waiting time between tasks. such as the weather) or conditional (where management will choose one path or another. organize. Each task is represented by a line which states its name or other identiﬁer. Each task is connected to its successor tasks in this manner forming a network of nodes and connecting lines. that is. The other end of the task line is terminated by another node which identiﬁes the start of another task. or review points (all of which are highly recommended in any project schedule). In brief. If multiple tasks begin at the same time. for example. where several risks combine in an activity. or fork out from the starting point. its duration. • Domain-speciﬁc uncertainties can have very particular uncertainty proﬁles. particularly where some of those risks are epistemic and others are aleatoric.S. originates. The chart is complete when all ﬁnal tasks come together at the completion node. a methodology developed by the U. depending upon a project parameter. such as third-party eﬀects. PERT charts depict task. checkpoints. the usual method is to draw a broken or dotted line between the end of the ﬁrst task and the start of the next dependent task. Sam Page 8 of 8 . • Then. Solution: (a) A PERT chart is a project management tool used to schedule. • We might need to model resource availabilities or requirements that are themselves uncertain (and possibly with uncertainties that vary over time): these can sometimes be the critical uncertainties. A PERT chart may have multiple parallel or interconnecting networks of tasks. critical) activities? (b) What is needed is to provide answers to the above same two questions. the number of people assigned to it. Navy in the 1950s to manage the Polaris submarine missile program. the precise timing of the availability window for a vital resource can be the deciding factor in whether a project meets its deadline. modelling these eﬀects might imply diﬀerent or unusual distributions to describe the duration of activities. or tasks. If the scheduled project has milestones. in practice there can be branching. PERT stands for Program Evaluation Review Technique. or the beginning of any slack time. however.EMRM5103-Project Risk Management Question 6 Final Examination September. (b) Provide a brief discussion of their shortcomings. When slack time exists between the end of one task and the start of another.e. such as the random failure of test rigs. and coordinate tasks within a project. • We might need to model uncertainties in the project network structure itself: all classical network methods assume that the network itself is ﬁxed. or common-cause eﬀects: the major risks within a project usually involve more than one activity. PERT fails to address the followng issues: • Most projects have activities with uncertain durations • Second come uncertainties that operate across a range of activities and/or resources. 2009 (a) Describe the use of the CPM/PERT techniques in project management. but for networks where there are uncertainties. Each chart starts with an initiation node from which the ﬁrst task. duration.
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