PRINCIPLES OF
PROJECT MANAGEMENT
PROJECT MANAGEMENT: ACHIEVING COMPETITIVE ADVANTAGE
Fifth Edition
Chapter 7
Risk Management
2
LEARNING OBJECTIVES
7.1 Define project risk.
7.2 Recognize four key stages in project risk management and
the steps necessary to manage risk.
7.3 Explain the Project Risk Analysis and Management (P R A M)
process.
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QUESTIONS TO CONSIDER IN RISK MANAGEMENT
• What is likely to happen (the probability and impact)?
• What can be done to minimize the probability or impact of these
events?
• What cues will signal the need for such action (i.e., what clues
should I actively look for)?
• What are the likely outcomes of these problems and my anticipated
reaction?
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RISK MANAGEMENT
Risk management—the art and science of identifying, analyzing, and
responding to risk factors throughout the life of a project and in the best
interest of its objectives.
Project risk—an uncertain event or condition that, if it occurs, has a
positive or negative effect on one or more project objectives such as
scope, schedule, cost, or quality.
Risk = Probability of Event (Consequences of Event)
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FIGURE 7.2 RISK VERSUS AMOUNT AT STAKE
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FOUR STAGES OF RISK MANAGEMENT
1. Risk identification
2. Analysis of probability and consequences
3. Risk mitigation strategies
4. Control and documentation
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RISK CLUSTERS
Common Types of Risks
• Financial
• Absenteeism
• Technical • Resignation
• Staff pulled away
• Commercial • Time overruns
• Skills unavailable
• Execution
• Ineffective training
• Contractual or • Specs incomplete
legal risk • Change orders
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RISK FACTOR IDENTIFICATION
• Brainstorming meetings
• Expert opinion
• Past history
• Multiple (or team-based) assessments
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FIGURE 7.4 RISK BREAKDOWN STRUCTURE (RBS)
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FIGURE 7.5 RISK IMPACT MATRIX
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PROJECT RISK SCORING (1 OF 2)
1. Use project team’s consensus to determine the score for each
Probability of Failure category: Maturity (Pm), Complexity (Pc), and
Dependency (Pd).
2. Calculate overall probability.
Pm Pc Pd
Pf
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3. Use project team’s consensus to determine the score for each
Consequence of Failure category: Cost (Cc), Schedule (Cs), Reliability
(Cr), and Performance (Cp).
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PROJECT RISK SCORING (2 OF 2)
4. Calculate Cf by adding the four categories and dividing
by 4:
Cc Cs Cr Cp
Cf
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5. Calculate Overall Risk Factor for the project by using
the formula:
RF Pf Cf Pf Cf
Rule of Thumb:
Low Risk RF < 0.30
Medium Risk RF = 0.30 to 0.70
High Risk RF > 0.70
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RISK MITIGATION STRATEGIES
• Accept • Insurance
• Minimize • Workaround
• Share • Other Mitigation Strategies
– Mentoring
• Transfer – Cross training
• Contingency Reserves • Control and Documentation
– Task contingency – Change management
– Managerial
contingency
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CONTROL AND DOCUMENTATION
Helps managers classify and codify risks, responses, and
outcomes
Change management report system answers:
• What?
• Who?
• When?
• Why?
• How?
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PROJECT RISK ANALYSIS AND MANAGEMENT
(PRAM)
PRAM presents a generic methodology that can be applied to multiple
project environments and encompasses the key components of project
risk management.
Key Features of PRAM
• Risk management follows a life cycle.
• Risk management strategy changes over the project life cycle.
• Synthesized, coherent approach.
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NINE PHASES OF RISK ASSESSMENT
1. Define
2. Focus
3. Identify
4. Structure
5. Clarify ownership of risks
6. Estimate
7. Evaluate
8. Plan
9. Manage
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SUMMARY
1. Define project risk.
2. Recognize the four key stages in project risk management and
the steps necessary to manage risk.
3. Explain the Project Risk Analysis and Management (P R A M)
process.
18
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