AACE® International

Project Risk Management Professional™ (PRMP™)

Certification Study Guide
First Edition

Diego Nicolás Guevara, Editor

2021

PRMP Certification Study Guide

First Edition
Copyright © 2021
by
®
AACE International
726 East Park Avenue #180, Fairmont, WV 26554 USA
Phone: +1.304.2968444 | Fax: +1.304.2915728 | E-mail: [email protected] | Web: www.aacei.org

© 2021, AACE International (All Rights Reserved)

 A Publication of

PRMP™ Certification Study Guide

First Edition

A continuing project of the AACE International Education Board

The 2020-2021 AACE International Education Board is grateful to the following individuals and companies
who have assisted in the development of the PRMP Certification Study Guide, First Edition:

Editor: Diego Nicolás Guevara; Education Board Contributing Member

Primary Contributor:
David A. Norfleet, CCP, CFCC, DRMP; Chair PRMP/DRMP Certification Committee

2021/2022 Education Board Members:

Shoshanna Fraizinger, CCP (Chair) Ken Cressman, CCP EVP
Marina Sominsky, PSP (Co-Chair) Steven Feng II
Brian Payne, PE CCP CFCC Mohammed Rafiuddin, CCP PSP, FAACE

2021/2022 Education Board Contributing Members:

Haith Al-Hayari, CCP Donald McDonald, CCP PSP, FAACE
Nelson Bonilla, CCP, FAACE Ann Marie Cox, EVP
Clive Francis, CCP, FAACE Andrea Georgopoulos, EVP
Diego Nicolas Guevara Varan Karunakaran
Hendrik Louw, CEP Igor Matos
Cokey Mills, CCP Jeffrey Milo, PSP
Akinlolu Oni, CCP Neil Opfer, CCP CEP PSP, FAACE
Lucio Provenzani, CCP Alexandre Rodrigues
Oscar Siles Sankar Subrahmaniyam
Ramapriya Valmiki, CCP Srinivasa Reddi Vanga, CCP

AACE International and the Education Board would like to give special thanks to Sagar Khadka, DRMP,
PSP, FAACE who currently serves as the DRM Subcommittee Chair and Larry Dysert, CCP, CEP, DRMP,
FAACE Hon. Life who is a current member of the Technical Board for the time and support they
provided to the writers and editors of this document. Additionally, James Arrow, DRMP previously
served as the DRM Subcommittee Chair and helped lay the initial groundwork and conceptual planning
for this new PRMP certification.

© 2021, AACE International (All Rights Reserved)

 SPECIAL NOTE: Regarding this initial version of the PRMP Study Guide:

This Study Guide is for the sole purpose of supporting the Project Risk Management
Professional Certification Beta Exam and is not to be distributed beyond those Beta
Examination candidates and those individuals who are participating in development of the Beta
Examination.

© 2021, AACE International (All Rights Reserved)

 Table of Contents

Introduction to the PRMP™ Certification Study Guide ................................................................... 1

What is Project Risk Management and a Project Risk Management Professional? ....................... 6
PRMP Certification Examination Structure ................................................................................... 10

Chapter 1.0 Supporting Skills and Knowledge ............................................................................. 12

Section 1.1 Elements of Costs................................................................................................... 14
Section 1.2 Elements of Cost Estimating .................................................................................. 20
Section 1.3 Elements of Planning and Scheduling .................................................................... 26
Section 1.4 Elements of Analysis .............................................................................................. 36
Section 1.5 Enabling Knowledge............................................................................................... 41

Chapter 2.0 Risk Management Skills and Knowledge................................................................... 53

Section 2.1 Overall Risk Management Terminology and Concepts .......................................... 56
Section 2.2 Processes and General Practices for Risk Management ........................................ 64
Section 2.3 Specific Risk Management ..................................................................................... 74

Chapter 3.0 Other Important Items ............................................................................................ 80

Section 3.1 Total Cost Management ........................................................................................ 81
Section 3.2 Procurement Planning (Including Contract Management).................................... 84

Appendices................................................................................................................................ 88
Appendix A: Project Risk Management (PRM) Terms and Glossary of Special Interest to Risk
Management Professionals ................................................................................... 89
Appendix B: AACE International Canons of Ethics ..................................................................... 95
Appendix C: Example of a Risk Management Plan Table of Contents ....................................... 96
Appendix D: Example of a RASCI Matrix..................................................................................... 97

PRMP Certification Study Guide 2021 i

 List of Figures

Figure 1―The Outline Structure of AACE’s TCM Framework (TCM Figure 1.3-1) ................................ 1
Figure 2― Summary of PRMP Required Skills and Knowledge ............................................................. 2
Figure 3―The TCM Framework Process Map for Risk Management (Section 7.6) .............................. 3
Figure 4―PRM Body of Knowledge Diagram for 1.0 Supporting Skills and Knowledge ..................... 13
Figure 5―Influence Curve ................................................................................................................... 16
Figure 6―Planning Elements from PSP Study Guide, 2nd Edition ....................................................... 28
Figure 7―Baseline Plan ....................................................................................................................... 29
Figure 8―Example of Fishbone Diagram ............................................................................................ 75
Figure 9—The Place of Total Cost Management (TCM) in the Cost Management Spectrum ............. 81
Figure 10―Structure of the TCM Framework Text and Chapters....................................................... 82
Figure 11 – Plan-Do-Check-Assess Cycle ............................................................................................. 83

List of Tables
Table 1 – Generic Cost Estimate Classification Matrix ........................................................................ 21

PRMP Certification Study Guide 2021 ii

 PREFACE
AACE International developed the “Project Risk Management Professional (PRMP) Certification Study
Guide” for two reasons. First, to aid professionals studying for AACE International’s (AACE) specialty
certification in project risk management (PRM). Second, to assemble and summarize various topics
considered essential for Project Risk Management Professional knowledge, as outlined in AACE
International’s Recommended Practice 11R-88, “Required Skills and Knowledge of Cost Engineering” and
included in the current edition of AACE International’s “Skills and Knowledge of Cost Engineering."

The “Project Risk Management Professional Certification Study Guide” (Study Guide) serves the needs
of PRM professionals who are preparing to take the AACE International PRMP certification examination.
It is organized in a concise and easy-to-follow format and covers the major skills and knowledge used by
a PRM professional.

The chapters and topics presented in this Study Guide are similar to specific chapters in the Skills and
Knowledge of Cost Engineering (current edition). The reader should use this Study Guide in conjunction
with S&K current edition. Together, these publications provide readers with the knowledge base
expected of a cost-engineering professional as outlined in Recommended Practice 11R-88, Required Skills
and Knowledge of Cost Engineering and the TCM Framework, 2nd Edition. This Study Guide has two
primary objectives:

1. To provide a summary of specific knowledge and competency areas and the associated key terms
that a Project Risk Management professional should comprehend, at a minimum, when
preparing for the Project Risk Management Professional (PRMP) certification exam.
2. To provide sample problems and questions for each topic area, as well as the associated answers,
to exercise the reader’s understanding of the concepts and skills presented in S&K-6.

To further assist in preparation, the reader should visit the AACE International website at
www.aacei.org for updates to the PRMP certification as well as related Recommended Practices.

Readers should begin their examination preparation by first studying the material presented in S&K
(current edition) and then working out the sample problems and questions in the Study Guide. The
summary and key terms found in each chapter offer a checklist of the comprehensive knowledge and
competencies needed to fully prepare for the examination. Readers may have to go back and forth
between the two publications to gain a full understanding of the subject matter as they attempt the
exercise problems and questions. Please note that the actual certification examination questions are
likely to address skills and knowledge from multiple chapters; therefore, a thorough understanding of
the material is vitally important. In addition, the Study Guide includes several key appendices such as:
(1) Project Risk Management (PRM) Terms and Glossary of Special Interest to Risk Management
Professionals, (2) Example of a Risk Management Plan Table of Contents, and (3) an example of a RASCI
Matrix.

Most terms and phrases incorporated in the Study Guide are generic to the profession; where
applicable, however, professionals should understand the definitions provided in the latest version of
AACE International’s Recommended Practice 10S-90 and the terms found in the glossary of this Study

PRMP Certification Study Guide 2021 iii

Guide. The terms and phrases used in industry and applicable risk management software may not
conform to the readers’ understanding, so consult the PRMP glossary found in Appendix A.

The goal of the AACE International Education Board is to continually improve this publication, making it
a living document that will be revised as needed to support the PRMP exam, while maintaining its
strengths. AACE’s Education Board encourages everyone to offer comments and suggestions for
improvements to future editions; please forward comments to the AACE International Education Board
([email protected] Education Board Manager).

PRMP Certification Study Guide 2021 iv

 Introduction to the PRMP™ Certification Study Guide
This is a Study Guide for the AACE International (AACE) Project Risk Management Professional (PRMP)
certification examination.

This Study Guide follows a systematic approach in its development:

1. It provides PRM terminology, ensuring usage that is consistent with AACE International’s Cost
Engineering Terminology (Recommended Practice 10S-90);
2. It ensures consistency with AACE International’s Total Cost Management (TCM) Framework,
as summarized in Figure 1; and
3. It ensures consistency with AACE International’s Skills and Knowledge of Cost Engineering;
4. It follows AACE International’s Recommended Practices related to PRM review and process
particularly the recently released Required Skills and Knowledge of Project Risk Management,
Recommended Practice No. TBD;

Figure 1―The Outline Structure of AACE’s TCM Framework (TCM Figure 1.3-1)

The TCM Framework is based on a series of integrated processes and one of them is fundamental to PRMP
certification: Risk Management (section 7.6); that is a sub-element of chapter 7 with certain relevancy to
project risk management professionals. A general understanding of asset planning and management
(sections 3.1 and 3.2 of Chapter 3), as they relate to risk management, is also important since there are
several parallels between assets and projects. All processes in TCM are integrated, and risk management
is linked to all the chapters of the TCM Framework.

Project risk management professionals must have a though understanding of the skills and knowledge
summarized in Figure 2. These skills and knowledge are taken from the Required Skills and Knowledge of
Project Risk Management, Recommended Practice No. TBD.

PRMP Certification Study Guide 2021 1

 1. Supporting 2. Project Risk
Skills and Management Skills
Knowledge and Knowledge

2.1. Overall Project Risk

1.1. Elements of
Management
Cost
Terminology/Concepts

2.2. Processes and General

1.2. Elements of
Practices for Project Risk
Cost Estimating
Management

1.3. Elements of
Planning and
Scheduling

1.4. Elements of
Analysis -
Statistics and
Probability

1.5. Enabling
Knowledge

Figure 2― Summary of PRMP Required Skills and Knowledge

PRMP Certification Study Guide 2021 2

Figure 3―The TCM Framework Process Map for Risk Management (Section 7.6)

The overall learning objectives of this Study Guide are:

• Understand the basis of Project Risk Management within the Total Cost Management framework
as illustrated in Figure 3;
• Understand the evolution and processes of risk management;
• Describe what is essential to planning and implementing a Project Risk Management process, and
apply its practices within a capital management or project organization in various enterprise
settings;
• Understand the essentials of Project Risk Management as applicable to many Total Cost
Management processes; and
• Provide the basis for AACE International’s PRMP certification within the Total Cost Management
Framework as summarized in Figure 2.

Following is a list of references that provide the general basis of knowledge outlined in this Study Guide:

1. AACE International Recommended Practice 10S-90, Cost Engineering Terminology.

2. AACE International Recommended Practice 11R-88, Required Skills and Knowledge of Cost
Engineering.
3. AACE International Recommended Practice 14R-90, Responsibility and Required Skills for a
Planning and Scheduling Professional.
4. AACE International Recommended Practice 17R-97 Cost Estimate Classification System
(Note: There are other Recommended Practices on this topic developed for specific industries.

PRMP Certification Study Guide 2021 3

 Please refer to those as applicable.)
5. AACE International Recommended Practice 23R-02, Planning & Scheduling Identification of
Activities.
6. AACE International Recommended Practice 24R-03, Planning & Scheduling, Developing
Activity Logic.
7. AACE International Recommended Practice 27R-03, Schedule Classification System.
8. AACE International Recommended Practice 52R-06, Time Impact Analysis–As Applied in
Construction.
9. AACE International Recommended Practice 40R-08, Contingency Estimating: General
Principles.
10. AACE International Recommended Practice 41R-08, Risk Analysis and Contingency
Determination Using Range Estimating.
11. AACE International Recommended Practice 42R-08, Risk Analysis and Contingency
Determination Using Parametric Estimating.
12. AACE International Recommended Practice 43R-08, Risk Analysis and Contingency.
Determination Using Parametric Estimating–Example Models as Applied for the Process
Industries.
13. AACE International Recommended Practice 44R-08, Risk Analysis and Contingency
Determination Using Expected Values.
14. AACE International Recommended Practice 47R-11, Cost Estimate Classification System–As
Applied in Engineering, Procurement and Construction for the Mining and Mineral Processing
Industries.
15. AACE International Recommended Practice 56R-08, Cost Estimate Classification System– As
Applied for the Building and General Construction Industries.
16. AACE International Recommended Practice 57R-09, Integrated Cost and Schedule Risk
Analysis Using Monte Carlo Simulation of a CPM Model.1
17. AACE International Recommended Practice 58R-10, Escalation Principles and Methods Using
Indices.
18. AACE International Recommended Practice 62R-11, Risk Assessment.
19. AACE International Recommended Practice 63R-11, Risk Treatment.
20. AACE International Recommended Practice 64R-11, CPM Schedule Risk Modeling and
Analysis: Special Considerations.
21. AACE International Recommended Practice 65R-11, Integrated Cost and Schedule Risk
Analysis and Contingency Determination Using Expected Value.2
22. AACE International Recommended Practice 66R-11, Selecting Probability Distribution
Functions for Use in Cost and Schedule Risk Simulation Models.
23. AACE International Recommended Practice 67R-11, Contract Risk Allocation.
24. AACE International Recommended Practice 68R-11, Escalation Estimating Using Indices and
Monte Carlo Simulation.
25. AACE International Project Risk Management Profesional -RP No.-TBD, Required Skills and

1 Very limited application to the PRMP Certification and a general understanding of this RP is sufficient. This practice can only
be used with quantitative risk assessments when a high-quality cost-loaded schedule is available.
2 Same comment as footnote 1.

PRMP Certification Study Guide 2021 4

 Knowledge of Project Risk Management.
26. American National Standards Institute/Electronic Industries Alliance Standard (ANSI/EIA) 748
B July 2007, Earned Value Management Systems.
27. Hastak, Makarand (Ed.). Skills & Knowledge of Cost Engineering, 6th Edition. (2015).
28. Brady David C. (Ed), AACE Professional Practice Guide No. 2, Risk, 2nd Edition, (2012).
29. Bramble, B. and M. Callahan, Construction Delay Claims, 7nd Edition, (2020).
30. International Standards Organization (ISO), ISO/IEC Guide 73 Risk Management–Vocabulary–
Guidelines, (2009).
31. Stephenson Lance, H. (Ed.). Total Cost Management Framework: An Integrated Approach to
Portfolio, Program, and Project Management, Second Edition (2015).
32. Hastak, Makarand (Ed.). CCP Certification Study Guide, 2nd Edition. (2016).
33. Uppal, Kul B., AACE Professional Practice Guide No. 8, Contingency, 4th Edition, (2015).
34. SAVE International, Value Methodology Glossary of Terms, 2020.

This Study Guide assumes candidates have a basic knowledge of PRM; it addresses PRM skills,knowledge
and competencies that are non-industry specific. This Study Guide further aims to help candidates learn
basic terminology, processes, and practices for project risk management. A candidate’s company or
industry, however, may dictate or emphasize other PRM processes for capital asset, project, program, or
portfolio management.

This Study Guide is organized according to Pproject Risk Management Body of Knowledge, described at
the beginning of each section. The recommended examination preparation includes a review of many of
the references listed above. This Study Guide does not provide a hierarchy of importance among the
various references and it is the PMRP candidate’s responsibility to make such judgments. Further, the
candidate is responsible for using the latest versions and editions of all references, even those issued or
revised after the date of this Study Guide. Candidates must also draw from the competencies acquired
through personal experience in project risk management and cost engineeringexperience.

PRMP Certification Study Guide 2021 5

What is Project Risk Management and a Project Risk Management Professional?
RP 10S-90 defines a Project as “A temporary endeavor with a specific objective to be met within the
prescribed time and money limitations and has been assigned for definition or execution.” It goes on to
define a Program as: (definition 2) “a set of projects with a common strategic goal. It is within those
parameters that a Project Risk Management Professional will practice.” It must be noted that TCM is
broader and encompasses other elements that are often inputs to and important to comprehensive risk
management including decision analysis, strategic asset management, and certain business functions.
Those elements are not expressly included herein but will become important during a PRMP’s career
development into more advanced levels of risk management. AACE is currently reviewing and revising its
Decision and Risk Management Professional (DRMP) certification to include relevant elements as part of
that expert-level certification program.

Research shows that the success or profitability of a project is largely determined by the quality of a
sanction decision or advancement from one phase of a project to the next and specifically the planning
and analysis leading to those events. Key to proper planning and analysis is risk management. Failure to
manage risks during execution can lead to loss of planned value. Failure to manage risks can further
diminish success of the specific work or the profitability of the entire enterprise, depending on the scope
and impact of the risk.

A Project Risk Management Professional is key to effective project execution (or within a
program/portfolio when multiple projects are involved). That individual is a skilled and knowledgeable
practitioner whose role is to establish an effective risk management plan and implement that plan in
accordance with the project/program/portfolio’s objectives. It is the PRMP’s responsibility to
communicate clearly in oral and written forms, both internally and externally, as required.

Certification as a Project Risk Management Professional recognizes certificate holders who have
demonstrated their expertise in project risk management, which includes the following:

• Risk management supporting skills and knowledge;

• Risk management skills and knowledge; and
• Other functional skills and knowledge.

Brief History
The concept of the consideration of risks in market economics is well established as exemplified in Adam
Smith’s 1776 treatise on the “Wealth of Nations,” e.g., “The ordinary rate of profit always rises more or
less with the risk. It does not; however, seem to rise in proportion to it, or so as to compensate it
completely.”3

Risk management as a process and business function began to evolve with the development of industrial
engineering and quality management as exemplified by the quality and continuous improvement models
of Dr. Walter Shewhart whose Plan-Do-Check-Act (PDCA) of the 1920s is the foundation of AACE
International’s total cost management framework. By the 1940s, references to “risk management” as a

3 Smith, Adam, “An Inquiry into the Nature and Causes of the Wealth of Nations”, 1776.

PRMP Certification Study Guide 2021 6

distinct business function became more common (albeit often in the context of marketing or insurance).
As post-war capital investment boomed in the 1950s, so too did interest in capital investment and project
risks.

Arguably, AACE International’s founding in 1956 can be ascribed to a need to better understand capital
investment economics and to make informed decisions in consideration of project risks and uncertainty.
AACE International’s Skills and Knowledge puts a strong emphasis, as does the project risk management
professional, on cost and scheduling fundamentals, analytical abilities, and probability principles. AACE
International’s first Recommended Practice in 1958 established cost estimate accuracy classifications,
wherein typical “accuracy ranges” were quoted for each phase of capital project scope development.4
These “accuracy” classifications, along with proper risk quantifications, are effective predictors for final
cost outcomes at project completion.

Methodical schedule risk analysis began to evolve during this period. The Program Evaluation and Review
Technique (PERT) was developed by the U.S. Navy in 1958 to manage the Polaris Missile Program. Its
objective was to simulate the schedule risk of the missile research and development program work using
a flow diagram technique that, in turn, lent itself to scheduling and network analysis.5

By the late 1980s, software to perform Monte Carlo simulation (MCS) using personal computer-based
spreadsheets was introduced, such that when combined with estimating, scheduling, decision-tree, and
other models, provided cost engineers with practical tools to perform sophisticated quantitative decision
and risk analyses.6 Formal capital asset and project decision and risk management processes, systems,
tools, and organizational concepts evolved and proliferated rapidly in the 1990s.

Despite measurable improvement in project cost and schedule accuracy, however, when best practices
are performed, projects and portfolio outcomes are still highly uncertain, particularly for the growing
numbers of mega-industrial and public infrastructure investments. Research has increasingly turned to
the field of behavioral psychology to understand better the human input to the risk management process.
The skills and knowledge of project risk management professionals, therefore, recommends an
understanding of the biased and sometimes irrational behavior of stakeholders, decision makers, and
team members.

What is Risk Management?

As identified in the Total Cost Management Framework (Section 7.6), risk management is a systematic
and iterative process comprising four steps:

1. Plan: establish risk management objectives;

2. Assess: identify and analyze risk;
3. Treat: plan and implement risk responses; and
4. Control: monitor, communicate, and enhance risk management effectiveness.

4 Gorey, J.M., “Estimate Types”, AACE Bulletin Vol. 1 No.1, November 1958
5 Fleming, Q. and Koppelman, J., Earned Value Project Management, 3rd Edition, 2005.
6 Hollmann, J, “Estimate Accuracy; Facing Reality,” Transactions, AACE Annual Meeting, July 2012

PRMP Certification Study Guide 2021 7

This risk management process is illustrated in Figure 3. The goal of risk management is to increase the
probability that a planned asset, project, or portfolio achieves its objectives. In Total Cost Management
(TCM), potential deviations from plans are all considered potentially adverse to overall performance. In
this sense, perceived opportunities may also pose a threat. If properly managed, however, the project- or
asset-management team may be able to capitalize on “opportune” uncertainties.

The risk management process is applied in conjunction with the other asset and project control planning
processes, such as scope development, cost estimating, schedule planning, schedule development and
implementation, resource planning, procurement planning, and financial systems integration. Within the
context of total cost management’s strategic asset management process, the term, enterprise risk
management (ERM), recognizes that the risk management process should be applied to overall enterprise,
portfolio, and program-level objectives, not just to a single business unit, asset, or project.

The risk management process, from a project control standpoint, is designed to address uncertainty in
both project input and outcomes. The process, however, generally applies and is critical to addressing
uncertainty in the input to and outcomes of any decision. As discussed in the TCM Framework Section 3.3
on “Investment Decision Making,” a key challenge in strategic asset planning is bringing an awareness of
risk and probability concepts to decisions, whether they result in an implemented project or not.
Traditional deterministic economic analysis used in decision-making may be somewhat meaningless when
there are significant risks.

Uncertainty and Risk (The Definition Debate)

An initial challenge that any project risk management professional must deal with is the fact that the
definitions of uncertainty and risk differ among practitioners and industries. For the purpose of the risk
management process within the Total Cost Management Framework, risk is defined as “an uncertain
event or condition that could affect a project objective or business goal.” The effect may be either positive
or negative, i.e., an opportunity or threat. This definition is consistent within the project management and
finance fields, e.g., ISO, PMI, etc., which have achievement of a target as their goal. Other fields, however,
such as safety and insurance, tend to equate risk and uncertainty with only negative effects or threats.

To summarize the various views, an early paper by AACE International defined risk as “an ambiguous term
that can mean any of the following:

1. All uncertainty (threats and opportunities);

2. Undesirable outcomes of uncertainty (risks + opportunities);
3. The net impact or effect of uncertainty (threats - opportunities).

The paper further recommended, “The convention used in any work should be clearly stated to avoid
misunderstandings.”7 This is still sound advice. The Total Cost Management Framework provides more
discussion of the “definition debate,” which has many points of view that PRMP candidates should be
aware.

7 AACE International. “Risk Management Dictionary,” Cost Engineering, vol. 42, (2000).

PRMP Certification Study Guide 2021 8

Conclusion
The preceding discussions only highlight aspects of the project risk management processes, practices, and
terms. For a more complete coverage, candidates are referred to the appropriate sections of the TCM
Framework and the aforementioned references.

PRMP Certification Study Guide 2021 9

PRMP Certification Examination Structure
Introduction
To be certified as a Project Risk Management Professional (PRMP), a candidate must meet the minimum
eligibility requirements and successfully pass a written examination as determined by the AACE
International Certification Board. This Study Guide provides helpful information and guidance needed to
prepare for the PRMP examination.

Basis of the Examination

The purpose of any professional certification or licensing program is to provide a mechanism to formally
and objectively evaluate and publicly recognize the capabilities of an individual in a defined skill area.
Certification as a Project Risk Management Professional (PRMP) recognizes certificate holders who have
demonstrated their expertise in Project Risk Management (PRM), which includes the following:

• Risk management supporting skills and knowledge;

• Risk management skills and knowledge; and
• Other functional skills and knowledge.

To define project risk management more specifically in terms of expected skills, knowledge and
competencies, AACE International has published Recommended Practices. Risk management is a sub-
element of cost engineering as applied to the process of total cost management, which is a dynamic,
integrated process incorporating many functions and is affected by advances in philosophies,
methodologies, and technology. A professional cost engineer specializing in PRM is expected to keep
abreast of these advances and demonstrate this knowledge in the examination.

In summary, the definition of PRM and Recommended Practice 11R-88, “Required Skills and Knowledge
of Cost Engineering” (PRM portion), form the foundation of the PRMP certification examination, which
addresses the following:

• Minimum knowledge covered by the basic skills documents; and

• Advanced knowledge based upon PRM experience.

Examination Structure
The PRMP exam contains multiple-choice questions and a written memo assignment.8 The multiple-choice
questions and the written assignment scores are averaged together for an overall exam score. The
candidate must receive a minimum average score of 70% in order to pass the exam successfully, as
determined by the Certification Board.

1. Multiple Choice Questions: The exam is delivered through computer-based testing (CBT), and is
comprised of multiple-choice and compound scenario questions. The topics covered in the exam

8Note that some of the sample questions included in this Study Guide are structured as True-False type questions. There will
be none of these questions on either the Beta or Final examinations. These questions will be revised after the Beta
examination.

PRMP Certification Study Guide 2021 10

 are limited to the Required Skills and Knowledge of Project Risk Management, Recommended
Practice No. TBD that will released in draft form for the PRMP Beta examination and in final
form thereafter.

2. Memo Assignment: The memo assignment will allow the candidate to choose from an onscreen
list of suggested scenarios and will require the candidate to demonstrate professional written
communication skills and a general knowledge of risk management competency. The memo will
be written in the text box provided onscreen and should demonstrate a candidate’s ability to
organize thoughts and communicate effectively. The memo will need to be addressed properly,
including a purpose statement, proposed solution with supporting details and including a closing
statement.

The exam is closed book. Candidates are permitted to bring any style of calculator, including
programmable calculators, to use during the exam.

The examination is not based upon the use or knowledge of a specific software, but rather, embodies the
knowledge and experience of a PRM practitioner using such tools. All materials utilized by the candidate
during the examination, including work paper, must be turned in upon completion of the examination.

Recognizing that there are many industries and fields within the profession―engineering, construction,
manufacturing, process facilities, mining, utilities, transportation, aerospace, environment and
government―candidates can expect questions that are general enough to apply, or be specific, to any of
these practices. The examination takes into account the fact that no one can be expected to be conversant
in all practice areas through the multiple-option format and extensive use of questions of general
applicability.

PRMP candidates are expected to have reasonably broad skills, knowledge, and experiences in cost
engineering in addition to specific PRM skills and knowledge. While it is not required, candidates will
benefit from first passing the CCP examination because of the shared skills and knowledge of Total Cost
Management (TCM) and cost engineering in general. However, passing the PRMP is not a substitute for
nor indicator of achievement of the CCP. PRM professionals cannot provide effective support to project
leaders without understanding the context of the relevant asset and project management process.

Finally, communication skills are vital to ensuring that the impacts of risks are identified and understood,
particularly among stakeholders, decision makers, and managers who have strong expectations and
biases. Before investing in the effort and expense required for taking the exam, candidates should
objectively review their understanding, skill, and experience of this diverse body of knowledge.

PRMP Certification Study Guide 2021 11

 Chapter 1.0 Supporting Skills and Knowledge
The following sections follow the overall format of the PRMP Skills Knowledge Recommended Practice
No. TBD. If there is any inconsistency between this Study Guide and the Recommended Practice, the
Recommended Practice governs. This is only a guideline to preparation for the examnination and
additional information relative to the material presented herein can be found in the Recommended
Practices and other AACE resources.

Introduction
The practice of risk management takes place throughout the life cycle of asset and project management
and is tied to all the processes in Total Cost Management (TCM). The first steps in TCM, whether for an
asset portfolio, a program of multiple projects, or for a single project, are to gather requirements for asset
or project performance from varied stakeholders and to establish objectives and measures that will
indicate if the requirements have been achieved.

Profit, usually measured in some form of return on investment, is the most common high-level objective
and is the basis for most decisions within for-profit enterprises. Profit is not generally an objective for
public entities and success is measured by a completed project that is delivered within the defined
specifications, on time, and at budget. Other requirements and objectives may address quality, health,
safety, environment, security, reputation, or other performance attributes of a portfolio, program, or
project. The PRM professional must therefore understand both asset and project lifecycle processes and
the many attributes of success to be planned, analyzed, and measured.

PRMP candidates will need to evaluate all measures using a wide variety of analytical methods. Because
PRM deals with uncertainty, most of the analyses involve the application of probability and statistics.
While PRMP candidates are not expected to be expert statisticians, they should be competent with the
basic statistical concepts such as common probability distribution attributes and basic descriptive
statistical definitions. The probability and statistical concepts are typically applied to various analytical
models of profit, cost, and schedule. Monte Carlo simulation (MCS) is often applied to the underlying
analytical models and is useful for modeling a variety of data.

The TCM processes take place in varied cultural, political, enterprise, organizational, and team settings.
There are many stakeholders to be consulted, considered, and dealt with, both internal and external to
the organization. These stakeholders often have competing, sometimes conflicting, needs and
expectations; each brings different biases to the analysis. PRM professionals should have a basic
understanding in organizational, cultural, political, behavioral, and psychological bodies of knowledge.

PRM professionals may be working in an owner, contractor, or consulting organization. For-profit owner
enterprises tend to lean more on the asset management (entire life cycle from development through
obsolesce) side of TCM, making portfolio, program, and project investment decisions. The quality of those
decisions are often strong drivers of success. Public-entity owners are more focused on successful delivery
of a quality project on time and at-budget. They may later move to an asset management focus after the
project or program is successfully delivered, but asset management in that form is not part of the role of
a PRMP as defined herein. Contractors tend to focus on the project control side of TCM. The owner’s profit
derives from return on capital assets―the strategic motivator is the investment decision, e.g. capital cost,
and the biggest risks may be market, regulatory requirements, product, and production related.

PRMP Certification Study Guide 2021 12

Conversely, the contractor’s profit derives from return on human capital―the strategic motivators are
the resourcing and bid decisions, and the biggest risks tend to be execution related.

PRMP candidates must understand each of these perspectives. This Study Guide attempts to broadly
recognize that a PRMP may function within a for-profit enterprise, a public entity delivering a public-works
project, or a contractor supporting either type of owner organizations. While the text within this Study
Guide cannot completely address each perspective in all cases, reliance is placed on the PMRP candidate
to understand which one, or more, of the perspectives he/she is supporting and interpret or translate the
material within this guide as applicable to the role encountered. The key point to remember is that the
fundamentals of risk management are essentially the same irrespective of the specific application.

The need to understand behavioral and psychological aspects is important to a PRMP (performing risk
elicitation, recognizing effective risk treatment/response plans, etc.).

In summary, the Project Risk Management Professional should have a firm understanding of the following
principle supporting skills and knowledge concepts:

1.0 Supporting
Skills and
Knowledge

1.4. Elements of
1.3 Elements of Analysis -
1.1 Elements of 1.2 Elements of 1.5 Enabling
Planning and Statistics and
Costs Cost Estimating Knowledge
Scheduling
Probability

Figure 4―PRM Body of Knowledge Diagram for 1.0 Supporting Skills and Knowledge

PRMP Certification Study Guide 2021 13

Section 1.1 Elements of Costs
Introduction
The term “elements” refers to any general knowledge of costs that needs to be understood to support
the practice of project risk management (PRM): definitions, attributes, perceptions, and implications.
PRMP candidates will find this material outlined in “Elements of Cost” of Recommended Practice 11R-88.

Cost Definitions
With regards to Total Cost Management (TCM), cost is any resource invested or expended in an asset, be
it monetary, time, effort, or other resource expenditure. The investment is put into effect through the
execution of programs and projects. The cost, therefore, in TCM and cost engineering, is not about money,
but about managing resource investments in assets through the execution of projects.

From a more traditional viewpoint, cost engineering is the application of scientific principles and
techniques to problems of estimation; cost control; business planning and management science;
profitability analysis; and project management, planning, and scheduling.

Elements of Cost
Varied viewpoints lead to the following elements of costs covering resources, deliverables, investment
vehicles, and so on. PRMP candidates should know and understand the following:

1. Cost definitions (covered previously);

2. Owner vs. contractor view of costs;
3. Cost vs. pricing;
4. Influence curve; and
5. Types (labor, material, equipment).

Costs within an estimate are often categorized into direct and indirect costs.

• Direct costs are costs of completing works that are directly attributable to its performance and
are necessary for its completion.
o In construction, the cost of installed equipment, material, labor and supervision
directly or immediately involved in the physical construction of the permanent facility.
o In manufacturing, service, and other non‐construction industries: the portion of
operating costs that is readily assignable to a specific product or process area.

• Indirect costs are costs not directly attributable to the completion of an activity, which
are typically allocated or spread across all activities on a predetermined basis.
o In construction, (field) indirect are costs which do not become a final part of the
installation, but which are required for the orderly completion of the installation and
may include, but are not limited to, field administration, direct supervision, capital
tolls, startup costs, contractor’s fees, insurance, taxes, etc.
o In manufacturing, costs not directly assignable to the final product or process, such as
overhead and general-purpose labor, or costs of outside operations, such as
Transportation and distribution. Indirect manufacturing costs sometimes include

PRMP Certification Study Guide 2021 14

 insurance, property taxes, maintenance, depreciation, packaging, warehousing, and
loading.
There is another element of cost that helps defining the accuracy of an estimate. During the
development of a project, there can often be a continuous effort to purchase the elements to be installed
or the effort to install them. A convenient way to convey this is to assign a field in the estimate to identify
if the element has been estimated, quoted or purchased. Summarizing by these items helps to identify
the potential risk remaining in the estimate.

Cost elements can be categorized into groupings, such as work breakdown structures (WBS), to better
organize, present, and analyze the estimate. A more detailed presentation of different types of
categories is covered in Recommend Practices such as RP20R-98 and RP34R-05.

Most of the elements of costs in the preceding list are covered in AACE International’s TCM Framework,
while the Skills and Knowledge text are defined in Recommended Practice 10S-90. A few of the important
concepts are discussed in the following paragraphs:

Another key concept for PRMPs to understand is the difference between cost and pricing. Pricing refers
to the amount of money asked or given for a product, e.g., exchange value. Pricing thus is tools and
techniques used to establish a monetary value for an output, the price that will be an amount expended,
or an input cost to the buyer. The price or money asked by the sellers includes their own input cost plus
profit and/or other margins.

Pricing is a step in the cost estimating and budgeting process of the TCM Framework, Section 7.3. TCM
indicates, “Pricing includes charging techniques that various stakeholders in the plan (bidders,
contractors, etc.) apply to costs in the estimate to allow for overhead and profit, to improve cash flow, or
to otherwise address market conditions and serve their business interests.” In considering risks, PRM
candidates should be aware that prices may be unbalanced, by either the bidder or seller; the values may
reflect their business and cash flow objectives and not cost expenditures.

PRMPs should also understand the concept of the influence curve as shown in Figure 5. Management has
more ability to influence either a risk or opportunity early in scope definition, with minimal impact to
project objectives. As time passes….

PRMP Certification Study Guide 2021 15

Figure 5―Influence Curve

Terms to Know
• Asset;
• Cash flow;
• Cost;
• Cost category;
• Cost breakdown structure (CBS);
• Cost objective;
• Direct cost;
• Economic cost;
• Expected value;
• Expenditure;
• Fixed cost;
• Indirect cost;
• Influence curve;
• Price;
• Project;
• Resource;
• Statement of work (SOW);
• Value;
• Variable cost; and
• Work breakdown structure (WBS).

PRMP Certification Study Guide 2021 16

Key Points for Review
• Describe the various elements of cost and the role they play in comprising total cost.
• Understand the different types of cost and how they are treated differently in the estimate.
• Identify the characteristics that separate direct from indirect costs.
• Understand the importance of identifying capital versus O&M costs.
• Understand the process of pricing, the distinction between cost and price, and how it relates to
PRM insight and analysis; and
• Understand the concepts behind the influence curve and its implications for PRM.

PRMP Certification Study Guide 2021 17

Sample Questions for Section 1.1

1. Which of the following is not a component of the pricing process?

A. Input.
B. Decision analysis.
C. Tools and techniques.
D. Output.

2. Cost is a measure of the value of an asset or labor.

A. True.
B. False.

3. Match the groupings of the phase-gate names of the influence curve in TCM.

A. Asset planning. 1. Asset option selected.

B. Asset implementation. 2. Project authorized.
C. Project control. 3. Asset opportunity identified.

4. In project management, the price of an item is the amount charged at the completion of a
contract item or total contract. Which of the following elements are not included in
determining the price?

A. Direct costs
B. Overhead
C. Profit
D. Contingency

5. Which of the following is an indirect cost of a concrete wall?

A. Material
B. Forming labor
C. Supervisory labor
D. Labor fringe benefits and taxes

PRMP Certification Study Guide 2021 18

Solutions to Sample Questions for Section 1.1

1. B. Decision analysis is not part of the pricing process matrix.

2. B. Cost is a measure of the value of an activity or asset.

3. A. Asset planning. 3. Asset opportunity identified.

B. Asset implementation. 1. Asset option selected.
C. Project control. 2. Project authorized.

4. D. Contingency. Hint: the project is complete.

5. C. Supervisory labor Hint: Labor fringe benefits and taxes would be included in the burdened
labor rate calculation and part of direct labor.

PRMP Certification Study Guide 2021 19

Section 1.2 Elements of Cost Estimating

Introduction/Learning Objectives

Cost estimating is of integral importance to the quality of the cost and scheduling program on any project.
The integrity of the cost estimate is of paramount importance to the success of a project and this is
ensured by the use of the appropriate cost estimating methodology. The cost estimate becomes the basis
for setting up the cost budget, resources and the ensuing progress and schedule monitoring processes
during project execution. To achieve this, a cost estimating basis/framework is necessary. The key learning
objectives are:

• Understand the classification of cost estimates.

• Understand some of the common methodologies used in preparing cost estimates.
• Relate estimate accuracy to the level of scope information and methodologies used in preparing
cost estimates.
• Apply the knowledge gained to effectively integrate cost estimates into the risk assessment
process.

1.2.1 Cost Estimating Terminology

Cost estimating terminology provides the backbone of effective communication by a common

vocabulary. RP10S‐90, Cost Engineering Terminology, is the AACE source for just that, cost engineering
terminology. RP10S‐90 contains terminology from all aspects of cost engineering, including planning
and scheduling, asset management, etc., and is not limited to just estimating. It is recommended that
the examinee take time to review all terms in the publication. A PRMP will often interface with cost
estimators and must know their terminology for effective communication.

1.2.2 Cost Estimate Classification System

Cost estimates are important indicators for the economic evaluation of potential projects. However,
expectations and understandings of the various parties involved vary widely with respect to the
information available to prepare those estimates, the various methods employed during the estimating
process, the accuracy level expected from estimates, and the level of risk associated with estimates. A
strong system for classification of cost estimates provides a means of unifying the expectations of the
various parties interested in the estimates.

The AACE system for classifying estimates is identified in RP 17R‐97, Cost Estimate Classification System,
shown in Table 1. It is typical that a series of estimates will be prepared for a project, beginning with
ones based on less project definition, and progressing through Classes 5 to 1 as the level of project
definition increases. An organization may not necessarily prepare all classes of estimates for a single
project. The Introduction to this Study Guide lists other RPs for Cost Estimate Classifications within
other industries. Each are unique to that industry, but all are based on common principles.

PRMP Certification Study Guide 2021 20

Table 1 – Generic Cost Estimate Classification Matrix

The primary parameter for the classification of estimates within all applicable RPs is the maturity level
of project definition upon which the estimate is based. Other characteristics associated with estimate
classes include the purpose of the estimate (anticipated end usage of the estimate), methodology used
in development of the estimate, the accuracy of the estimate, and the relative effort required to
produce the estimate.

1.2.3 Estimate Variability

The same exact activity can be performed in twenty projects and the resulting actual cost may be
twenty different numbers. This is the reason that it is called estimating and not “actualizing.”

Historical estimating databases are developed by normalizing the information from past projects and
identifying the “most likely value” by plotting a distribution curve. The value in the database is usually
the most likely occurrence, not necessarily the one that should be used in the estimate. To determine
the best number to use you need to understand what causes variability in estimates.

Additional variability can come from location, quantity, waste, overtime, spoilage, loss, market
competition, and even the type of contract. All of these considerations need to be taken into account
in an estimate. When developed and evaluated properly these variables should be included in the direct
cost estimate, not as contingency.

PRMP Certification Study Guide 2021 21

 In addition to unit price variability, the class of the estimate can have a large impact on the variability
of the estimate. At the Class 5 level, there is only a limited definition of the project deliverables. Since
there is much still unknown, there is a likelihood of a large variance in the estimate. As the project
definition is refined through Class 1, there is more and more known to the point at 100% definition; the
unknowns are likely to reflect a small variability in the estimate.

1.2.4 Project Life Cycle

Project and life cycle costing take estimating into the fourth dimension of time. Simply put, life cycle
costs are the sum of every cost incurred for a particular item (project, product, etc.) over its lifetime
from inception through disposal. It is necessary to estimate these costs over time at an assumed
escalation rate and then convert it to a present‐day value for comparing with other options.

The estimate scope begins with the design, construction, and startup costs. In the next phase it is
necessary to determine the cost of operation including raw materials, labor, general and administrative
(G&A), and other factors. It must include anticipated maintenance and perhaps improvement costs
over the life of the plant. The final stage is the dismantling and salvage value of the remaining asset.

Terms to Know

• Accuracy
• Accuracy Range
• Allowance
• Basis of estimate
• Bid/Tender Estimate
• Budget Estimate
• Cash flow
• Code of accounts
• Concept Study
• Conceptual Estimate
• Constructability
• Control Estimate
• Cost Estimate Classification System
• Cost Estimating Relationship (CER)
• Costing
• Definitive Estimate
• Detailed Unit Costs
• Deterministic (Detailed)
• Escalation
• Feasibility
• Labor Productivity
• Learning Curve
• Location Factor
• Normal Curve
• Order of Magnitude (Conceptual) Estimate
• Overhead

PRMP Certification Study Guide 2021 22

 • Parametric Estimate
• Preparation Effort
• Price
• Pricing
• Productivity
• Project Definition
• Scope
• Screening
• Stochastic
• Take-offs
• Weighted average

Key Points for Review

• Explain the importance of using a common terminology.

• Explain why it is important to understand the terminology of other cost engineering disciplines
• Understand the different classes of estimates in the cost-estimate classification system and the
characteristics used in classifying estimates.
• Understand the differences in the various types of estimating techniques and for which classes of
estimates they are typically used.
• Describe how accuracy of quantities or unit costs affects estimate variability.
• Understand how probabilities can affect the accuracy and the variability of estimates.
• Understand the factors that can cause variability in an estimate and how to adjust for them.
• Understand how to use risk analysis to reduce the impact of potential variables.
• Understand how the estimate class affects the potential variability.

Sample Questions for Section 1.2

1. From the contractor’s perspective, which of the following is not a scope change?
A. A prolonged labor strike
B. A force majeure event
C. An error in the concrete take‐off
D. A project delay by the owner

2. What class of estimate is an order of magnitude estimate?

A. Class 2
B. Class 5
C. Class 1
D. Class 3

3. An estimate prepared from well-defined engineering data is referred to as a .

A. Range estimate
B. Preliminary estimate

PRMP Certification Study Guide 2021 23

 C. Conceptual estimate
D. Definitive estimate

4. Which of the following is recognized as the primary characteristic used in classifying estimates.
A. End usage or purpose of estimate
B. Level of project definition
C. Estimating methodology used in preparation of estimate
D. Expected accuracy range of estimate

PRMP Certification Study Guide 2021 24

Solutions to Sample Questions for Section 1.2

1. C. An error in the concrete take‐off

2. B. Class 5

3. D. Definitive estimate

4. B. Level of project definition

PRMP Certification Study Guide 2021 25

Section 1.3 Elements of Planning and Scheduling
Introduction
PRMP candidates will find much of the planning and scheduling material outlined in the planning section
of the process and functional skills and knowledge of Recommended Practice 11R-88. The information in
this section of the Study Guide parallels the basis of the Planning and Scheduling Professional (PSP)
certification for those holding that certification. PRMP candidates will be familiar with both the TCM
Framework and 11R-88 treatments, which use an integrated lifecycle-process viewpoint versus the PSP
treatment, which uses an organizational-function or career-role viewpoint.

Planning in TCM versus Planning and Scheduling as a Function

Planning in TCM is a broader topic than what is covered in this section of the Study Guide. Planning in
TCM encompasses both strategic asset planning and project control planning, including all sections in
Chapters 3 and 7 of the TCM Framework respectively. Cost estimating, for example, is part of asset and
project planning and is not the responsibility of persons with the title of planner. It is accepted in PRM
that one of the best ways to reduce uncertainty is to perform better, more integrated, lifecycle planning,
whether at the asset portfolio, program, or project level. In a broad sense, planning includes consideration
of all the input and output of scope, cost, time, quality, and so on. This type of phased planning is reflected
in the influence diagram described previously. In chapter 3 of the TCM Framework, planning is focused
on deciding the right project. Once a project alternative is selected for further scope elaboration, planning
in TCM Framework, Chapter 7, is focused on doing the project right, focuses on starting project
implementation, as covered in TCM Framework, Section 4.1, which reviews phase or stage-gate scope
development, team building, and so on.

Planning and scheduling, in the traditional, functional meaning of the term, tends to be limited more to
the project scope-and-execution strategy-development and schedule-planning-and-development process
sections of TCM Framework, Sections 7.1 and 7.2, the viewpoint of this Study Guide section. TCM
Framework, Section 7.1, is focused on work breakdown structure (WBS) and work package development
for a specific project, tasks often led by professional planners. The next step is schedule planning in which
the planner leads the identification of specific work activities and develops an activity logic model. The
element of time has still not been considered at this point.

Time is a key driver of project success, even if not stated as a primary business or project objective. Time
and costs on projects are interrelated (and can often be traded off); taking more time tends to correlate
with more costs, thereby reducing profitability. In general, the majority of risk events and conditions, if
they occur, tend to add more time, which in turn increase costs. The amount of time to complete a scope
of work is analyzed through the process of scheduling (or schedule development in TCM Framework,
Section 7.2) applied to an activity logic model.

PRMP candidates are no doubt aware that the functions of planning and scheduling require different skills
and knowledge. A common systemic risk for project systems is that planning and scheduling people are
often more focused on the mechanics of scheduling than on understanding how work is most safely and
productively organized and performed.

Planning Function
This planning discussion provides an organized outline to understanding the means, methods, and tools
necessary in the planning process as shown in Figure 6.

PRMP Certification Study Guide 2021 26

 • Planning development
1. Planning input and data; and
2. Planning considerations and constraints.
• Planning product
1. Planning output and deliverables.

Each section identifies the concepts associated with particular planning phases.

• Planning is conceptual;
• Planning is dynamic; and
• Planning is both cyclical and iterative.

Planning starts with understanding the project requirements and objectives. One of the most important
objectives for PRMPs to understand is whether time or cost is most important to the decision makers, and
if a risk occurs, which objective is most important to preserve when deciding upon a risk response.
Schedule is often important because of commitments to deliver product from the asset and to start the
revenue stream. Projects where time-to-market is not critical, however, cost is most important to NPV.

The planning process is repeated with each phase of work effort and development throughout the
project’s life cycle. As scope is developed, information becomes more detailed, and the plan and schedule
are more detailed, as well. This iterative review, development, and modification cycle is constant
throughout the life of the project.

The scope of the planning process must be appropriate to the phase of work. The elements of a plan
developed in the planning process must be equally weighted to achieve a balanced and usable product.

When conditions change for the plan or any of its elements, or risks occur, the planner should re-examine
and,as necessary, update the plan. In some cases, practices such as acceleration or crashing may be
considered, which may add uncertainty to the plan. The plan for one phase is key to developing a plan for
the next phase, as well as for the overall project.

Project planning begins early and continues as the project moves through phases of the life cycle, from
conception to completion to closeout. Rather than a serial process, project planning is best thought of as
a planning cycle. Effective implementation of a plan results in the ability to produce a credible schedule.
Most project management professionals agree that there is a basic five-step process involved in
developing a project plan.

Essential questions to be answered during project planning are these:

• What: The physical feature and technical objectives (scope);

• How: Work breakdown structure (WBS);
• Who: Resource commitments and organization breakdown structure (OBS);
• When: Timeline initially, then schedule later in the planning process; and
• How much: Budget estimate.

Based on these questions, the recommended sequence of actions to developing a project plan is:

• Define project scope;

PRMP Certification Study Guide 2021 27

 • Establish a work breakdown structure (WBS);
• Identify resources and availability (people and capital assets);
• Establish timeline and sequence of deliverables; and
• Determine a budget for each component activity, work package, or group of tasks.

Planning and scheduling assists the project manager in:

• Facilitating preparation of the project plan and work breakdown structure (WBS);
• Facilitating estimation of timelines and project phases;
• Identifying key project results and milestones;
• Involving team members in planning process and involving the client in defining project goals and
key results; and
• Providing a basis for risk identification and analysis.

1.0 Planning

1A. PLANNING DEVELOPMENT 1B. PLANNING PRODUCT

1.1 INPUT & DATA 1.2 CONSIDERATIONS & 1.3 OUTPUT & DELIVERABLES
CONSTRAINTS

1.1.1 Contract 1.2.1 Identification of 1.3.1 Define Scope of Work

Requirements Resources
1.3.2 Define Project Goals
1.1.2 Identification of 1.2.2 Value
Stakeholders Engineering
1.3.3 Define Project Plan
1.1.3 Constructability 1.2.3 Stakeholder
Methods Considerations 1.3.4 Phase Definition

1.3.5 Establish Work

1.2.4 Project Variables Breakdown Structure

1.3.6 Establish Organization

Breakdown Structure

1.3.7 Establish Cost

Breakdown Structure

1.3.8 Sequencing & Phase

Relationship

1.3.9 Review by
Stakeholders

1.3.10 Cost Estimate

Development

1.3.11 Baseline Plan

1.3.12 Periodic Forecasts

1.3.13 Risk & Recovery

Plan

Figure 6―Planning Elements from PSP Study Guide, 2nd Edition

The baseline plan should be agreed upon by the contracting parties in all major project aspects, and the
contracting parties should understand the baseline plan, as the definitive plan becomes the foundation
for baseline schedule development. All parties should understand concepts of creating a planning

PRMP Certification Study Guide 2021 28

timeline, which lays out the major elements so as to obtain an appreciation of the overall concept and
duration of the project.

An optimal plan may explicitly accommodate identified risks and potential risk responses; this is referred
to as contingency planning, i.e., establishing plans in advance to respond to risks if they occur. Later, in
schedule modeling, the technique of conditional branching―in which alternative branches reflect the
contingency plans―can be applied to assess the range of risk impacts to the schedule. PRMP candidates
may interface with planning and scheduling at this point.

The baseline planning timeline evolves with the planning process. Ultimately the baseline plan forms the
basis for the initial schedule and cash flow models and serves as the benchmark against which all
performance measurements are evaluated and reported.

The baseline plan is a fixed document, unless significant modifications of the scope of work occur, which
may be driven by risk events. Significant changes to the scope of work can cause the previous baseline to
be a poor representation of the work and to be of little value for work status reporting. When this occurs,
a re-baselining effort is required. As before, this new baseline should be agreed upon by the contracting
parties in all major aspects. Typically, the budget, schedule, and percent-complete status are all affected.

Figure 7―Baseline Plan

PRMP Certification Study Guide 2021 29

Each organization manages its project according to its own baseline plan and schedule (see Figure 7); an
owner-client may not need to manage to as low or as detailed a level as a contractor. Likewise, a
subcontractor focuses only on its scope of work and necessary coordination and interfacing with related
trade work.

Scheduling Function
The objective of this scheduling discussion is to provide basic knowledge in an outline structure for a study
of the means, methods, and tools necessary for project schedule development and periodic maintenance
processes. These documents and data then form the basis for managing execution of the base scope of
work, accommodating and accounting for change and risk occurrence, and controlling outcomes. This
discussion consists of two main subparts:

• Schedule development
1. Input and data; and
2. Creating schedule.
• Schedule maintenance and controlling
1. Maintain schedule; and
2. Output and deliverables.

Each subchapter develops concepts associated with each particular scheduling phase as shown in Figure
6 aboveError! Reference source not found..

Key considerations are:

• Schedule results from the plan;

• Scheduling is both cyclical and iterative; and
• Scheduling is dynamic.

Schedules are developed at various points in the planning process. Schedules are maintained to report
progress and forecast trends, work progress, and completion. Schedules are used to control the successful
execution of the project.

The schedule models the plan and the cost estimate using resources and execution strategy to meet the
project objectives. The schedule must accommodate and account for change as it occurs through
controlled forecasting and change-management processes. A probabilistic schedule model, integrated
with cost, is optimal for robustness and to support risk-aware decision-making. PRMP candidates will most
likely interface with the process at this point. PERT modeling methods were originally developed to
address schedule risks, however, the most common probabilistic method used today is CPM modeling
with Monte Carlo simulation.

The key characteristics of a successful schedule include elasticity, sensitivity, completeness, robustness,
and clarity for all stakeholders. Elastic and sensitive schedules readily accommodate change and risk
impacts to the schedule model over the lifecycle of the project. Complete schedule models fully depict
the plan and the cost estimate in an integrated way through resource planning, which also supports
integrated cost and schedule risk analysis. Resource planning includes practices such as resource loading
and resource leveling.

PRMP Certification Study Guide 2021 30

The modeling and scaling of the schedule must be appropriate to the phase of work. The schedule model
is a database of extensive data elements. It is important to develop a well-conceived and effective
methodology of controls, tools, reports, and reporting requirements to meet the needs of all stakeholders.

The planning process provides the underlying, fundamental data for the baseline schedule. The baseline
schedule, upon stakeholders’ approval, becomes the standard for performance measurement as well as
risk management.

The project baseline plan and the cost estimate are the fundamental documents used in the development
of the plan and schedule for the next phase of the project.

Learning Objectives
• Understand the concept and processes of asset and project control planning in the TCM
Framework, Chapters 3 and 7) vs. the functional view of planning and scheduling as an
organizational role (PSP perspective using processes in TCM Framework, Sections 7.1 and 7.2);
• Understand fundamental concepts of the planning and the scheduling functions and its
terminology;
• Understand where PRM has a direct role in planning and scheduling, e.g., understanding cost vs.
time objectives, contingency planning, probabilistic schedule modeling, etc.;
• Recognize that
1. the planning process is a dynamic process repeated throughout each phase of a program or
project life cycle;
2. scaling of the planning process must be appropriate and equally weighted to each phase of
work to achieve a balanced and usable product;
3. when conditions change or risks occur, the planning process and deliverables should be
examined and updated as necessary; the plan for one phase of a project offers a pattern for
developing the plan or next phase of the project as well as the project as a whole;
4. effective implementation of a plan results in a schedule;
5. project policies and procedures provide the method and means for developing, reviewing,
and approving the baseline plan;
6. at each stage in the planning process the goals, objectives, and overall scope of work must be
known in sufficient detail; sequencing and phasing of major tasks allow planning to evolve
into conceptual schedule model development; key milestones can be evaluated and
established;
7. the planning timeline and associated budget are developed concurrently; cost and schedule
trade-offs are considered;
8. the baseline planning timeline and budget for completion are evaluated to determine the
feasibility and probability of meeting stakeholder requirements; if necessary, revisions are
developed and evaluated to meet project goals; and
9. a baseline plan should not be changed unless stakeholders agree, presumably in compliance
with any established procedures for re-baselining.

PRMP Certification Study Guide 2021 31

Terms to Know
• Acceleration;
• Activity;
• Constraints;
• Contingency planning;
• Crashing;
• Critical path method (CPM);
• Delay;
• Deliverables;
• Durations;
• Fast-track scheduling
• Free float (FF);
• Integrated cost and schedule planning;
• Logic;
• Milestones;
• Notice to proceed;
• Organization breakdown structure (OBS);
• Planning―in TCM and in planning and scheduling;
• Precedence diagramming method (PDM);
• Program evaluation and review technique (PERT);
• Project life cycle;
• Resources;
• Resource planning (resource loading and leveling);
• Schedule accuracy
• Schedule contingency (reserve)
• Schedule types;
• Total float (TF);
• Work breakdown structure (WBS); and
• Work Package.

Key Points for Review

• Understand why the fundamental concepts of planning and scheduling are important to PRM;
• Understand fundamental concepts of the schedule planning process and its terminology;
• Understand how risks can be addressed in planning and scheduling;
• Recognize that
1. the planning process is a dynamic process repeated throughout each phase of a program or
project life cycle;
2. scaling of the planning process must be appropriate and equally weighted to each phase of
work to achieve a balanced and usable product;
3. when conditions change or risks occur, the planning process and deliverables should be
examined and updated as necessary in consideration of risk; the plan for one phase of a
project offers a pattern for developing the plan or next phase of the project as well as the
project as a whole; in TCM, any change is a potential risk;
4. effective implementation of a plan results in a schedule;

PRMP Certification Study Guide 2021 32

 • Explain the differences between planning and scheduling;
• Understand the concept of integrated cost and scheduling;
• Explain the role of scope definition and development in planning;
• Have a general understanding of schedule development tools and techniques:
1. Bar or Gantt charts;
2. Critical path method (CPM) and network models;
▪ Arrow diagramming method (ADM) / i – j node, also known as activity-on-arrow (AOA);
▪ Precedence diagramming method (PDM); and
3. Program evaluation and review techniques (PERT) and other risk models.

Sample Questions for Section 1.3

6. During the planning process for a capital project, which is not a consideration?

A. Religious holidays.
B. Local country language.
C. Education and skill level of local craft labor.
D. None of the above.

7. Constructability takes into account all but:

A. Location, logistics, and resource availability analysis.

B. The average price of general labor in the area.
C. Quality inspections and compliance.
D. Labor productivity studies from previous similar projects in the area.

8. Material resource considerations include all except:

A. Availability.
B. Installation.
C. Crew skills.
D. Timing of delivery.

9. Which of the following is not a constraining resource?

A. Labor availability.
B. Scheduling software.
C. Material delivery.
D. Craft skill levels.

10. The baseline plan is a fixed document and should be changed only if the following occurs:

A. Contract modifications result due to significant changes in the work.

B. Change is allowed whenever one of the primary stakeholders thinks it appropriate.
C. Never.
D. Once a year.

PRMP Certification Study Guide 2021 33

 11. The physical constraints of a jobsite can impose a limit on the amount of simultaneous
equipment usage.

A. True.
B. False.

12. List three types of resources.

8. Choose the correct letter (from A-D below) that lists four different types of the most
commonly used schedule models.

A. Bar and Gantt charts, critical path method and network schedules, linear or line-of-
balance, milestone.
B. Critical path method and network schedules, hammocks, rolling wave, milestone.
C. Gantt chart, linear or line of balance, level of effort, work lists.
D. Flags, constraints, estimate, bar chart.

9. What is an activity and what are its primary characteristics?

10. Pick the least accurate statement (from A-D below) concerning schedule activity durations.

A. They are often determined by examining the quantity of work and the resources
that will be applied to perform that work.
B. Work is always performed continuously from start to finish.
C. There is a “rubber band” for overall duration, depending upon the quantity of work
actually performed and the number of hours of work expended.
D. Planned and assumed productivity factors, location factors, and other
considerations are applied against the optimum duration to determine a planned
duration.

11. Durations are not derived from which one of the following:

A. Cost estimate.
B. Resource loading.
C. Activity ID.
D. Cost.

12. Durations may include which one of the following:

A. Multiple elements of the scope of work.

B. Relationships.
C. Risk plan.
D. Scheduling specification.

13. Name and describe the different types of schedule relationships that are used in scheduling
software tools based on the precedence diagramming method.

PRMP Certification Study Guide 2021 34

Solutions to Sample Problems for Section 1.3

14. D. None of the above.

15. C. Quality inspections and compliance.

16. C. Crew skills.

17. B. Scheduling software.

18. A. Contract modifications result, due to significant changes in the work.

19. A. True.

20. Labor, equipment and materials.

21. A. Bar and Gantt charts; critical path method and network schedules;
linear or line-of-balance; milestone.

22. An activity is an individual element of work that is logically linked to other activities to form
the schedule. Its primary characteristics include an overall duration based upon the resources
applied to it (manpower, materials, and equipment), a start and completion date tied to a
work calendar, and relationships to other activities (predecessor and successors).

23. B. Work is always performed continuously from start to finish.

24. C. Activity ID.

25. A. Multiple elements of the scope of work.

26. Finish-to-start: activity A finishes before activity B starts.

Finish-to-finish: activity A finishes when activity B finishes; the activities finish simultaneously
after running concurrently, but they may start at different times.

Start-to-start: activity A starts when activity B starts; the activities begin simultaneously and
run concurrently, both they may finish at different times.

Start-to-finish: activity A starts before activity B finishes.

PRMP Certification Study Guide 2021 35

Section 1.4 Elements of Analysis
Introduction
An understanding of the main elements of analysis is required for PRMPs. Elements refers to any general
knowledge about selected analytical methods that need to be understood to support the practice of
project risk management, e.g., definitions, general methods, attributes, perceptions, implications, etc.
These are building blocks applied later in specific PRM tools and techniques. Much of the material here is
outlined in Recommended Practice, 11R-88, Section 1.2 “Elements of Analysis.”

The analytical fundamentals most important to PRMPs include both statistics and probability. This Section
1.3 includes the basic aspects of these two fundamentals, but a more details discussion follows within
Chapter 2.0 where PRM Skills and Knowledge are introducced.

Statistics and Probability

Statistics and probability skills and knowledge are required because PRM deals with uncertain decision
input, uncertain risk occurrence, and uncertain risk input. The outcomes of decision and risk analyses and
models are typically reported probabilistically, e.g., distributions of possible outcomes. Statistics and
probability are the mathematical language of uncertainty.

A challenge for PRMP candidates is that these concepts are often difficult to communicate with decision-
makers and project leaders; if these concepts are not understood, the outcome of PRM practices are not
likely to be successful. Another challenge is that statistical analysis can be extremely complex, and PRMP
candidates must consider the practicality of a particular method given the situation and the value of
information. It is not necessary for PRMP candidates to be expert statisticians to perform effective risk
analysis; however, the fundamentals must be well understood.

PRM methods (and planning in general) benefit from learning through experience. The analysis of
empirical data, often through regression analysis, can provide valuable insights and analytical models for
application in risk analysis, e.g., parametric models.

The following is an outline of the skills and knowledge regarding statistics and probability required for
PRMPs. This material is well covered in many general texts on the topic.

Samples and Populations

• General–be able to describe the relationship of the mean of a sample to the mean of a population
and the general effect of sample randomness, bias, and size on the reliability of the sample
statistics;
• Central limit theorem–be able to define this concept; and
• Pareto principle–be able to describe this principle.

Descriptive Statistics
• Basic Statistics–given a set of data, be able to determine the arithmetic mean, median, mode,
standard deviation, and variance.
• Distribution Attributes–be able to describe
1. Skewness (symmetry);
2. Kurtosis (central tendency relative to normal);
3. Bounded vs. unbounded;

PRMP Certification Study Guide 2021 36

 4. Discrete vs. continuous; and
5. Confidence levels and intervals.

• Distribution types–be able to describe the characteristics of distributions commonly used in

decision and risk analysis models as well as their advantages and disadvantages in model usage
1. Discrete;
2. Uniform;
3. Triangle;
4. Double triangle;
5. Trigen;
6. Normal;
7. Log normal;
8. Pert or betapert;
9. Binomial; and
10. Cumulative.

• Histograms, cumulative frequency–given a tabular distribution for a variable that is other than
normal, be able to draw a histogram and resultant cumulative frequency curve (frequency
distribution) and determine the percent probability of the variable, being not less than nor more
than a given number.

Inferential Statistics
• Probability–given a curve of normal distribution and an accompanying table of areas under the
curve, be able to determine the probability of a) the variable being between two given numbers,
b) not being higher than a given number, or lower than that number, and c) given a confidence
interval or range in terms of percentage probability, give the corresponding low and high number
of the interval or range;
• Regression analysis–be able to describe the concept of the methodology as well as diagnostic
statistics (R2, root mean square error [RMSE], and t) and the importance of sample size relative
to the number of variables being assessed; and
• Statistical significance–be able to describe the purpose and use of chi-squared and t-tests, be
able to interpret the t-statistic for comparing two sets of normally distributed data, and be able
to interpret the chi-squared.

Terms to Know
• Auto/serial correlation;
• Boundary conditions;
• Boundary definition and conditions;
• Central limit theorem;
• Coefficient of variation;
• Conditional probability;
• Confidence interval;
• Confidence level;
• Correlation;
• Deterministic;
• Distributions;

PRMP Certification Study Guide 2021 37

 • Distribution parameter;
• Expected value;
• Histogram (frequency diagram);
• Latin hypercube;
• Linear regression;
• Mean/median/mode;
• Monte Carlo simulation (MCS);
• Multi-variable regression;
• Pareto;
• Populations;
• Probability calculations;
• Risk management (RM);
• Risk analysis (RA);
• Samples and sampling;
• Selecting distribution;
• Sensitivity analysis;
• Simulation;
• Standard deviation;
• Statistical significance;
• Stochastic;
• Variable;
• Variable dependency (or correlation); and
• Variance.

Key Points for Review

• Understand the concepts of statistics and probability for defining uncertainty in general and as
applied in PRM;
• Understand the Monte Carlo simulation (MCS) method including the concepts of random number
generation, seeds, and correlation;
• Understand the use of MCS in various models used in risk analysis; understand the use of
sensitivity and scenario analysis in the project risk management process; and
• Understand the use of parametric modeling in the project risk management process.

PRMP Certification Study Guide 2021 38

Sample Questions for Section 1.4

27. Which of the following is the statistical term for the value that occurs most frequently?

A. Mode
B. Mean
C. Average
D. Median

28. If your If your project has a 20% change of $200,000 profit and a 80% chance of a $25,000
loss, the expected value outcome would be:

A. 20,000
B. 40,000
C. 155,000
D. 160,000

29. Latin hypercube forces the samples drawn to correspond more closely with the input
distribution and thus converges faster on the true statistics of the input distribution.

A. True.
B. False.

30. Monte Carlo simulation requires a small number of samples to approximate an input
distribution, especially if the input distribution is highly skewed or has an outcome of low
probability.

A. True.
B. False.

PRMP Certification Study Guide 2021 39

Solutions to Problems for Section 1.4

1. A. Mode

2. A. $20,000

3. A. True–Latin hypercube allows for a convergence using less statistical iteration based upon
metrics of distribution.

4. B. False–Monte Carlo simulation requires a small number of samples to approximate an input

distribution.

PRMP Certification Study Guide 2021 40

Section 1.5 Enabling Knowledge
Introduction
The processes of TCM and PRM are enabled by skills and knowledge in a host of areas. PRM candidates
must have at least rudimentary skills and knowledge in several areas, such as ethics and finance. This will
help PRMPs plan, interpret input, improve practices, tailor work product and communicate. PRMPs must
know what questions to ask of the other experts. On the other hand, what is not enabling can potentially
be disabling: a lack of or flawed understanding in one of these areas can be a source of systemic risk.
These types of risks can affect any and every activity in ways that are hard to predict.

Primary Areas of Enabling Knowledge

For the effective application of PRM as a process, PRMPs must consider many desires, needs,
requirements, and other input from various stakeholders that will influence PRM practice and enable
PRMPs to contribute to overall successful outcomes of the asset or project. These factors often come from
various functions or teams in the company’s organization with which PRM functions must interface or in
which PRM functionality must reside. PRM is also influenced by the environment in which it takes place;
this includes the economic, market, cultural, sociological, political, legal, and physical environment,
including nature and technology. Finally, PRM must consider human factors: behavior, psychology, and
biases , which are a source of uncertainty in planning, work performance, and analysi...

These areas listed below can have a significant impact on PRM processes and practices, even though their
input can be implicit and intuitive. This sometimes-bewildering set of input (and reception to output) is a
challenge that sets PRM apart from the more deterministic functions and processes of traditional
estimating, planning and scheduling, cost/schedule control, and so on. Judgment can never be suspended
from PRM processes. Some of the material here is outlined in Recommended Practice 11R-88, Section,
“Enabling Knowledge.” PRMPs should have an understanding ofthe following:

31. Ethics;
32. Organizations/leadership/teams;
33. Culture/bias;
34. Performance/productivity/human factors;
35. Quality/cost of quality;
36. Environmental Health & Safety (EH&S)/sustainability;
37. Legal;
38. Insurance (including bonds, etc.);
39. Contracting;
40. Markets, economics; and
41. Stakeholder management.

The fields of finance, insurance, safety, and others have their own specialized risk management processes
and practices (and often associations and certifications); the PRMP body of knowledge is focused on
capital asset and project management, i.e., TCM fields, and excludes practices in other fields except to
understand their interface with PRM. PRMPs, for example, must understand the use of insurance for risk
treatment in asset and project management, but they do not need to understand actuarial practices used
to price insurance.

PRMP Certification Study Guide 2021 41

Ethics
At all times, each person in the enterprise must judge the means and the ends of a process against
personal and societal values and rules of conduct. These values and rules of conduct are referred to in the
TCM Framework, Section 11.1 as ethics. In judging, people and organizations must ask questions about
the means and ends such as, Are they fair, respectful, responsible, honest, and honorable? Society sets
the framework for this questioning, but individuals and organizations make the judgments and set the
rules.

The degree to which ethics are understood and practiced is a great source of uncertainty. Unethical
behavior by asset or project stakeholders or team members can be of great concern. In extreme cases,
corruption can greatly diminish the value obtained from large public asset investments. In small cases,
bending rules can diminish the reliability of a procurement or project system. The ethics of PRMP
practitioners is also of the highest concern, as PRMPs are often privy to highly sensitive information
regarding cost/priceand the risks therein. They are also often privy to personal and confidential views of
the conduct of a project, the chances of success of an asset, or the performance of other stakeholders.
PRMP candidates, therefore, must have a good understanding of ethics and ethical issues including
knowledge of AACE International’s Canons of Ethics.

Ethics is any system of guidelines for appropriate conduct toward others, aiming to comply with certain
rules, or achieving certain results in particular types of situations. A rule-based system of ethics
emphasizes guidelines such as, Always tell the truth, or, Never steal. A results-based ethical system
emphasizes achieving the greatest good for the greatest number, or directs, Act as you propose only if the
world would be bettered by everyone in your situation also acting as you propose. In difficult situations,
different systems of ethics may condone or condemn a specific action as ethical or unethical, especially
with respect to different cultural groups. In any case, PRMPs must be aware of and consider prevailing
ethical attitudes and practices in their work.

Organization/Leadership/Teams
Project risk management processes and practices take place in the context of organizations and teams
under leadership. PRMPs must have a good understanding of the concepts of organizational structure to
understand the context. As covered in the TCM Framework, Section 11.2, the design of an organization
structure must consider these principles:

• Division of labor–consider departmentalization or specialization;

• Unity of command–consider lines or chains of command;
• Unity of directions–consider authority and responsibility; and
• Span of control–consider levels of control and degree of centralization.

PRMPs must also understand the basic organizational structural design frameworks used, for which the
preceding principles are considered:

• Functional–focused on division of labor or specialization, e.g., cost engineering;

• Divisional–focused on unity of command and direction concerning product lines and/or regions;
typically, each division is organized functionally; and
• Matrix–focused on tasks; typically, task managers draw resources from functional and divisional
organizations as needed.

PRMP Certification Study Guide 2021 42

As spelled out in the TCM Framework, Section 11.2.2 Leadership and Management of People, subsection
.1 Leadership; leadership of an organization “is not about imposing control, but about obtaining
commitment from people to support enterprise goals and objectives. It is about positively influencing
people’s behavior toward self-control and enhanced individual and group performance.”

Skills and knowledge required in TCM of an individual or organization to perform a job or function is
referred to as competency. Enterprises must assess where and with whom competencies should reside in
the organizational structure. Often, organizational effectiveness is improved if some jobs or functions are
performed by individuals or organizations outside the enterprise, i.e., if they’re outsourced. In general,
most enterprises keep those jobs and functions in-house that are essential to its operations and
effectiveness; these are generally called the core competencies of the organization.

Weaknesses, ambiguity, confusion, or conflict in any of these frameworks or their attributes can
contribute or detract from effective PRM (and asset and project performance as a whole), and can result
in systemic risks, which can create uncertainty in any or all asset or project management activities, e.g.,
ineffective leadership, poor communications, lack of direction, poor competency, etc. In addition,
organizational-change projects are often most subject to failure.

Project risk management functionality and competency must themselves reside somewhere in these
frameworks, be they centralized or decentralized, in-house or outsourced, and so on. There is no right
structure, leadership style, or competency strategy. Increasingly, organizations are establishing enterprise
risk management (ERM) processes and organizational frameworks to integrate RM throughout the
enterprise and PRMPs should be aware of this development

In summary, PRMPs must be able to describe organizational concepts, identify and assess how
organizational structures and attributes such as leadership and competency influence the performance of
PRM, and identify and assess how they may result in or help mitigate risks.

Culture/Bias
A challenging issue that PRM processes and practices must address is the effects of culture and biases
inherent in cultural behavior. A cultural issue may be societal or organizational in nature, and one may be
related to the other.

PRMPs must be aware of how culture and bias may drive the way risk-averse individuals or organizations
react. In many corporate cultures, the punishment for failure, e.g., cost overrun or schedule-slip exceeds
the reward for success, e.g., lower absolute costs or better profitability. In such cultures, risk aversion is
required for career survival and advancement or “maintaining face,” or respect, from a societal viewpoint.
Many organizations establish key capital and project system objectives and measures to minimize
overruns (predictability) regardless of absolute cost outcomes (competitiveness). This is an expensive
practice, as it results in unknown and often excessive allowances for risks being hidden in baseline plans.
It is difficult for PRMPs to expose and quantify these biases without creating conflict or risk to their own
careers. On the other hand, leaders or organizations, e.g., a new company or exiting executive with little
to lose, may have a bias to take risks; one or the other may be resistant to having these risks questioned
and quantified. Similarly, organization entities or leaders may be biased toward pet projects that are in
keeping with their own value system and goals regardless of that of the enterprise.

A particular culture may also affect organizational attributes wherein financial control, project control,
governance, quality, compliance, or risk management functions may lack the authority or responsibility

PRMP Certification Study Guide 2021 43

to stop initiatives found problematic. The political imperative for people in these risk management
functions may be to let questionable programs, projects, or activities proceed. Recently, the world has
witnessed examples of endemic failures of RM functions in the financial industry to access or stop
systemically risky investments. Closer to home, a prominent researcher, Dr. Bent Flyvbjerg, has called
estimates for large public infrastructure projects, lies; the political culture is so biased toward funding
these projects that they cannot be trusted to plan them objectively.

Culture and bias do not have to be dramatic to affect PRM. In an individual project, organization, team, or
even individual, bias may result in such behaviors as focusing RM efforts on just a specific grouping or
discipline’s set of activities, which can result in critical risk elements remaining unidentified. Similarly, a
multi-attribute decision analysis may inappropriately devalue an objective of one or more of the
stakeholders.

In any case, it is crucial for PRMPs to understand the societal and organizational culture and biases that
may exist or arise and impact PRM processes and practices.

Performance/Productivity/Human Factors
In the execution of work and performance of activities, human factors are arguably the greatest source of
uncertainty. In engineering and construction, it is well known that cost estimates for labor services are
usually the least accurate. For those reasons and others, PRMPs, must be able to describe the concept of
productivity and how it differs from production. PRMPs must also be able to describe the effect on
performance of many drivers or factors in terms of motivation and waste/inefficiency, how performance
can be threatened by various systemic and project-specific risks, and how these performance risks might
be treated. Recommended Practice 11R-88 includes a list of many of the factors related to performance
and productivity.

Quality/Cost of Quality
Quality is conformance to requirements, which are based on customer needs. Requirements are
established so that objectives can be met, e.g., profitability or at-budget and on-time projects. Risk in TCM
is an uncertain event or condition that could affect a project objective or business goal, so to a large
extent, successful PRM starts with setting the correct requirements and achieving them. Quality PRMPs
are aware that failure to achieve quality results in changes, rework, and confusion that are known risk
factors. TCM is itself a quality management process focused on continuous cost performance
improvement. There are a number of areas of skills and knowledge related to quality identified in
Recommended Practice 11R-88:

• Quality planning–be able to describe this as an integrated method of planning directed toward
satisfying customer needs;
• Quality management–be able to describe this as a process for managing quality, e.g., TCM;
• Quality assurance–be able to describe this as actions that provide confidence the requirements
will be fulfilled;
• Quality control–be able to describe this as actions focused on fulfilling requirements;
• Continuous improvement–be able to describe this as a common goal of quality management
processes (the traditional result of the PDCA process);
• Plan-Do-Check-Assess (PDCA)–be able to describe this as the basis model for TCM and many other
management processes;

PRMP Certification Study Guide 2021 44

 • Quality measurement–be able to explain that in some views, cost is the best single quality
measurement because so many measures can be expressed in cost terms (likewise, decision
analysis often uses monetary measures);
• Quality policy–be able to explain that this as an imposed requirement assumed to be guided by
accepted quality management principles;
• Quality standards–be able to describe these imposed requirements
1. ISO 9000 standard quality management series;
2. ISO 10006 quality in project management; and
3. ISO 31000 on risk management.
• Quality focused practices in TCM: be aware that these key practices (covered in later sections)
have particular importance to quality management
1. Benchmarking;
2. Cost of quality;
3. Value analysis/engineering; and
4. Change management.

Environment, Health, Safety (EH&S), Security and Sustainability

The EH&S interests and objectives of an enterprise have long been represented by their own group or
groups within major company organizations, and these functions often have their own PRM functionality.
Security and sustainability are growing areas of similar interest.

The main role for PRMPs working in capital and project management (within an ERM framework) may be
to interface with the PRM processes of these organizational entities, i.e., to ensure that information
needed for PRM flows among the groups and that all risks are identified, analyzed, treated, and controlled
as appropriate. For example, the environmental group may identify upcoming legislation that may affect
a capital project during its life cycle, or the safety group may establish incident response plans to be
considered in project contingency planning. For smaller entities, these groups may simply represent
additional, important stakeholders to manage, obtain input from, and to consider in output of the PRM
process.

Legal
The law establishes rules, regulations, constraints, duties, and other requirements related to an enterprise
and its activities and potential penalties or remedies if the laws or regulations are violated. Such
requirements must be considered in asset and project planning whether related to contract law,
environmental law, employment law, and so on. Some laws are easily understood and addressed, others
are less clear or are evolving, e.g., international law.

PRMPs are not expected to have strong skills and knowledge in the legal field but must ensure that legal
representation is involved in PRM activities as appropriate: If environmental laws are changing, an
environmental lawyer may be included in risk identification. If an environmental risk event is identified,
its potential legal impact, if it occurs, may need to be assessed by the legal function. Complex sourcing of
resources on a large international project may require international or trade-law input.

Insurance–Inclusive of Bonds and Other Instruments

A risk treatment option for many threat or negative risks is to acquire insurance (or bonds, guarantees,
warranties, retainage, liquidated damages, or similar financial or procurement instruments or remedies
to compensate or indemnify for hurt, loss, or damage due to risk event occurrence, failure to function or

PRMP Certification Study Guide 2021 45

perform, failure to meet quality requirements, etc.). PRMPs are not expected to be experts in the
insurance, bonding, or related fields, but are primarily expected to know in what circumstances and events
these risk treatments should be considered and established and to be able to describe the general nature
of these financial instruments and contract elements. PRMPs should also understand the general concepts
of insurance and similar instruments and where they apply, e.g., warranties on purchase equipment
operation, so as to ask the right questions of the experts during risk assessment (coverage, term, price,
deductibles, etc.).

Contracting
Owner organizations rarely perform all asset and project management functions themselves. Contracting
is required to obtain the services of external parties. As has been discussed with regard to organizational
enabling skills and knowledge, each party in a project optimally should focus on its core competencies,
e.g., contractors usually perform detailed engineering and construction services for owner companies.
Such is not always the case, however. The contracting process can be particularly complex, a source of
uncertainty, involving organizational structure, legal, bonding, culture bias, and other issues falling under
the heading of contracting.

PRMPs are not expected to be expert in the contracting process but are expected to know and understand
various contract types and their typical content as numbered below. (Contract risk allocation is covered
in the risk treatment section of the Study Guide.)

42. Be able to explain the advantages and disadvantages of the types of contracts and delivery
methods below from the owner and contractor viewpoints:

• Fixed price (with fixed, incentive, or award fees);

• Unit price;
• Cost-plus (with fixed, incentive, or award fees); and
• Time and materials (T&M).
• Design-Bid-Build Delivery
• Design-Build Delivery, including Progressive Design-Build
• Public-Private-Partnerships (P3)

43. Be able to describe the general contents and purposes of the following elements of bidding
and contract documents:

• Invitation to bid or request for proposal;

• Bid form;
• Agreement;
• General conditions;
• Supplementary or special conditions;
• Technical specifications;
• Drawings;
• Addenda;
• Modifications;
• Bid bond and contract (performance) bond;
• Performance guarantee; and
• Warranties.

PRMP Certification Study Guide 2021 46

 44. Be able to explain the role of contract documents in avoiding and resolving disputes,
changes, claims, and the risk implications if the contract is not well developed.
45. Be able to describe the various types of insurance that may be required as part of a contract.
46. Be able to explain the term “retention” and understand its role in risk treatment.
47. Be able to explain contract payment terms and how they may expose the parties to risk, e.g.,
payment not commensurate with work performed, unbalancing, etc.
48. Be able to describe the risks of various contract types when markets are not competitive.

Markets/Economics
Research indicates that project success is often determined by how well the organization/enterprise
evaluated the market for the product resulting from the asset or project to be built, modified, or
maintained by projects. Businesses and owners are usually optimistically biased in this evaluation (in
quantity sold and/or sale price). PRMPs must be aware of the importance of product market uncertainty
and capacity and the efforts required to assess this through market analyses of various types. On the cost
side of cash flows (resource expenditure or investment); markets can drive demand and prices for goods
and services. In TCM, the effect of markets and economics on price levels over time is called escalation.
Escalation includes both inflation, i.e., debasement of currency, which affects all prices the same more or
less, and market-driven price changes, which are often specific to industry, region, and commodity.

As projects grow larger, e.g., mega-projects in mining or oil, local labor and commodity demand can
increase rapidly, while supply is limited in the short run and volatile pricing results. Shortages of skilled
labor can also result in industry-wide reductions in average productivity.

Stakeholder Management Including Requirements Elicitation

The TCM process starts (see section 3.1) with requirements elicitation, which “is a process of identifying
stakeholders and their needs, wants, and expectations; probing deeper into them; and documenting them
in a form that supports planning, communication, implementation, measurement, and assessment.”
Requirements are critical to the TCM process and PRM, as quality is adherence to requirements and
measured by success in meeting requirements. Requirements are needed to answer the questions, what
are successful PRM processes, risk analyses, assets or projects?”

Stakeholder management in general is a process that includes the following:

• Identification;
• Assessment;
• Interaction;
• Communication; and
• Agreement.

PRMPs first have to recognize the stakeholders; the TCM Framework defines stakeholders basically as
persons and organizations, such as shareholders, customers, sponsors, performing organizations, and the
public who may obtain, own, and/or use the asset as well as those whose interests may be otherwise
affected by the existence [of the asset] or use the asset. Stakeholders may also include those who are
actively involved in associated projects or whose interests are affected by execution or completion of the
projects; they may exert influence over the management and use of assets and/or the project and its
deliverables.

PRMP Certification Study Guide 2021 47

PRMPs must identify parties relevant to the process or analysis at hand, e.g., an internal PRM process
improvement exercise, a project contingency estimate, etc., requires knowledge of organizational
structure, contracting, regulatory requirements, and so on. PRMPs will work with business and project
teams to do this. Initially, PRMPs should not presume who among them may be aware of an uncertainty
or potential risk event or circumstance; all team members and stakeholders may have contributions to
make the analysis.

PRMPs next assess the stakeholders with respect to influence, authority, skills and knowledge,
competency, value added to a risk analysis, and so on. Based on the assessment, PRMPs will plan their
interactions. It is usually inappropriate and impractical to engage each stakeholder in the same way and
to the same extent.

Next are interactions and communication, which may vary widely depending on risk analysis needs and
the organizational structure. A contingency estimate may be limited to inviting the interested parties to a
risk identification brainstorming session and so on.

In addition to these types of direct interaction, communication is needed to keep all parties informed, to
engage them in the process, or as a form of risk treatment, e.g., to mitigate the risk of disagreement owing
to poor communication. Communication should be planned as to protocols and who needs to know what
and when. Communication may continue over the course of the asset or project lifecycles. Stakeholder
management and particularly communication, as with risk identification and other steps, requires PRMP
awareness of culture and bias and behavioural psychology.

Finally, at the completion of a project, process, or step, PRMPs should measure and assess whether the
stakeholders’ requirements or expected level of satisfaction was met; if not, further direct interaction may
be needed; did stakeholders feel that all of their risk or other knowledge was appropriately tapped and
used? Lessons are then applied to find ways the PRM process may be improved in the future.

Terms to Know
• Ethics;
• Organizations/leadership/teams;
• Competency;
• Function;
• Leadership;
• Matrix;
• Culture/bias;
• Performance/productivity/human factors;
• Quality/cost of quality;
• EH&S/sustainability;
• Legal;
• Insurance (including bonds, etc.);
• Bonds;
• Guarantees;
• Warranties;
• Retainage;
• Liquidated damages;
• Indemnify;

PRMP Certification Study Guide 2021 48

 • Contracting;
• Breach of contract;
• Markets, economics;
• Escalation;
• Stakeholder management.

Key Points for Review

Ethics
• Be familiar with the AACE Canons of Ethics.

Organizations/Leadership/Teams
• Be able to identify the fundamentals of organizational structures and frameworks and the
implications to the PRM processes;
• Be aware of the difficulty and risks of organizational change; and
• Understand the nature of leadership.

Culture/Bias
• Understand the concept of risk aversion; and
• Understand the risks of predictable versus competitive corporate or societal cultures.

Performance/Productivity/Human Factors
• Understand the many factors that can affect or influence performance; and
• Understand the typical relative uncertainty of labor and services versus materials.

Quality/Cost of Quality
• Understand that quality is conformance to requirements and the importance of identifying
requirements for PRM processes and practices;
• Understand why TCM and its PRM processes are quality management processes;
• Understand the concepts and functions of quality, quality management, quality assurance and
control, and continuous improvement; and
• Understand the concept of the cost of quality and the PRM implications of quality objectives and
measures.

EH&S/Sustainability
• Be familiar with environmental regulations and standards and the influence thse have on project
risks
• Be able to assess and address risk issues related to non-compliance with EH&S/sustainability
regulations
• Understand the importance of stakeholders in these areas;

Legal
• Understand the laws, rules, regulations, constraints, duties, and other requirements placed on an
enterprise and its activities and potential penalties or remedies if the laws or regulations are
violated;

PRMP Certification Study Guide 2021 49

Insurance (Inclusive of Insurance, Bonds, Etc.)
• Understand the use of insurance (or bonds, guarantees, warranties, retainage, liquidated
damages, or similar financial or procurement instruments or remedies) to treat risks to
compensate or indemnify for hurt, loss, or damage due to risk event occurrence, failure to
function or perform, and failure to meet quality requirements, etc.;
• Understand the circumstances and events for which these risk treatments should be considered
and established and be able to describe the general nature of these financial instruments and
contract elements.

Contracting
• Understand that the contracting process is a complex source of uncertainty involving
organizational structure, legal, bonding, culture/bias, and other issues that are important to have
contract expertise be part of risk analysis (as appropriate);
• Understand the various contract types or delivery methods and their typical contents;
• Be able to explain the role of contract documents in avoiding and resolving disputes, changes, and
claims and risk implications if the contract is not well developed; and
• Understand breach-of-contract concepts and claims and their PRM implications (see legal);

Markets, economics;
• Understand the processes necessary for evaluation of the market for the product that results from
the asset to be built, modified, or maintained by projects (see psychology and bias);
• Understand how market risks and economics, e.g. supply and demand, influence pricing
uncertainty for goods and services;
• Understand the concept of escalation and the role of markets and economics in escalation;
• Understand how shortages of skilled labor and resources can result from market and economic
drivers and how this affects performance uncertainty (see productivity and performance); and
• Understand the role of economists in providing input to PRM processes and analyses, i.e.
escalation factors.

Stakeholder Management
• Understand the concept and steps of stakeholder management in TCM and PRM processes;
• Understand stakeholder attributes such as influence, authority, skills and knowledge,
competency, value added to a decision or risk analysis, and so on;
• Understand when stakeholders should be engaged in PRM process steps and be able to plan
engagement (see psychology and bias);
• Understand the importance of stakeholder communication in PRM, and be able to develop a
communication plan;

Finally, understand that success of TCM and PRM lies in meeting stakeholder expectations and
requirements, and be able to plan ways to measure their satisfaction and learn from the experience.

PRMP Certification Study Guide 2021 50

Sample Questions for Section 1.5

1. Which of the following variables could be a project risk?

A. Construction costs.
B. Escalation.
C. Cash flows.
D. Monte Carlo simulation.

2. Project architects are:

A. Stakeholders.
B. Developers.
C. Activists.
D. Special interest groups.

3. Which is not normally considered a stakeholder on a Greenfield chemical plant project?

A. Shop owners in an enclosed mall three miles downwind of the project.

B. The owner’s project banker’s engineer.
C. A third-tier electrical subcontractor.
D. The employee-owned contractor.

4. All project stakeholders provide input data and information during the initial planning process to set
the overall project duration. This statement is:

A. True.
B. False.
C. Only by analyzing the contract can one determine if a change in duration is allowed.
D. Only the project owner-client may set the overall duration, and this is often driven by
marketing and business considerations.

PRMP Certification Study Guide 2021 51

Solutions to Problems for Section 1.5

1. B. Only escalation as a construction cost is direct, and cash flows are a result. Escalation increases,
as does time.

2. A. Stakeholders.

3. A. Shop owners on an enclosed mall three miles downwind of the project.

4. B. False.

PRMP Certification Study Guide 2021 52

 Chapter 2.0 Risk Management Skills and Knowledge
Introduction
Risk management is a rapidly developing area of skills and knowledge in terms of strategy, process,
organization, tools, and methods. The development and practices of risk management differ among
various industries, such as finance, insurance, environmental, safety, and so on. The risk management
body of knowledge outlined in this chapter is for the industry segment covered by TCM, i.e., life cycle
asset, portfolio, program, and project management. It is also focused on the traditional skills and
knowledge of cost engineering, which has always had a strong quantitative RM focus. Candidates whose
RM experience is limited to qualitative RM and execution-phase project management will require further
study. All PRMPs will be challenged throughout their career to stay abreast of industry developments.

The good news is that, unlike specialty practices such as estimating, planning and scheduling, and earned
value management, the development and practice of PRM is global and broadly applicable across the
industries where cost engineering is practiced, e.g., capital assets and projects in government,
infrastructure, commercial, and process. The risk management body of knowledge was designed to be
fundamentally consistent with current international RM standards such as the ISO 31000 series and
committee of the sponsoring organizations of the Treadway Commission (COSO) work; it may, however,
differ in some respects and go beyond the standards in some areas. Quantitative methods for contingency
analysis, for example, are not extensively addressed outside of AACE’s technical library.

As was discussed in Chapter 1 of the Study Guide, for PRMPs to be effective in supporting decision makers
and project leaders, they must understand the context in which their RM processes and practices are
being applied. This context includes knowledge of other functional practices such as cost estimating,
planning and scheduling, and project control. PRMPs may not be subject matter experts in any one of
these areas, but the important skill is to be able to facilitate integration and communication with regard
to risk intelligence and process flow.

In applying risk management, PRMPs will find varying degrees of formality and explicitness in processes,
practices, and organizations depending on the size of the enterprise they are dealing with. PRMPs should
remember that no matter the environment in which they work, the principles and concepts are the same
and are applied similarly.

The risk management body of knowledge is structured in increasing specificity from general concepts and
terminology, through general work processes, organization, and so on, to specific methods and tools
applied in the RM process steps. The following are the primary AACE sources of reference information for
the body of knowledge (see the overall reference list at the start of the Study Guide):

• Terminology and Concepts–AACE TCM Framework, Section 7.6, and Recommended Practice 10S-
90 and Recommended Practice 11R-88;
• Processes and Organization–AACE TCM Framework, Section 7.6; and
• Practices–AACE Recommended Practices.

The following is a summary of the PRM Body of Knowledge:

2.1 Overall Risk Management Terminology/Concepts

1. Uncertainty and risk;

PRMP Certification Study Guide 2021 53

 2. Accuracy and range;
3. Scope;
4. Allowances, contingency, reserves;
5. Risk taxonomy;
6. Empiricism;
7. Causation;
8. Roles and responsibility/organization;
9. Risk appetite/acceptance/tolerance/policy;
10. Assurance;
11. Objectives; and

2.2 Processes and General Practices for Risk Management

1. Risk management and TCM;
2. Risk management processes (COSO, ISO, ERM, etc.);
3. Process alignment with objectives;
4. Planning for risk management (objectives, policy, responsibility);
5. Risk assessment–identification and causation;
6. Risk assessment–analysis; qualitative and quantitative assessments
7. Risk treatment (including response and allocation); and
8. Risk control (including communication and monitoring).

2.3 Specific Risk Management Practices

1. Risk assessment–fault tree analysis, cause/effect analysis;
2. Risk treatment–contingency planning/contingent response;
3. Quantitative risk analysis–contingency (cost and schedule) and reserves; escalation, inflation,
currency;
4. Risk control–change management (integration with RM); and

Terms to Know
• Body of knowledge;
• International Standards Organization (ISO); and
• Qualitative versus quantitative assessments

PRMP Certification Study Guide 2021 54

Key Points for Review
• AACE RM body of knowledge–understand its scope;
• ISO 31000 series–understand the universal nature of RM;
• RM–applicability of Body of Knowledge; understand that concepts are generic, but process and
practices are focused on life cycle asset portfolio, program, and project management;
• RM–importance of integration; understand that many industries, organization elements, and
functions have PRM practices with which PRMPs must assure integration;
• RM–degree of formality/explicitness; understand that the size of the organization or project does
not mean that concepts and principles do not apply;
• RM process (TCM Framework, Section 7.6)–understand the AACE RM process and its integration
to TCM as a whole;
• RM terminology (AACE Recommended Practice 10S-90)–understand the AACE definition of risk
terms and be aware that definitions vary somewhat between industries; PRMPs must understand
this variability, e.g., variation from ISO definitions;
• RM practices (AACE Recommended Practices)–be familiar with these practices and be aware that
these represent practices for which there is general consensus that they reliably add value if
properly applied with the appropriate expertise (AACE does not use the term “best” practice); and

PRMP Certification Study Guide 2021 55

Section 2.1 Overall Risk Management Terminology and Concepts
Introduction
Overall risk management terminology and concepts are primarily defined in AACE’s Total Cost
Management Framework, Section 7.6 on risk management, and AACE’s risk management Recommended
Practice 10S-90. An excerpt of PRM-related 10S-90 terms is included as an appendix to this Study Guide.
AACE definitions are usually developed within the context of TCM and Recommended Practice
development, i.e., the terms have been determined to work in that context. All terms in 10S-90 represent
a general consensus of the person or organization that commented; this is why the PRMP certification
emphasizes this usage. PRMPs, however, no doubt will understand that definitions vary and that they
must be familiar with other recognized sources, such as ISO 31000, PMI, and so on. It is impotant to note
that certain governmental agencies or industries have produced risk management practices and
procedures where certain terms and definitions may be unique to that entity. RMPs must understand,
and potentially adopt, these terms and definitions to properly fulfil the assigned task. Each definition is
correct given its context, e.g., PMI with respect to the guide to the project management body of
knowledge). Beyond the definitions, the concepts here reflect principles and philosophies, views of which
may also differ. AACE’s TCM Framework and Recommended Practices have a strong focus on feedback,
e.g., PDCA is a loop, and learning that comes from historical experiences and data; reflecting these
experiences and data that are covered in the concept of empiricism. AACE’s Recommended Practices on
contingency analysis, for example, covers practices that incorporate empiricism as a principle. Each
heading that follows is considered to be a core concept that PRMPs must understand to provide effective
support to decision makers and project leaders.

Uncertainty and Risk

The correlation between uncertainty and risk was discussed previously. Official definitions of uncertainty
and risk are found in RP10S-90, but they can generally be characterized in the following fashion:

Uncertainty is the absence of certainty meaning that the propability of occurrence cannot be either 0%
or 100%. Simply stated, Uncertainty = Threats+ Opportunities, i.e. represents all risks. For a risk to be a
risk within TCM, there must be some level of uncertainty. The first part of the definition of a risk begins
by stating that a risk “is an uncertain event or condition….”

Accuracy and Range

In AACE Recommended Practice 10S-90, accuracy range is an expression of an estimate’s predicted
closeness to final actual costs or time. Typically expressed as high/low percentages by which actual results
may be over and under the estimate along with the confidence interval these percentages represent.
Statistically speaking, this is analogous to the concept of confidence interval.

PRMPs should be aware that the concepts of accuracy and range are a simplified expression, or shorthand
used to communicate uncertainty in a way that does not delve into specific probability
distributions―which does not, however, allow for vagueness in communication. Accuracy is traditionally
expressed as +/- percent around the base estimate, with a stated confidence that the actual cost will fall
within this range. It is important to be clear and to insist on clarity in policies and procedures about
whether a quoted range is applied to the point or base estimate, i.e., before contingency, or the total or
reference estimate, i.e., after including contingency. It is also important to identify whether the stated
accuracy range is based on rule-of-thumb, a consensus from brainstorming, or a quantitative risk analysis.

PRMP Certification Study Guide 2021 56

The concept of accuracy and range is also related to the concept of estimate and schedule classification.
AACE classifications define levels of scope definition with the expectation that accuracy range will narrow
as scope is better defined (the premise of phase-gate project systems). PRMPs must be aware that AACE’s
Recommended Practices for classifications do not establish standard accuracy ranges; they show
indicative range-of-ranges but state that a specific accuracy range is only determinable through risk
analysis. Risk cannot be predetermined or delivered on demand as a deterministic requirement of a
planning product. Research shows that predetermined range guidelines, e.g., +/-10% on funding
estimates, have no basis in empirical reality; quoting such ranges tends to drive stakeholder biases and
shuts down further meaningful communication about possible outcomes.

Scope
Scope definition is the division of the major deliverables of a project or activity into smaller, more
manageable components to:

• improve accuracy of cost, time, and resource estimates;

• define a baseline for performance measurement, and control; and
• facilitate clear responsibility assignments.

Managing project scope is critical to project success, and it is an important aspect of every phase of the
project lifecycle. Project scope may be affected or threatened by a range of events or drivers that are the
basis of scope definition.

Since scope is derived directly from requirements, any changes, additions or deletions to requirements
almost always have an impact on scope. Changes to scope and other aspects of the project may, at any
time during the life of a project, be requested by the end-user or by the project team. Issues may escalate
into risks and lead to changes. The occurrence of a risk may lead to a scope change in response. In PRM,
the outcome of any risk analysis, e.g., contingency is always relative to a stated scope.

While definitions above may seem clear, PRMPs must be aware that the concept of scope is widely
misunderstood; one cannot assume that stakeholders and teams understand or agree on its meaning in
their given situation. It is essential, however, that everyone understands it’s meaning with respect to the
risk management process or practice being applied. A particularsource of misunderstanding occurs
between asset owners and project execution contractors. To owners, scope is the basic business premise
of the project as understood and agreed to by the business sponsor; this cannot be a voluminous
document as, no senior executive is going to understand or agree to more than what can be summarized
in a few paragraphs or bullet points. Hence, owner-uncertainty of outcomes, contingency, and ranges
tend to be quite large for a given scope. To contractors, scope is defined by the contract and the
uncertainty is relatively narrow. The miscommunication of scope and its implications is a significant
systemic risk and endemic problem in PRM.

In a narrower sense, the concept of scope may also apply to process or practice input (and relates to the
concept of bounds and conditions). In a sensitivity analysis, for example, the values of a model input may
vary to assess the range of outcomes; the definition of the model input variable may be referred to as its
scope. PRMPs must document such assumptions made in their analyses.

Allowances, Contingency, Reserves

These concepts relate to methods of including quantified uncertainty in portfolio, program, project, item,
or activity estimates and schedules. These concepts have long been of particular emphasis and strength

PRMP Certification Study Guide 2021 57

of AACE technical development and the skills and knowledge of cost engineering. It is not enough to
qualitatively identify a risk and to rank it, i.e., red, yellow, green for treatment. Cost engineers are relied
on to “put a number on it,” or to measure it, and account for it appropriately as to each project control
plan-element, e.g., estimate or schedule. Allowances, contingency, and reserves are various ways to
incorporate valuations of uncertainty in plans.

There is a lot of variation in use and confusion regarding these terms and concepts. As with scope, PRMPs
must ensure that stakeholders and team members agree to these terms with respect to the process or
practice at hand, e.g., in some fields, reserves and contingency are treated as analogous; they are not in
AACE’s Recommended Practice 10S-90. Given their importance, the AACE definitions are shown here
(Reference RP 10S-90 for full and updated definitions):

• Contingency–an amount added to an estimate to allow for items, conditions, or events for which
the state, occurrence, or effect is uncertain and that experience shows will likely result, in
aggregate, in additional costs or time.
• Management reserve–an amount added to an estimate to allow for discretionary management
purposes outside the defined scope of the project, as otherwise estimated. This may include
amounts that are within the defined scope but for which management does not want to fund as
a contingency or that cannot be effectively managed using contingency.
• Allowance–resource for estimating, and included in estimates, to cover the cost of known but
undefined requirements for an individual activity, work item, account, or sub-account. Resource
for scheduling, dummy activities, and/or time included in existing activities in a schedule to cover
the time for known, but undefined requirements for a particular work task, activity, account, or
subaccount. In 10S-90, the definition of base estimate does not exclude allowances, even though
they are relatively uncertain.

These definitions are not just general concepts in TCM project control, but are integral elements of
cost/schedule control, and reflect an organizational span of control/authority concepts. Each risk
management concept is quantified as a basis for measurement, assessment, forecasting, and change
management. Each concept reflects levels of authority for its management. For example, reserves are
called reserves because authority for their use is reserved for someone above the project manager. To
respond to risks in a timely way, the project manager must have authority over the use of contingency
funds. Finally, allowances are incorporated in items and work packages under the authority of the
responsible work package party. Confusion of authority, accounting, and control is a systemic risk to risk
management effectiveness, e.g., if authority to use contingency or management reserve is withheld from
the project manager, it may delay response to risk events.

Risk Taxonomy
The identification, analysis, and reporting of risk information is aided by having established ways of
categorizing risks. The results are often referred to as risk breakdown structure. There are many ways to
categorize risks for a given purpose. Common examples include internal vs. external risks, strategic vs.
tactical risks, ownership risks, technical vs. business risks, and so on. Some of the risk breakdown structure
types are defined in 10S-90, including, but not limited to, the following:

• Determinants of recommended contingency estimating methods, i.e., systemic vs. project-

specific;

PRMP Certification Study Guide 2021 58

 • Cost risk categories for estimating and project control, i.e., contingency, allowance, reserve,
escalation, currency exchange; and
• RM process categories, e.g., residual, emergent, etc.

Without risk taxonomy, it’s impossible to communicate effectively or manage different types of risks
across the enterprise. If each area of the business or each project uses its own terms to classify risk, then
the aggregated information will be subjective, incomplete, redundant, and/or flawed.

Empiricism
The principle of empiricism is inherent in total cost management, i.e., the basis of all processes and
practices includes consideration of applicable historical experience, data, and information. Every TCM
process includes a feedback cycle. Some PRM practices, such as parametric modeling, use historical data
directly, e.g., regression analysis. In other practices, the information is more subjective or intuitive, e.g.,
using the judgment of experienced people. Objective information obtained through historical databases,
however, is preferred. PRMPs develop and maintain historical data for tool- and model-building and
calibration to capture lessons for improvement in future practice, and to identify PRM performance trends
and deviations to improve processes.

Causation
A cause is anything that produces or results in an effect or impact, i.e a risk driver. In the risk-treatment
step of risk management, causes identified in the empiricism assessment step are used to determine
proactively an appropriate treatment. Methods such as root cause analysis (RCA) are sometimes used to
identify the major underlying causes. Historical data can be used to look for correlations between various
conditions, events or circumstances, e.g., systemic risk drivers, and risk outcomes, but caution must be
used not to confuse correlation with causation.

Roles and Responsibility/Organization

Chapter 1 of the Study Guide addressed organization and team concepts in general, i.e., structures and
frameworks. PRMPs should also know how these organizational issues relate to the PRM process in an
enterprise or project. A common challenge is that PRM is a relatively new field and is often not an
established organizational entity, especially in smaller enterprises. The roles and responsibilities are often
disseminated to people with other positions such as business manager, project manager, or project
control engineer, which may present a systemic competency risk. When PRM is established, there is a
systemic complexity risk if responsibilities are unclear or if they cross lines, e.g., during execution, does
the project control change management process or the risk management process govern certain risk
identification roles? Organization is a concern for risk management.

Risk Appetite/Acceptance/Tolerance/Policy
Chapter 1 of the Study Guide addressed psychology, culture, and bias in general, e.g., the prevalence of
risk-averse cultures, strategies, and systems; they relate to the term risk perception, which in 10S-90
terms “subjective attitudes, judgments and biases of an asset or project stakeholder concerning the
characteristics, probability and/or impact of a risk. This affects the establishment or expression of more
objective risk policy, appetite, and/or tolerances.” In other words, these later terms―policy, appetite, and
tolerance―are more formalized methods and measures to incorporate perception into our processes and
practices. In decision-making, the concept of risk acceptance criteria applies. Dealing with human factors
of bias and perception, and applying them as measures and tools, are among the most difficult challenges
PRMPs will face and are highlighted as focus areas in the body of knowledge.

PRMP Certification Study Guide 2021 59

Assurance
In quality management, assurance is the practice of assessing whether a defined process is being followed;
it is a basis of governing an enterprise or system. Governance processes set expectations, grant power or
authority, measure results, and specify corrective actions; assurance is focused on measuring. In risk
management, the concept of assurance applies to governance of the enterprises or project’s decision and
risk management processes. In addition, the RM process is concerned with the performance (or lack of)
of assurance of other processes (e.g., management of finance, safety, etc.) as a risk driver.

The greatest systemic risks are often the failures of the assurance process. Establishing an assurance
process can be a risk treatment. A regulatory example is the Sarbanes-Oxley law in the United States,
which was passed in response to fraudulent financial practices at WorldCom, Enron, and Tyco
corporations in the 1990s. The project control function in TCM has an assurance role, to assure that
planned work processes are followed. Assurance can affect decision-making by assuring that decision
analysis input is valid.

Objectives
The Study Guide previously highlighted the definition of risk in total cost management (TCM) as “an
uncertain event or condition that could affect a project objective or business goal.” If objectives are not
well understood, risk management will never truly be effective. Research shows that the failure to
communicate clearly and understand objectives during asset or project scope definition drives cost and
schedule overruns and diminishes profitability.

PRMPs should know that there are almost always multiple objectives, e.g., cost vs. schedule. Any
particular decision, including selection of risk treatments and risk responses in risk management, must
consider prioritization of and trade-offs among objectives. A common situation arises when project
managers must select from alternate risk responses: one response might be fast but expensive, another,
slow but less expensive. The selection and its impact depend on whether the business’s primary objective
is cost or schedule; if these are not known in advance, the project manager may delay making this
response while seeking clarity and thereby aggravate the overall impact on the project.

Terms to Know
• Accuracy and range;
• Assurance;
• Causation;
• Classification (of estimates and schedules);
• Confidence level and intervals;
• Empiricism;
• Governance;
• Parametric estimating;
• Risk;
• Risk acceptance;
• Risk appetite;
• Risk breakdown structure (RBS);
• Risk driver;
• Risk event;
• Risk identification;
• Risk policy;

PRMP Certification Study Guide 2021 60

 • Risk taxonomy;
• Risk tolerance;
• Root cause analysis;
• Scope;
• Scope development; and,

Key Points for Review

• Understand the various definitions of risk
• Understand the concepts of scope, scope viewpoints, and their implications for PRM;
• Understand the level of scope definition as a risk driver;
• Understand the definitions, uses, and applications of allowances, contingency, reserves, and other
risk categories in PRM and project control;
• Understanding risk taxonomy and risk breakdown structure (RBS) and how they are used and their
importance in risk assessment and communication;
• Understand the principle of empiricism, its role and incorporation in PRM;
• Understand the concepts of causation and correlation vs. causation;
• Understand the variations in and risks associated with roles, responsibilities, and organization for
PRM and enterprises and projects in general;
• Understand the concepts of objective risk perception (and relation to psychology, culture and
bias) and the more formalized concepts to address perception (appetite, tolerance, policy and
acceptance criteria);
• Identify the assurance process involved in PRM, the role of assurance as a risk treatment, and the
risks of its failure;
• Understand the fundamental importance of clarity in objectives and the implications of objective
tradeoff to PRM; and

PRMP Certification Study Guide 2021 61

Sample Questions for Section 2.1
1. Risk taxonomy is the practice and science of naming, classifying, and defining relationships
between resources, risks, goals, and business processes in the enterprise.

A. True.
B. False.

2. Which of the following is an estimating allowance item to be included in the estimate?

A. A potential differing site condition discovered during construction

B. An amount applied to a conceptual estimate to account for the potential of the contractor’s
bid may be higher than expected.
C. The potential a labor strike
D. Piping to be installed in a plant but the size of pipe has not been determined by the designer

3. In causation of risk, root cause analysis (RCA) is sometimes used to identify the major underlying
causes.

A. True.
B. False.
4. Which one of the following should not be included when quantifying contingency?

A. Discretionay scope items added by management

B. Cost of a delay to the critical path based on the time-related costs
C. Potential remediation upon discovery of unknown/undisclosed hazardous material
D. Cost of contractor’s remobilization resulting from an owner-caused delay to the critical path

5. A confidence level is described by the following:

A. Standard Deviation
B. The probability that the results of an analysis will be equal to, or less than, the stated amount
C. A Monte Carlo Simulation
D. Contingency percentage

PRMP Certification Study Guide 2021 62

Solutions for Problems in Section 2.1

1. A. True–taxonomy is a net benefit to the risk breakdown structure.

2. D. Piping to be installed in a plant but the size of pipe has not been determined.

3. A. True–root cause analysis is a fundamental of causation.

4. A. Discretionay scope items added by management.

5. B. The probability that the results of an analysis will be equal to, or less than, the stated amount.

PRMP Certification Study Guide 2021 63

Section 2.2 Processes and General Practices for Risk Management
Introduction
This section of the PRMP body of knowledge and Study Guide is focused on processes for risk management
(RM) as well as general process management methods, e.g., maturity models. These processes and
methods are well documented in the study references; however, a few notable summaries are included
here. The next section of the Study Guide delves into specific methods and tools applied in the RM
process.

Risk Management (RM) and Total Cost Management (TCM)

For AACE International, the integrated process for risk management is described in Section 7.6 of the TCM
Framework. The process map in Section 7.6 is shown in Figure 3 of the Study Guide introduction. This
process is focused on asset and project management, but is generically applicable to most industries and
enterprises. Risk management in Section 7.6 is a systematic and iterative process comprising four major
steps:

• Plan–to establish risk management objectives;

• Assess–to identify and analyze risk;
• Treat–by planning and implementing risk responses; and
• Control–by monitoring, communicating and enhancing risk management effectiveness.

This srudy guide attempts to make the TCM Framework, Section 7.6 risk management process compatible
with generally accepted international standards, e.g., ISO 31000 series. Improvements included
integrating it with the asset and project life cycle. Also, in keeping with cost engineering’s focus on
quantification and support of decision-making and project control, i.e., the need to put a number on the
risks, the TCM Framework, Section 7.6 process includes recycling post-treatment residual risks back
through the assessment step for contingency and related risk estimation and analysis (TCM is the only
identified process that deals directly with contingency as a critical step). PRMP candidates should begin
their risk management process study with total cost management.

Risk Management Processes

There are a variety of industry, national, and international organizations that define processes for RM,
including enterprise risk management (ERM). The International Organizational for Standardization (ISO) is
the most recognized. The ISO 31000 series of standards cover the risk management process in a way that
is universally applicable to most kinds of risks. Their guidelines can be applied throughout the life of any
organization and a wide range of activities, including strategies and decisions, operations, processes,
functions, projects, products, services, and assets.

The risk management process in ISO 31000 (Risk Management Principles and Guidelines on
Implementation) consists of the following steps and sub-steps:

• Establishing the context;

• Identification; and
• Assessment.

PRMP Certification Study Guide 2021 64

Establishing the Context
Define all the internal and external parameters that organizations should consider when they manage
risk: for internal context, PRMPs must understand the organization’s structure, policies, objectives, roles,
capabilities, and decision-making process. These parameters also include establishing the risk attitude of
the internal organization. For external context, PRMPs must identify and understand all external
stakeholders: political, legal, financial, cultural, societal, etc. and their potential influence on risk
objectives and decisions.

Identification
Once the context has been established successfully, the next step is identification of threats or potential
risks. This identification can be at the level of the source or the problem level itself.

Source analysis means that the source of risks is analyzed and appropriate mitigation measures are put
into place. The source of risk could be either internal or external to the system. Examples of the source of
risk could be inadequate or delayed funding, operational inefficiency in a certain process, differing site
conditions etc. Problem analysis, on the other hand, means analysis of the effect rather than the cause of
the risk, for example, a drop in production, delays in obtaining regulatory approvals, etc.

The choice of risk identification method varies across industry and organizational culture and takes a
variety of factors into account. Some common methods of risk identification are:

• Taxonomy-based risk identification–the possible risk sources are broken down, hence taxonomy;
a questionnaire is made best on existing knowledge, and the answers to the questions are the
risks;
• Objective-based risk identification–an organization or any business activity has certain objectives;
any activity deemed an obstacle to achieving these objectives is perceived as risk;
• Scenario-based risk identification–various scenarios, which may be alternative ways to achieving
an objective, are created; if an undesired scenario is created, a threat is perceived; and
• Common risk-check–there are certain risks common to an industry; each risk is listed and checked
on time.

Assessment
Once the risks have been identified, they are then assessed on their likelihood of occurrence and their
impact. This process can be simple, as in the case of assessment of tangible risks, or difficult, as in the
assessment of intangible risks. It can also be qualitative or quantitative; or both.

ISO 31000 is ambiguous on specific methods for the steps of the process. In terms of assessment, for
example, the only quantification method addressed in any way is the use of probability of occurrence
times impact, i.e., likelihood and consequence. This approach is the primary basis of risk screening
methods, e.g., the risk matrix, which is where most RM processes focus their assessment attention. This
approach is more commonly associated with the qualitative assessment process and is key to ranking the
risks in their hierarchical order of significance. ISO 31000 does not address the specific concept of
contingencyas applied in total cost management and only mentions that risk estimation, i.e. quantitative
assessments as described in AACE’s RPs addressing contingency estimating, needs to be done.

As an element of ERM, risk management processes may be applied at various levels of aggregation, i.e.,
for overall or business-level capital asset and project portfolios, for programs, and so on. The principles
remain the same; integration is essential.

PRMP Certification Study Guide 2021 65

Process Alignment with Objectives
The importance of well understood and communicated asset or project objectives to RM was reviewed in
the previous section. In the TCM Framework, Section 7.6, the risk management process begins with
establishing risk management objectives as part of RM planning, considering all requirements for the
project, activity, or other alternatives being evaluated. The process of eliciting requirements from
stakeholders is addressed in the TCM Framework, Section 3.1. Since risk is anything that could affect a
project objective, it is essential to get the first step right, and it is therefore highlighted in the body of
knowledge.

The project risk management (PRM) body of knowledge is predicated on the assumption that, for the
purpose of continuous project management performance improvement, the enterprise has established a
quality management strategy incorporating process management, such as the TCM Framework model.
Further, that it has included risk management capability in this process to increase the probability that all
the project management objectives will be achieved. Process governance requires assurance measures
that the risk management process is being used and is capable of meeting objectives. Risk management
process assurance leads to and often uses risk maturity models (RMM), a subset of overall system maturity
models.

Risk Maturity Models

Given the fundamental importance of process measurement to meeting objectives, various authors have
advocated risk maturity models (RMMs) since the 1990s. Dr. David Hillson’s four-level model is often
referenced with regard to project risk management maturity. The published models are generic, but to be
useful, RMMs must be specific to the process being measured, and PRMPs should have the skills and
knowledge to help establish and implement such models and potentially to act as the assessor using the
model. A cost engineering maturity model, based on Hammer’s PEMM™ (process and enterprise maturity
model), using the TCM Framework process model as a basis, including risk management, has been
developed and is proposed as an AACE Recommended Practice along with an expansion with respect to
risk management. PRMPs should be familiar with these models and references and stay attuned to
developments in this area.

Planning for Risk Management–Objectives, Policy, Responsibility

PRMP candidates will find this risk management process step defined in TCM Framework, Section 7.6 and
the AACE International Recommended Practice 72R-12, Developing a Project Risk Management Plan. A
risk management plan is often a subset of a broader project system (see TCM Framework, Section 4.1) or
project control plan (TCM Framework, Section 8.1). An example risk management plan is in appendix D of
the Study Guide. Included in planning is organizational development for risk management and the
concepts and tools for establishing and communicating roles and responsibilities, e.g., RASCI diagrams.

Risk Assessment–Identification and Causation

PRMP candidates will find this risk management process step defined in the TCM Framework, Section 7.6
and Recommended Practice 62R-11, Risk Assessment. Section 7.6, risk assessment includes several sub-
processes. The first step is risk identification followed by risk analysis (qualitative). Total cost management
also recycles post-treatment residual risks through the quantitative assessment step to estimate risk
costs, e.g., contingency, escalation, etc., for use in project planning. The principle of this process is that
risks cannot be managed or quantified that are not first identified and characterized. A key tool of risk
identification is the risk register; PRMPs must know typical content and use for the risk register. Key skills
in identification are elicitation of risks from stakeholders, including methods such as brainstorming, the

PRMP Certification Study Guide 2021 66

Delphi method, surveys, and empirical identification of systemic risks. PRMPs must be able to distinguish
risks from, causes, and effects; using a standard meta-language in risk descriptions will clearly distinguish
cause, risk, and effect. For example: due to <cause>, there is a threat/opportunity that <risk> will occur,
which may lead to <effect>. An issue or problem is a risk that has occurred or is an unplanned question or
decision that needs to be addressed by a process other than risk management. It is also important to
distinguish risks from decsions that must be made and actions that will be taken. These are part of normal
project management functions and, while their outcomes may subsequently cause a risk, they should not
be included in a risk register, per se.

The next step of quantification focuses on the probability of occurrence and the effect. This is followed by
risk treatment, which tends to focus on causes (or risk drivers); analysis of cause is therefore an important
assessment step. A key tool for analyzing causes includes the Ishikawa diagram, which is used to illustrate
how various causes and sub-causes create a specific effect; it is also called cause-and-effect diagram or
fishbone diagram. Some refer to this class of methods as root cause analysis (RCA). These tools can be
used in forecasting potential causes, as well as in studying causes of incurred risks to aid future risk
management.

Risk Assessment–Analysis
After risks are identified and characterized, they are analyzed so as to guide treatment (qualitative) or to
be incorporated into plans and budgets (quantitative). PRMP candidates will find this RM process step
defined in the TCM Framework, Section 7.6. The qualitative approaches, e.g., risk screening or ranking
and the risk matrix, are covered in Recommended Practice 62R-11, Risk Assessment. The quantitative
approaches, e.g., contingency, escalation, etc., are covered in a series of Recommended Practices
discussed later in the Study Guide section on specific RM methods. Qualitative analysis is focused on
screening and ranking the identified risks for treatment. Enterprises need to focus their limited resources
on the risks that matter and with the greatest significance. The ranking or scoring is typically done using
the expected value concept (probability times impact equals the expected value of a risk). The value or
score of a risk is a function of its probability of occurrence and its impact if it occurs (the score does not
need to be a direct multiplication). This scoring is often done by developing a risk matrix where probability
ranks are on one axis and impact ranks on the other. Risks that have both high probability and high impact
will be prioritized for treatment. A Tornado diagram is often used to illustrate ranking.

The risk matrix treats each risk separately; however, risks may be related and their impacts may
compound. A Venn diagram, in this case, may be used to understand better the relationship and
interaction of risks. A risk that individually may score low may be found to interact with many other risks
and hence deserve treatment.

Quantitative analysis is more complex than qualitative analysis. For one thing, the outcome of quantitative
analysis should be probabilistic so that decision-makers can understand the uncertainty and make
informed judgments in selecting values for budgeting or planning. One general approach is to apply the
expected value concept (probability times impact) in which risks, their probability and impacts on cost
and time, are built into a model to which Monte Carlo simulation (MCS) is applied. There are other
methods, however, such as parametric estimating and critical path method (CPM) models with MCS that
can be applied as appropriate to the type of risk and stage of project scope development.

PRMP Certification Study Guide 2021 67

Risk Treatment/Response Planning
After risk assessment, the risk treatment step is performed. This risk management process step is defined
in the TCM Framework, Section 7.6 and covered in Recommended Practice 63R-11, Risk Treatment.
Section 7.6 summarizes the elements of treatment:

• Evaluating all appropriate response strategies;

• Selecting an appropriate risk-response plan strategy (or combination of strategies);
• Developing action items in support of the selected response;
• Validating proposed actions with those assigned team members to be acted upon, including dates
for implementation;
• Ascertaining post-response targets and gains;
• Ascertaining response plan resource requirements;
• Updating project schedule or budget if the anticipated treatment value gain is positive; and
• Identifying any secondary threats or opportunities that may arise from the response.

Opportunities may be referred to a value management process for focused treatment, possibly using
value improving practices to capitalize on them. From a proactive perspective, this is analogous to
planning corrective actions in project control change management. Response planning and project control
planning should be integrated, particularly when contingency or fallback plans are put in place for
potential responses to residual risks if they occur.

PRMPs should understand the typical response strategies for threats, listed here in order of preference:

• Avoid;
• Reduce;
• Transfer; and
• Accept.

Response strategies for opportunities, listed in order of preference:

• Exploit;
• Share;
• Enhance; and
• Accept.

A particularly challenging response strategy is to transfer a threat to (or share an opportunity with) a third
party. This usually is done through insurance (see enabling knowledge) or contractual transfer. While the
procurement/contracting functions may lead this effort, PRMP candidates should be familiar with transfer
practices such as those covered in Recommended Practice 67R-11, Contract Risk Allocation.

Risk Control (Including Communication and Monitoring)

This risk management process step is defined in the TCM Framework, Section 7.6. The activities in this
step are highly integrated with project control and are sometimes led by that function to minimize
organizational complexity during project execution. This step is primarily one of monitoring risks during
execution and ensuring they get on-going attention. In addition to monitoring through project control
assessment, the process may include periodic or special risk control meetings to facilitate ongoing risk
identification and analysis. If an identified risk is observed to have occurred, or is forecast to be imminent,

PRMP Certification Study Guide 2021 68

contingency or fallback plans may be implemented. If an unexpected risk occurs, workarounds may need
to be implemented, possibly including rework. Changes, rework, and workarounds resulting from risk
impacts and responses are managed using the change management process (see TCM Framework,
Section 10.3), including contingency management. In some cases, full recycling of a project plan through
risk planning, assessment, treatment, and control may be required to address major changes, such as
when project plan re-baselining is required.

During risk control, an important objective and challenge is to communicate risk information to the project
stakeholders and team. Risk management reporting, integrated with project control reporting, helps
maintain discipline and vigilance and actively promotes risk awareness throughout the asset and project
life cycle. At the end of the project, or periodically as appropriate, risk information and lessons are
captured in historical data or knowledge management processes to improve the process continually and
to support tool building, e.g., empirical models, checklists, etc.

PRMP Certification Study Guide 2021 69

Terms to Know
• Brainstorming;
• Cause and effect (and cause and effect/Ishikawa diagram);
• Contingency planning (fallback plans);
• Delphi method;
• Enterprise risk management (ERM);
• Expected value (probability times impact);
• ISO and ISO 31000 probability vs. impact matrix (risk matrix);
• Probability of occurrence;
• Process maturity model;
• Qualitative risk analysis;
• Quantitative risk analysis;
• RASCI;
• Residual risk;
• Risk action owner;
• Risk allocation;
• Risk assessment;
• Risk analysis;
• Risk communication;
• Risk control ;
• Risk drivers;
• Risk identification;
• Risk impact;
• Risk management process;
• Risk maturity model (RMM);
• Risk monitoring;
• Risk owner;
• Risk management planning (and plan);
• Risk register;
• Risk response;
• Risk review;
• Risk treatment;
• Risk treatment response strategies for threats (avoid, reduce, transfer, accept);
• Risk treatment response strategies for opportunities (exploit, share, enhance, accept);
• Tornado diagram;
• Venn diagrams; and,
• Workarounds.

PRMP Certification Study Guide 2021 70

Key Points for Review

• Define the risk management process (from both ISO and AACE perspectives);
• Assess/assure risk management process maturity using maturity models;
• Define contingency and fallback plans and workarounds as used in the risk management (RM)
process;
• Perform risk elicitation using the various typical methods;
• Analyze cause and effect for risk and understand risk meta-language;
• Develop a risk register and characterize identified risks for management purposes;
• Distinguish risks from decisions, actions, issues, and concerns;
• Apply the methods of qualitative and quantitative risk analysis in the appropriate steps of risk
management (RM);
• Determine risk ranking using the appropriate expected value and risk matrix concepts and
diagrams;
• Develop a risk control plan as part of risk management (RM) planning and integrated with project
control planning;
• Identify risk analysis scenarios and its use in risk management (RM);
• Identify the typical risk response strategies and their order of preference; and
• Identify the main elements of contract risk allocation

PRMP Certification Study Guide 2021 71

Sample Questions for Section 2.2

1. The industry practice or formula for ranking risk is: frequency of occurrence times impact.

A. True.
B. False.

2. Which of the following are the risk-response strategies for threats, in their order of preference?

A. Assess risk, transfer risk, reduce risk, and transfer risk.

B. Avoid risk, transfer risk, reduce risk, and transfer risk.
C. Avoid risk, transfer risk, reduce risk, and treat risk.
D. Avoid risk, transfer risk, reduce risk, and transfer risk.

3. Response strategies for opportunities, listed in order of preference are:

A. Analyze, share, enhance, and accept.

B. Exploit, share, mitigate, and accept.
C. Exploit, share, enhance, and accept.
D. Exploit, report, enhance, and accept.

4. In risk analysis, "expected value" can be used as a means of determining the risk weighted outcome.
The formula for expected value is:

A. Desired outcome multiplied by the impact if it occurs

B. Desired outcome divided by the impact if it occurs
C. Probability of occurrence multiplied by the impact if it occurs
D. Probability of the outcome divided by the impact if it occurs

PRMP Certification Study Guide 2021 72

Solutions for Problems on Section 2.2

1. A. True. Frequency, occurrence, and impact are the basis of DRM.

2. D. Avoiding risk, transferring risk, mitigating risk, and transferring risk.

3. C. Exploit, share, enhance, and acceptance.

4. C. Probability of occurrence multiplied by the impact if it occurs

PRMP Certification Study Guide 2021 73

Section 2.3 Specific Risk Management
Introduction
This area of risk management (RM) body of knowledge is focused on methodologies and tools commonly
applied in the RM process covered previously in the Study Guide. Many of these methods are described
in AACE’s Recommended Practices. The following highlights are summarized here as a guide to study,
however, there are many more methods and tools (and deeper skills and knowledge) needed to support
a robust project management/risk management process in Total Cost Management, and PRMPs are
expected to know and understand those tools most commonly used and covered in industry literature.

• Risk assessment
1. cause/effect analysis;
• Risk treatment
1. contingency planning/contingency response;
• Quantitative risk analysis
1. contingency (cost and schedule) and reserves;
2. escalation, inflation, currency;
• Risk control
1. change management (integration with RM); and
2. forecasting (integration with RM).

Risk Assessment–Cause/Effect Analysis

PRMPs must have applications skills in the commonly used cause/effect analysis methods. The Ishakawa
or fishbone diagram tool was developed for quality improvement. It helps visualize sources of variation
and their relationships. It starts with grouping causes into major categories of sources of uncertainty
similar to the way bones of a fish branch from the spine, where the interest effect is at the end of the
spine. The primary branches, or major categories, are usually systemic in nature; the main categories vary
depending on scope of the system affected and its influential conditions and drivers. For example,
organization or people, technology or equipment, processes, environment, etc. Secondary branches can
be added for more detail sources within a category. Affinity diagrams can be used to capture and sort
large input into groups, e.g., as might result from a brainstorming session. Figure 8 provides an example
from manufacturing, in which the bottom of the figure indicates there are many types of diagrams,
depending on industry or scope of the problem.

PRMP Certification Study Guide 2021 74

Figure 8―Example of Fishbone Diagram

Risk Treatment–Contingency Planning/Contingent Response

Based on research, industry practices for improved asset and project scope definition are improving, e.g.,
phase-gate scope development. Note: in some industries such as construction, this phase-gate scope
development is akin to design development, i.e. feasibility, conceptual, preliminary, and final design.
Phase-gate systems often state that only one scope alternative should be reviewed at the full-funds
sanction gate, which is sometimes taken too literally; it does not mean that there cannot be
predetermined alternative plans in place to respond to potential risks. The application of contingent plans
is underused. PRMPs should be prepared to communicate and justify the need for contingency planning
and help ensure the integration of risk management planning, treatment, and project control planning to
make it happen.

Quantitative Risk Analysis–Contingency (Cost and Schedule) and Reserves

The principles of practice, and the primary methods for cost and schedule contingency analysis, have been
documented in AACE Recommended Practices. PRMPs should have application knowledge for these
practices and be able to describe the limitations and benefits of each. In general, the recommended
methods are probabilistic, begin with identification of risk (and quantification of risk), employ empiricism,
employ PRM expertise, and integrate cost and schedule analysis. The general categories of methods are:

• Parametric (primarily for systemic risk);

• Range estimating with Monte Carlo simulation (MCS);
• Expected value with MCS; and
• CPM schedule with MCS.

PRMP applicants must know the principles of application of MCS in commercial software to apply these
methods, but the examination does not include software-specific questions. Special consideration for
CPM schedule models used for risk analysis are also important, e.g., appropriate levels and use of
schedule hammocks, network quality diagnostics, dynamic risks (static vs. dynamic logic), use of
conditional branching, merge bias, the role of float, use of buffers, etc.).

PRMP Certification Study Guide 2021 75

The concept of reserves was discussed earlier in the Study Guide. PRMPs must understand risk cost and
time allocation alternatives (contingency vs. reserves) for budgeting and planning for control, what drives
them, and how they are applied, including roles, responsibilities, and authority for control.

Quantitative Risk Analysis–Escalation, Inflation, Currency, and Estimating Accuracy

The principles of practice and the primary methods for escalation estimating have been documented in
AACE Recommended Practices. PRMPs should have application knowledge for these practices and be able
to describe the limitations and benefits of each. The recommended methods use forecast price indices for
specific services and commodities; are probabilistic for longer projects; apply PRM expertise but
incorporate the input of economics experts and econometric modeling; and consider the realities of the
applicable markets, e.g., using procurement and contracting input.

PRMPs must understand the basic concepts of escalation and inflation. It is also important to understand
estimating accuracy in the context of AACE’s Classes of Estimates and its relationship to contingency. The
quantification of uncertainty in currency exchange rates is similar to escalation estimating; rather than
use price indices, however, indices for relative currency value are applied to the cash streams for items
paid and received in alternate currencies. PRMPs must be able to communicate with finance,
procurement, and contracting relative to risk response strategies, e.g., hedging.

Risk Control–Change Management and Forecasting (Integration with Risk Management)

During project execution, the processes of change management, forecasting, and risk control must be
integrated. This requires PRMPs to understand change management and forecasting (see: TCM
Framework, Sections 10.3 and 10.2). PRMPs must understand the organizational concepts and issues
involved with establishing and communicating roles and responsibilities effectively for risk control as part
of overall project control (and related methods such as work breakdown structure [WBS] and earned value
management [EVM]) to avoid conflict or miscommunication of risk management information.

Terms to Know
• Ishikawa/fishbone/cause-effect diagramming;
• Affinity diagramming;
• Change management;
• Classification–estimates and schedules;
• Contingency;
• Contingency planning;
• Contingency estimating method taxonomy:
1. Parametric;
2. Range estimating;
3. Expected value with MCS;
4. CPM schedule with MCS;
5. Systemic vs. project-specific risks;
• Contingency response;
• Control planning;
• Conditional branching;
• Escalation;
• Risk estimation;
• Fault tree analysis (FTA);
• Float/buffer;

PRMP Certification Study Guide 2021 76

 • Inflation;
• Integration;
• Internal and external risks;
• Monte Carlo simulation (MCS);
• Merge bias;
• Price indices;
• Probabilistic;
• RASCI;
• Reserves;
• Schedule levels; and
• Work breakdown structure (WBS).

Key Points for Review

• Be able to apply the fundamental contingency estimating methodologies;
• Be able to explain the fundamental escalation estimating methodologies
• Be able to apply the fundamentals of MCS in a risk quantification model;
• Be able to consult on application of risk funding (contingency, reserves, allowances, etc.) in
budgets and control systems; and
• Understand change management and forecasting process and methods and their integration with
risk management.

PRMP Certification Study Guide 2021 77

Sample Problems for Section 2.3

1. The risk management process includes all the following steps except:

A. Risk identification.
B. Risk assessment.
C. Risk analysis.
D. Risk elimination.

2. Projects can control all the following risks except:

A. Design errors because of untrained personnel.

B. Price changes because of market forces.
C. Cost overrun because of excessive changes.
D. Ineffective contractor due to flawed selection process.

3. To manage project risks effectively, the elements of the work breakdown structure (WBS) may have
to be decomposed to lower levels to align risk events with individual WBS elements.

A. True.
B. False.

4. All projects should have formal risk assessments performed.

A. True.
B. False.

5. Which one of the following is a practical approach to managing risks for a small or less complex
project:

A. Do nothing.
B. Formally assess risks.
C. Informally assess risks.
D. Develop responses only when risks actually happen.

PRMP Certification Study Guide 2021 78

Solutions to Problems in Section 2.3

1. D. Risk elimination–risk mitigation is the final step of the risk management process. A risk
mitigation plan could include avoidance, reduction, transfer, hedging, and insurance. It is
neither practical nor cost effective to eliminate all project risks.

2. B. Price change–market forces are an external risk. A project cannot control the occurrence
of an external risk but can mitigate the impact if such risk occurs.

3. A. True–If an earned value management (EVM) system is used during risk assessment, the
team may determine that the work breakdown structure (WBS) needs to be decomposed
to lower levels to align risk events with individual (WBS) elements to help monitor and
manage risk events and responses.

4. B. False–All projects have some limitation on resources (money or people). To manage

project risk, it is a good practice to perform risk assessment. Depending on the project
size and complexity, however, it is not always practical to perform a formal risk
assessment.

5. C. Informal risk assessment–For small or less complex projects, an informal risk assessment
might be the right approach for the project manager to discuss with stakeholders to
surface potential risks and to develop a detail task-outline to manage the impact of risk
events.

PRMP Certification Study Guide 2021 79

 Chapter 3.0 Other Important Items
Introduction
This Study Guide has addressed Project Risk Management (PRM) terms and concepts and the processes
and practices of risk management. PRM, however, does not work in a vacuum, and PRMPs should be able
to work with all the other processes involved in asset and project management during their life cycles.
These processes are all covered in AACE’s Total Cost Management Framework; those most closely
integrated with risk management, Section 7.6, which is covered here. Definitions and descriptions of other
processes are not repeated in this guide; candidates can review them in the reference documents. This
Study Guide highlights elements of processes and practices most critical to and that interface most heavily
with PRM. The Study Guide also highlights some of the more significant project risks challenges that
PRMPs will face in performing PRM in interaction with all the other processes.

PRMP Certification Study Guide 2021 80

Section 3.1 Total Cost Management
Introduction
“Total Cost Management is the effective application of professional and technical expertise to plan and
control resources, costs, profitability and risks. Simply stated, it [total cost management] is a systematic
approach to managing cost throughout the life cycle of any enterprise, program, facility, project, product,
or service. This [managing cost] is accomplished through the application of cost engineering and cost
management principles, proven methodologies and the latest technology in support of the management
process.” This is AACE International’s definition of total cost management as it reads in its constitution.

Put another way, total cost management (TCM) is the sum of the practices and processes that an
enterprise uses to manage the total lifecycle cost-investment in its portfolio of strategic assets. It is also
the process within which the practices of cost engineering and project risk management (PRM) are
applied. In TCM, cost is any resource invested in an asset through projects―be it people, material, time,
or money.

PRMPs will interact with or be influenced, to some extent, by all the processes of TCM in the performance
of the project risk management (PRM) process and practice. Figure 9 shows how comprehensive TCM and
PRM are in terms of their object-focus (products, services, assets), work-focus (projects, operations,
manufacturing), and resource-focus (people, time, money, materials). TCM is a very broad body of
knowledge.

Figure 9—The Place of Total Cost Management (TCM) in the Cost Management Spectrum

The TCM Framework is a process-model that uses the basic concepts of quality and process management.
PRMPs should see processes as a flow of input and output, with mechanisms that transform input to
output. The TCM Framework is a map of these processes and reflects the mechanisms and activities by
using them as tools, techniques, or sub-processes in organized parts, chapters, and or sections.

PRMP Certification Study Guide 2021 81

The TCM Framework chapters, as shown in Figure 10, are grouped into basic or overarching processes,
functional or working processes for project control, functional processes for strategic asset management,
and enabling processes for TCM.

Figure 10―Structure of the TCM Framework Text and Chapters

The Basis of the TCM Process Model—Plan-do-check-assess (PDCA)

The model for the TCM process and each sub-process, including project risk management is based upon
the plan-do-check-assess (PDCA) management or control cycle, which is also known as the Deming or
Shewhart cycle. The PDCA cycle is a generally accepted, quality driven, continuous-improvement
management model. In this cycle, “check” is generally synonymous with “measure.” “Assess” is
sometimes substituted for a form of “act” as in “to take corrective action.” The PDCA cycle is the
framework for TCM because it is time-proven and widely accepted as a valid management model, it is
quality driven, and it is highly applicable as one of the cost management processes, which are cyclical by
nature.

The PDCA cycle, shown in Figure 11, in the TCM Framework includes the following steps:

• Plan–plan asset solutions or project activities;

• Do (i.e., execute)–initiate and perform the project or project activities in accordance with the
plan;
• Check (i.e., measure)–making measurements of asset, project, or activity performance; and
• Assess (i.e., act)–assessing performance variances from the plan and taking action to correct or
improve performance to bring it in line with the plan or to improve the plan.

PRMP Certification Study Guide 2021 82

Figure 11 – Plan-Do-Check-Assess Cycle

The basis PDCA above is elaborated in TCM in a hierarchy of working process maps. At the highest level,
the strategic asset management (SAM) process deals with management of assets and projects within the
portfolio of an enterprise. This is primarily the realm of the asset owner whose major decision under
uncertainty is to decide upon alternative investment opportunities. In practice, this is usually referred to
as capital management. Once an investment decision is made, a project is implemented to be realized as
part of a project system. The TCM process for this is called project control (PC). In practice, this is usually
referred to as project management, usually working within a project system. During this process,
contractors and other suppliers take more prominent roles. Their major decision is usually whether and
how to bid on project work. At a working level there are many processes such as project risk management
(see TCM Framework, Section 7.6); this process is applied in project control. Owners’ and contractors’
TCM responsibilities include processes, each of which further include risks to be managed. In the area of
risk management, for example, decisions on risk funding (contingency) and risk responses must be made
and analyzed.

PRMP Certification Study Guide 2021 83

Section 3.2 Procurement Planning (Including Contract Management)
Introduction
Enabling knowledge of contracting is covered in Chapter 1 of this Study Guide. This section expands on
that subject by highlighting the process of procurement planning, with an emphasis on contracts, and the
integration of project risk management (PRM) with these processes, as covered in TCM Framework,
Section 7.7. This integration includes topics such as working with contracting parties in PRM, e.g., in risk
identification and analysis, risk transfer, and allocation (treatment), and control.

Procurement planning, in TCM Framework, Section 7.7, ensures that information about resources, e.g.,
labor, material, etc., as required for asset management and project control, is identified for, incorporated
in, and obtained through the procurement process (including contracting). TCM does not explicitly include
the procurement process itself; it only addresses the TCM (and PRM) interface with procurement.

The term procurement is used here in the broad sense of the collective functions that obtain labor,
services, materials, tools, and other resources. Asset owners usually obtain most of the labor, materials,
and other resources used in projects from outside parties; these typically include vendors and fabricators
for materials and contractors for labor.

An initial area of PRM concern is that the other parties generally have different objectives, e.g., their own
profit, and different values regarding society, ethics, HS&E, and so on. They are also stakeholders to some
extent. Since risks are things that affect objectives, the quality of the alignment of all parties―and
potential conflict of interest―is a systemic risk. At a strategic level, the owner may establish relationships
with key suppliers and contractors to support project work, in part as a risk treatment strategy. The
process of supply chain management may address enterprise-wide strategy for both asset and project
management.

The relationship of suppliers and contractors with the project team, or between suppliers and contractors
involved in the project, is defined by contracts, purchase orders, agreements, or other documents. All of
these are legal documents, meaning the legal function must be involved in the process and associated
PRM. The goal of procurement planning is to ensure that labor, materials, tools, and consumables that
are obtained from or through suppliers are obtained in a way that optimally achieves project objectives
and requirements. The terms and quality of the contract, the interaction of the parties as defined in them,
and each party’s knowledge and understanding of the contract is another significant systemic risk and can
become a legal risk (dealt with later in the forensic processes) if things go poorly, i.e., claims and disputes
resolution.

Procurement involvement begins in the scope development process (see TCM Framework, Section 7.1)
when the work breakdown structure (WBS), organization breakdown structure (OBS), work packages, and
execution strategy are developed. The execution strategy identifies general approaches through which
the work will be performed including the role of suppliers and contractors, it involves determining the
type of contracts to be used for various elements of the work. Each contract type, e.g., lump sum, unit
price, time and materials, cost-plus, etc. and project delivery method such as design-bid-build, design-
build, as well as other alternative delivery methods such as a public-private-partnership (P3), have specific
risk management implications; AACE’s Recommended Practice 67R-11 addresses contract risk allocation.

PRMP Certification Study Guide 2021 84

The roles and responsibilities of owner vs. contractor must be considered in PRM plans and their
participation in project activities, e.g., who prepares which plans and to what level, who participates in
risk analyses sessions, etc., who interfaces, who reports. Contractors bring strong competencies to the
table for execution activities; however, organizational complexity is a known systemic risk. If new or
proprietary technology is part of the scope, the parties will be concerned with confidentiality as a risk.
Contractors and consultants can bring objectivity, impartiality, and independence to assurance processes
and to decision and risk analyses. During project control, issues such as ownership and use of contingency
and reserves in cost and schedule are significant procurement-related PRM concerns.

Terms to Know
• Procurement;
• Contracting;
• Contracts/agreements;
• Conflict of interest;
• Common sources of resources–contractors, vendors, fabricators, consultants, etc.;
• Basic types of contracts (see section 1.4);
• Contract risk allocation (risk treatment–transfer/sharing); and

Key Points for Review

• Be able to describe the procurement and contracting processes as they apply to total cost
management (TCM) in both asset planning and project planning;
• Be able to describe significant interactions of project risk management (PRM) and procurement
and contracting processes;
• Be able to describe risk drivers affected by procurement practices, i.e., systemic, legal, complexity,
intellectual property, conflicts of interest, etc.;
• Be able to describe the various major contract types and their risk implications; and
• Be able to describe the practices of risk treatment with respect to contracts, i.e., contract risk
allocation.

PRMP Certification Study Guide 2021 85

Sample Problems for Section 4.7

1. Which of the following elements of a project does a subcontractor consider most useful in
determining scope?
A. Contract.
B. Material.
C. Labor rates.
D. Overhead.

2. What would determine the detail of the data incorporated by the subcontractor in its performance
measurement system?
A. Type of contract and value.
B. Project scope, schedule, and budget.
C. Customer.
D. Type of subcontractor.

3. When reviewing the subcontractor reporting requirements, the prime or general contractor can
dictate the structure and format for reporting.
A. True.
B. False.

4. Describe the difference between contract types and delivery methods.

PRMP Certification Study Guide 2021 86

Solutions to Problems for Section 4.7

49. A. The subcontractor considers the contract most useful for defining scope of a project.

50. B. The subcontractor must have the project scope, schedule, and budget defined by the
subcontract.

51. A. If it is not dictated to the subcontractor, the data might not be provided in a required
and functional format; to preclude possible claims, the subcontract should be relatively
detailed in specifying data, information, formats, and frequency of reporting.

52. D. A detailed scope of work statement.

53. Contracts define the financial terms of a relationship between an owner and a contractor,
while the delivery method describes the method of management the contractor will use to
perform the work.

PRMP Certification Study Guide 2021 87

 Appendices

PRMP Certification Study Guide 2021 88

Appendix A: Project Risk Management (PRM) Terms and Glossary of Special
Interest to Risk Management Professionals

For most current and additional definitions of these PRM terms and cost engineering, PRMP candidates
are directed to the most recent version of AACE International’s Recommended Practice 10S-90, Cost
Engineering Terminology, available online at www.aacei.org/technical/rp/10S-90.pdf.

Allowances: Allowances are additional resources included in an estimate to cover the cost of known but
undefined requirements for an individual activity, work item, account, or subaccount.

Best Estimate: See the definition of most-likely value.

Biases: Biases are a lack of objectivity based on the enterprises or individual's position or perspective.
Systematic and predictable relationships between a person's opinion or statement and his/her underlying
knowledge or circumstances. There may be system biases and individual biases.

Condition (Uncertain Condition): Condition is any specific identifiable circumstance that might affect the
outcome of the project.

Confidence Level: Confidence level is the probability 1) that results will be equal to or more favorable
than the amount estimated or quoted, or 2) that the decision made will achieve the desired results, or 3)
that the stated conclusion is true. Confidence level may also be expressed as equal to or less favorable
than; if this is the case, it should be so noted. Without such a note, the definition shown is assumed.

Contingency: Contingency is an amount added to an estimate to allow for items, conditions, or events for
which the state, occurrence, or effect is uncertain and that experience shows will likely result in additional
costs. Contingency is typically estimated using statistical analysis or judgment based on past asset or
project experience and usually excludes: 1) major scope changes such as end-product specification,
capacities, building sizes, and location of the asset or project, 2) extraordinary events such as major strikes
and natural disasters, 3) management reserves, and 4) escalation and currency effects. Some of the items,
conditions, or events for which the state, occurrence, and/or effect is uncertain include, but are not
limited to, planning and estimating errors and omissions, minor price fluctuations (other than general
escalation), design developments and changes within the scope, and variations in market and
environmental conditions. Contingency is generally included in most estimates and is expected to be
expended.

Cumulative (Probability) Distribution: Cumulative distribution is a curve whose vertical height is the
probability of an amount being equal to or less than the value on the horizontal axis; the vertical axis goes
from 0 to 100 percent (or 0.00 to 1.00). The confidence level may also be expressed as equal to or less
favorable. If such is the case, it should be noted; without a note, the definition shown is assumed. See
probability distribution.

Dependent Variable: Dependent variable is an event or condition whose impact or probability of

occurrence is not certain and depends in some way on another variable (see independent variable).

Distribution Curve: See definition of cumulative (probability) distribution.

PRMP Certification Study Guide 2021 89

Event (Uncertain Event): Event is an incident or occurrence whose nature or result could be a threat or
opportunity to the outcome of the project. See condition (risk condition).

Expected Value (Mean): Expected value in risk analysis is the product of probability times impact, i.e., a
risk-weighted measure of impact. In statistical usage, expected value is synonymous with the mean.

Frequency Distribution: See definition of probability distribution.

Independent Variable: Independent variable is an event or condition whose amount or probability is not
certain, but which does not depend in any way on the value or probability of any other event or condition.
See dependent variable.

Kurtosis: Kurtosis is a measure of the shape of a distribution curve, the higher the kurtosis value, the more
peaked the distribution. See skew.

Latin Hypercube: Latin hypercube is a stratified random sampling technique similar to the Monte Carlo
method (simulation), which converges with fewer samples (see Monte Carlo simulation).

Mean: Mean is the sum of all values divided by the number of items in the group; mean is also known as
the expected value and as the weighted average.

Median: Median is the value of the middle item in a list of numbers that have been sorted by amount. If
there is an even number of items, it is the simple average of the values of the two middle numbers in the
list.

Mode: See definition of most-likely value.

Monte Carlo Simulation: A computer sampling technique based on the use of pseudo-random numbers
that selects samples for a simulation of a range of possible outcomes. See Latin hypercube.

Most Likely Value: Most-likely value in risk analysis usually refers to the mode of a distribution. If the
distribution is multimodal, uniform, or complex, this may express the estimator’s judgment. See best
estimate.

Most Probable Amount: Most probable amount is an ambiguous term that frequently refers to the most
likely or means value but sometimes refers to the mode. It is important to ascertain what is meant by this
term in each case that is used. See most likely value.

Normal Curve: Normal curve is a special bell-shaped probability distribution curve that is typical of totally-
random events with normal frequency for all possible values in the range. The characteristics of a normal
curve include that the mode, mean, and median all have the same value, which splits the area of the
probability distribution curve in half and occurs at the 50 percent point of the cumulative distribution
curve; there is no skewness, the curve is perfectly symmetrical; and the area under the curve is related to
the standard deviation whereby:

• N is the number of standard deviations;

• The range is the mean ±N standard deviations;
• A, the area under the curve, is the percent of the total area of the probability distribution curve
that is in the portion of the curve within the range; and

PRMP Certification Study Guide 2021 90

 • C, the confidence level, is the probability that the observed value will be equal to or less than the
value of the mean +N standard deviations.

Opportunity: Opportunity is an uncertain event that could improve the results or improve the probability
that the desired outcome will happen. See risk, threat, uncertainty.

Overrun (Underrun): Overrun is an underestimation of the actual costs of work performed to date relative
to the value of the work performed; if the actual costs are less than work performed to date, it is an
underrun. See probability of underrun (or overrun).

Probability: Probability is a measure of how likely a condition or event is to occur. It ranges from 0 to 100
percent (or 0.00 to 1.00).

Probability Distribution: Probability distribution is a curve whose vertical height represents the
probability of the amount shown on the horizontal axis occurring (see cumulative distribution). The
probability distribution shown is skewed to the high end, which is typical for project cost and schedule
curves (see skew and normal distribution).

Probability of Overrun/Underrun: Probability of over- or underrun is the chance, in risk analysis and
contingency estimating, that the cost or time will be less (underrun) or more (overrun) than a given cost
or time from the distribution of outcomes of the risk analysis model.

PRMP Certification Study Guide 2021 91

Probabilistic Risk Assessment: Probabilistic risk assessment is a quantitative process used to evaluate
risks in a way that provides probabilistic information.

Qualitative Risk Analysis: Qualitative risk analysis is used to screen risks wherein risk probabilities of
occurrence and impacts are expressed narratively, or in ranked categories of severity, which typically
incorporates the use of a risk matrix. See quantitative risk analysis, risk analysis, risk matrix.

Quantitative Risk Analysis: Quantitative risk analysis is used to estimate a numerical value, usually
probabilistic, on risk outcomes wherein risk probabilities of occurrence and impact values are used
directly, rather than expressing severity narratively, or by ranking, as in qualitative methods. See
qualitative risk analysis, risk analysis.

Range: Range is the absolute difference between the maximum and minimum value in a set of values, or
some stated confidence interval; the simplest measure of the dispersion of a distribution. See accuracy
range.

Range Estimating: Range estimating is a risk analysis technology which combines Monte Carlo simulation,
focus on a few key variables, and heuristics to rank critical risk elements. This approach is used to establish
the range for the total project estimate and define how contingency should be allocated among the critical
elements.

Range of Accuracy: Range of accuracy is an expression of an estimate’s predicted closeness to final actual
costs or time. It is typically expressed as high/low percentages by which actual results will be over and
under the estimate along with the confidence interval these percentages represent.

Regression: Regression is a functional relationship between two or more variables empirically determined
from data and used to predict the value of one of the variables when given value(s) of the other variables.

Reserves: Reserves are a portion of contingency held in reserve by management to be released only if
needed to complete the project. See contingency.

RBS: An acronym for Risk Breakdown Structure

Risk: 1) An ambiguous term that can mean all uncertainty (threats + opportunity), downside uncertainty
(threats), the net impact or effect of uncertainty (threats - opportunities); the convention used should be
clearly stated to avoid misunderstanding. 2) Probability of an undesirable outcome. 3) As used in total
cost management, an uncertain event or condition that could affect a project objective or business goal.
See: opportunity, event, condition (uncertain), threat, and uncertainty.

Risk Analysis: Risk analysis is a risk management process step (part of risk assessment) and methodology
for qualitatively and/or quantitatively screening, evaluating, and otherwise analyzing risks to support risk
treatment and control. See risk management.

Risk Assessment: Risk assessment in TCM is a risk management process step, which includes the
identification and analysis of risks.

Risk Breakdown Structure: Risk breakdown structure is a framework or taxonomy to aid in risk
identification and for organizing and ordering risk types throughout the risk management process. See
prompt list.

PRMP Certification Study Guide 2021 92

Risk Control: Risk control is a risk management process step that includes the implementation of the risk
management response plan.

Risk Management: Risk management is a process for managing asset and project risks. The process in
TCM includes risk planning, risk assessment, risk treatment, and risk control.

Risk Management Plan: The risk management plan is a process for carrying out risk assessment, risk
treatment, and risk control efforts and is established by the asset planning or project team.

Risk Mitigation: Risk mitigation is an ambiguous term that typically includes any risk treatment action to
reduce, transfer, or eliminate a threat. See risk treatment, risk response.

Risk Sources: Risk sources are an ambiguous term to describe categories used in risk identification and
risk breakdown structures that describe process steps, stakeholders, organizational entities,
environments, or other origins of risk causation. See risk taxonomy.

Scenario: Scenario is a description of specific events and conditions and their probable outcomes; they
are usually limited to likely or probable vs. all possible scenarios. Frequently, most-likely, best-case, and
worst-case scenarios are used to define the most probable outcome and the range of outcomes.

Scenario Analysis: Scenario analysis is methods to assess a range of events, conditions, and outcomes
employing specific scenarios; an alternative to simulation methods for assessing ranges (sensitivity
analysis). See range, scenario, and simulation.

Sensitivity: Sensitivity is the relative magnitude of the change in one or more elements of an engineering
economy, estimate, schedule, risk, or other planning analysis that will reverse a decision among
alternatives. More generally, sensitivity is the degree to which a change in an element of a model affects
the outcome.

Simulation: Simulation is the application of a physical or mathematical model to observe and predict
probable performance of the actual item or phenomenon to which it relates. See modeling, Monte Carlo
simulation (method), and Latin hypercube method.

Skew: Skew is a measure of the shape of a probability distribution; the more skewed the distribution, the
greater the asymmetry. A skewed distribution has more values on one side of the peak (mode) than on
the other side, and one tail of the curve is usually longer than the other. See kurtosis.

Standard Deviation: Standard deviation is the most widely used measure of dispersion of a probability
(frequency) distribution. Standard deviation is calculated by summing squared deviations from the mean,
dividing by the number of items in the group, and taking the square root of the quotient; it is the square
root of the variance. See variance and normal curve.

Tactical Risk: Tactical risk is a risk for which the potential impact does not significantly threaten an overall
project objective or have a significant potential impact on the enterprise, portfolio, or other higher
objectives or plans beyond the project level. See strategic risk.

Threat: Threat in TCM risk management is an uncertainty that, if it occurs, will have an adverse or
downside impact on an objective (or objectives). In some uses (but not all), risks are considered
synonymous with threats.

PRMP Certification Study Guide 2021 93

Uncertainty: Uncertainty is 1) the total range of events that may happen and produce risks (including both
threats and opportunities) that affect a project (uncertainty = threats + opportunities), and 2) all events,
both positive and negative, whose probabilities of occurrence are neither 0 percent nor 100 percent.
Uncertainty is a distinct characteristic of the project environment. See opportunity, event, condition
(uncertain), risk, threat.

Variance: Variance is the difference between what was originally expected and what actually happened.
See schedule variance, cost variance.

PRMP Certification Study Guide 2021 94

Appendix B: AACE International Canons of Ethics

AACE members and those certified by AACE International agree to be bound by the terms of the AACE
International Canons of Ethics, a criterion that states all individuals will practice their profession in a
manner that meets fundamental ethical standards. The Canons of Ethics can be found on the association’s
website at www.aacei.org.

PRMP Certification Study Guide 2021 95

Appendix C: Example of a Risk Management Plan Table of Contents

The following example of a Table of Contents for a Risk Management Plan, it is not meant to be all inclusive
but to provide an idea to readers as to what may be included in a risk management plan. Section titles
and whether they are included will depend on an organization’s risk maturity, as well as terminology they
use.

Table of Contents
1.0 Scope
2.0 Responsibilities
2.1 Project Director
2.2 Project Manager
2.3 Risk Coordinator
2.4 Project Controls Manager
2.5 Risk Management Team
2.6 Risk Action Owner
2.7 Risk Owner
3.0 Definitions
4.0 Strategy
5.0 Risk Identification
5.1 Categories
5.2 Priorities
5.3 Risk Descriptions and Triggers
6.0 Qualitative Risk Assessment
6.1 Probability of Occurrence
6.2 Project Consequence
6.3 Initial Risk Levels
6.4 Risk Response Actions
6.5 Potential Trends/PCNs
6.6 Residual Risk Levels
6.7 Risk Status
7.0 Quantitative Risk Analysis
7.1 Contingency Management
7.2 Integrated Analysis
8.0 Deliverables / Tasks
9.0 Risk Schedule
10.0 Critical Success Factors
11.0 Risk Closeout and Lessons Learned
12.0 Reporting
13.0 Implementation
13.1 Software
13.2 Reference Documents
14.0 Compliance
15.0 Interpretation and Updating
16.0 Approved By
Appendix A –Risk Matrix and Assessment Criteria
Table A1 - Risk Matrix
Table A2 - Probability and Consequence Descriptions
Appendix B – Typical Risk Checklists
Appendix C – Table of Contents for Required Risk Reports

PRMP Certification Study Guide 2021 96

Appendix D: Example of a RASCI Matrix

Project Manager

Risk Coordinator

Project Controls

Action Owner
Risk Manager
Sponsor / VP

Construction
TASK

Risk Analyst

Engineering

Risk Owner

Owner
PMO
1 Risk Management Plan A C R S C S I I I
2 Identification R C S S S S S
3 Qualitative Analysis R C S S S S S
4 Treatment I C S S S R A S S
5 Quantitative Analysis I S C S A R S S
6 Monitoring I R C S
7 Risk Reporting I A R S I I
8 Training / Education A
9 Risk Standards & Procedures A R
10 Risk Closeout I A R S C C I C I I I I

PRMP Certification Study Guide 2021 97