Dynamics of Project Risk Management Lec-04

PROJECT RISK ANALYSISQualitative Risk Analysis

By: Engr.Dr.Attaullah Shah PhD ( Civil) Engg , Mphil (Eco),MSc Engg ( Strs), BSc Engg ( Gold Medalist),

MBA, MA ( Eco), MSc Envir Design, PGD Computer Sc.Tel: 051-9250100

E-mail: pdaiou@yahoo.com.

Project Risk Management Process and questions for project managers

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Project Risk Analysis

• During the risk identification step, a business owner or project team may identify many risks and it is often not possible to try to address all those identified.

• The risk analysis step will assist in determining which risks have a greater consequence or impact than others.

• Risk analysis involves combining the possible consequences, or impact, of an event,

• with the likelihood of that event occurring. The result is a ‘level of risk’. That is:

Risk = consequence x likelihood

Project Risk Analysis-Qualitative Assessment Purpose• Risk assessment is the overall process of risk analysis and risk

evaluation.• Its purpose is to develop agreed priorities for the identified

risks.• Risk analysis is the systematic use of available information to

determine how often specified events may occur and the magnitude of their consequences.

• Risk evaluation is the process of comparing the estimated risk against given risk criteria to determine the significance of the risk.

Rationale• Agreed priorities are used to determine where the greatest effort

should be focused in treating identified risks. • They facilitate structured action planning and resource allocation.Inputs• Information used in the risk assessment process may include

historical data, theoretical analysis, empirical data and analysis, informed opinions of experts and the concerns of stakeholders.

Method• Determine the consequences of each risk, should it arise.• Assess the likelihood of those consequences occurring.• Convert the consequence and likelihood ratings to an initial priority

for the risk.• Agree risk priorities and inherent risk levels.

Project Risk Analysis-Qualitative Assessment

Outputs• Outputs comprise: a prioritized list of risks and a detailed

understanding of the impact upon the success of the project should they occur; and

• Consequence and likelihood ratings, agreed risk priorities and inherent risk levels.

Documentation• Record ratings, priorities and risk levels in the risk register.

Qualitative vs. Quantitative risk analysis• Qualitative analysis is based on nominal or descriptive scales for

describing the likelihoods and consequences of risks. • This is particularly useful for an initial review or screening or• When a quick assessment is required.• Semi-quantitative analysis extends the qualitative analysis

process by allocating numerical values to the descriptive scales.• The numbers are then used to derive quantitative risk factors.• Quantitative analysis uses numerical ratio scales for likelihoods

and consequences, rather than descriptive scales.• The analysis stage assigns each risk a priority rating, taking into

account existing activities, processes or plans that operate to reduce or control the risk.

Qualitative Risk Analysis • Qualitative risk assessment methods are quick and relatively easy to

use, broad consequences and likelihoods can be identified, • They can provide a general understanding of comparative risk

between risk events, and the risk matrix can be used to separate risk events into risk classes (ratings).

• Qualitative risk assessment techniques use descriptive terms to define the likelihoods and consequences of risk events.

• Risk = consequence x likelihood• The consequence may be described as insignificant—level 1, minor—

level 2, moderate—level 3, major—level 4, or catastrophic—level 5. • Similarly likelihoods can be determined as: almost certain—level A,

likely—level B, possible—level C, unlikely—level D, or rare—level E.• Outputs from qualitative risk analyses are usually evaluated using a

risk matrix format.

Risk Matrix ( Basic)

Qualitative approaches are best used as a quick, first-pass exercise where there are many, complex risk issues and low-risk issues need to be screened out for practical purposes. However, many organizations use qualitative methods for more comprehensive risk assessments.

Risk Matrix

• To implement a structure like this, it is important that clear and consistent definitions

• of the consequence and likelihood scales are used. These are likely to depend on the nature

• of the project, its objectives and criteria, and the kinds of risks anticipated.

To implement a structure like this, it is important that clear and consistent definitions of the consequence and likelihood scales are used. These are likely to depend on the nature of the project, its objectives and criteria, and the kinds of risks anticipated.

Consequences of risks

• Consequences are rated in terms of the potential impact on the criteria, often on five-point descriptive scales linked to the criteria identified in the context step.

• Where a risk has several consequences on different parts of the scale, the highest consequence is used to generate the rating. This generates a conservative view of the overall consequences of the risk.

• The numerical limits in a financial impacts scale are often linked to the size of the project, the size of the organization undertaking it, or the amount it can afford to lose.

• There is often a trade-off between risk and opportunity, the resolution to which must usually take place at managerial levels well above that of the project.

• In some organizations, the health and safety scale is adjusted so that a single fatality falls in the most severe consequence category. This reflects the organization’s attention to employee safety as a core part of its vision and duty of care.

Scales of Consequences

Scales of likelihood

Likelihood scale for repetitive procurement projects

Risk Evaluation Risk evaluation is about deciding whether risks are

tolerable or not to the project, taking into account:

• The controls already in place or included in project plans;

• The likely effectiveness of those controls;• The cost impact of managing the risks or leaving

them untreated; • Benefits and opportunities presented by the risks;

and• The risks borne by other stakeholders.

Adjustment of priorities Adjustments to the initial priorities may be made for several

reasons.• Risks may be moved down. Typically these will be routine,

well-anticipated risks that are highly likely to occur, but with few adverse consequences, and for which standard responses exist.

• Risks may be moved up. Typically there will be two categories of risks like this: those risks that the project team feel are more important than the initial classification indicates; and those risks that are similar to other high-priority risks to the project and hence should be considered jointly with them.

• Some risks may be moved up to provide additional visibility if the project team feels they should be dealt with explicitly.

Risk Register (contents) • The risk register for a project provides a repository for current

information about the risks and the treatment actions relating to them.

Template of Risk Register

Problems with qualitative analysis • Key criticisms are: – that qualitative methods are imprecise, – It is difficult to compare events on a common basis,

there is rarely clear justification of weightings placed on severity of consequences and the use of emotive labels makes it difficult for risk communicators to openly present risk assessment findings to stakeholders.

– Furthermore, the outputs from qualitative approaches are difficult to incorporate into financial business considerations.

CONSTRUCTION AND OPERATION OF PIPELINE PROJECTS IN PAKISTAN - ASSOCIATED RISK AND THEIR SOLUTION

A Case Study • Sajjad Mubin: University of Engineering and Technology, Lahore, Pakistan sajjadmubin@uet.edu.pk, http://www.uet.edu.pk• U.A. Goryainov: Russian State University of Oil and Gas, Moscow, Russia, Construction of Oil & Gas Pipelines and Storages

Department http://www.gubkin.ruhttp://www.ogbus.ru/eng/authors/Mubin/Mubin_1.pdf

Route of TAPI gas pipeline project

Future pipeline projects

Proposed Risk Model

Risks and Project life cycle

• Risks during Construction• Risk during Exploitation of oil and gas

pipelines risks in gas pipeline construction sector.

Risk Break Down Structure (RBS)

Standard Values of Consequence ( Impact) and its probability ( Likelihood)

Risk register

Results and Recommendations 1. Three most critical tasks calculated by Risky Project are Excavation ,

Transportation of Material and Stringing of pipelines. The most critical risks come out to be change in economic parameters, delay in approval from regulatory body, internal and external communication, earthquake and terrorism during construction and operation of gas pipelines.

2. Considering all risks the probable value to project completion calculated by Risky project is 460 days however the base project duration is 390 days. Similarly the project cost with out risks is 350,00,000 however, with risks it is 391,00,000. On the basis of that contingency budget of project can be formulated to cater the risk.

3. The secondary risks like change in material prices, construction not finished in time or budget and design not in time can be reduced or transferred to the other party or organization by contract. However SNGPL is designing, constructing and operating gas pipelines so risk can be eliminated by strengthening the internal organizational capacity for design, construction and operation.

• 4. Organizational or technological risk like insufficient resource planning or project management, change in scope etc can be eliminated by improving the process or application of new technologies available in this field. New state of the art technologies are helpful in managing change at any stage of the project.

• 5. Probability of risk occurrence P comes out to be the function of project duration “T” both during construction and operation phase. However Intensity of destruction or Impact is a function of enterprise environment.

• 6. Historical data of river flows shows that the flood has probability of 95% of occurrence between June to August. This risk can be minimized during construction phase by rearranging the construction schedule. Other risks like landslides are associated with floods, rain fall or earthquakes.

Assignment No.4 • Please visit the MS Engg. Thesis titled as

“ DEVELOPMENT OF A FRAMEWORK FOR PRELIMINARY RISK ANALYSIS IN TRANSPORTATION PROJECTS”

http://www.wpi.edu/Pubs/ETD/Available/etd-12254-123510/unrestricted/GUOW.pdf- Explain how the risks in Transportation Projects have been

identified and analyzed - List the risks involved in the Transportation projects- How can you compare these risks with the risks in transportation

projects of Pakistan.