Topic 3: Execution of the Project Plan and Evaluating Project

Progress

BUSE 4322 – Project Management

Copyright Course Technology 2001

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Project Management Framework

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Project and Risk

• By definition, a project is something that we have not done before and will not do again in the future. As a result a project is inherently risky

• Risk management is the means by which risk is systematically managed to increase the likelihood of meeting project objectives.

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The Concept of Risk

• If you are a parent, a mountain climber, a physician, a lawyer, an investor, a smuggler, a politician, a soldier, an engineer, a scientist, a poet, an astronaut, an environmentalist, a shareholder, an entrepreneur, a student, a line manager or a project manager, your notion of risk would likely have different connotations.

• All projects experience the unexpected; but some project managers are ready for it.

• Known unknowns represent identified potential problems, such as the possibility of a strike when a labor contract expires, or enough rain to stall a construction project during winter in Seattle. We don’t know exactly what will happen, but we do know it has a potential to damage our project and we can prepare for it.

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The Concept of Risk

• Unknown unknowns are the problems that arrive unexpectedly. These are the ones project managers couldn’t have seen coming, but project managers do expect them, because they know something unexpected always happens.

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The Concept of Risk

• Risk management is the primary job of a project manager.

• Every topic and technique in this course is really a risk management technique.

• Time Management reduce the risk of being late. Cost Management reduce the chances of overrunning the budget. Quality Management and Stakeholders management are techniques for Risk Managment

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The Concept of Risk

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Risk and Project Life Cycle

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Probability of project risk

Adapted from Kerzner, H, Project Management, 1998, p. 880

Initiation• No expert input• Poor problem

definition• Unclear

objectives• No feasibility

study• No real

commitment

Planning• No risk

management plan

• Fragile planning

• Poor specs• Unclear SOW• No

management support

Execution• Unskilled labor• Strikes• Material not

available• Weather, etc.• Change in scope• Change in

schedule• Regulations• No control

systems

Closure• Poor quality• Late delivery • Not acceptable

to customer• Cask flow

problems

The Risk Management Framework

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The Risk Management Framework

describes risk management

process that is repeated

throughout the project

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Risk Management Steps

• Step One: Risk Identification

• Step Two: Develop a Response Strategy

• Step Three: Establish a Contingency and Reserve

• Step Four: Continuous Risk Management

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Risk Identification

• The first critical step of risk management is Risk Identification.

• Identifying risk requires skills, experience, and a thorough knowledge of project management techniques.

Techniques for identifying risk:

1. Stakeholders and Experts Meetings

2. Creating risk profile (Risk Log);

3. Learning from past, similar projects;

4. Focusing on the risks in the schedule and budget.

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Stakeholders and Experts Meetings

• Different stakeholders bring different perspectives to the project depending on their project role. Include customers, sponsors, team members, subcontractors, functional management, and people who have worked on similar projects. They all have a stake in the project.

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Stakeholders and Experts Meetings

Brainstorming and Interviews sessions:

• Build a list of potential risks.

• Combine similar risks and order them all by magnitude and probability.

• Focus on risk identification, not response development.

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Creating Risk Profile

• One of the best ways to ensure the success of a project is to apply the lessons learned from past projects. This is done by using a risk profile.

• A risk profile is a list of questions that address traditional areas of uncertainty gathered and refined from previous, similar projects.

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Creating Risk Profile

• Creating a risk profile is an ongoing process: At the end of this project, what has been learned will be incorporated into the profile.

• Risk profiles must be:– Industry-specific. For example, building an

information system is different from building a shopping mall.

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Creating Risk Profile

- Organization-specific. Address risks specific to a company or department.

- Address both product and management risks. Risks associated with using or developing new technology are product risks. Management risk addresses project management issues, such as team.

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Creating Risk Profile

- Predict the magnitude of each risk. Even simple, subjective indicators of risk such as “high–medium–low” contribute to a clearer assessment of specific risk factors. More specific quantitative indicators offer the opportunity for greater refinement and accuracy over many projects.

• Risk profiles are generated and maintained by a person.

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Risk Profile Example

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Risk Profile Example

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Historical Records• History is best predictor of the future.

• Project manager can investigate what happened on similar projects in the past. such as:

• Planned and actual performance records that indicate the accuracy of the cost and schedule estimates.

• Problem logs that portray the unexpected challenges and relate how they were overcome.

• Post-project reviews that generate the lessons learned from the project;

• Customer satisfaction records. 21

Estimating Schedules and Budgets

• Risk management contributes to detailed planning, but detailed planning is also an opportunity to discover risks.

• As part of the plan, each low-level task will require a cost and schedule estimate.

• Tasks that are difficult to estimate, means that there is some uncertainty associated with them and must be treated as risk.

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Estimating Schedules and Budgets

• For these tasks:• Identify the reason for the uncertainty and create a strategy for

managing it.

• The risks identified during scheduling and budgeting usually affect smaller parts of the project, but they are important just the same.

• Managing the small risks as well as the big ones means that little things are less likely to trip you up.

• Recognizing detailed planning as a risk management opportunity further emphasizes the iterative and unbreakable relationship between risk planning and schedule development.

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Prioritize the Risks

• Risk identification activities will create a long list of potential risks.

• Some of these risks will have a low impact, a low probability, or both.

• The outcome of the risk identification process is a list of known risks that are worth studying and planning for.

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Developing Risk Response Strategy

• Step Two: Developing Risk Response Strategy

• Not every risk will jeopardize a project.

• Project manager must know how to:– Determine the magnitude of the risk– Develop an appropriate strategy to deal with it.

• This strategy is called: Response Development Strategy

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Response Development Strategy

• Response Development Strategy has three components:

1. Defining the risk, including the severity of the negative impact.

2. Assigning a probability to the risk. How likely is it that this problem will occur?

3. Developing a strategy to reduce possible damage.

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Defining the Risk

• Defining the risk requires a brief statement describing the situation that is causing concern or uncertainty and the possible negative outcomes that may be caused by the condition.

• Project Manager must record the consequence of these risks in terms of cost, schedule, and possible damage to the project.

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Risk Probability

• Assigning probabilities to a risk requires that a project manager use experts advice, experience and intuition as well as knowledge.

• Assigning a probability to the risk helps to assess the consequences of the risk.

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Risk Response Strategy

• Developing a strategy to reduce possible damage must targets reduce the impact of the risk, the probability, or both.

• There are five categories of risk response strategies:

• accepting, avoiding, monitoring, transferring, and mitigating the risk.

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Accepting the Risk

• Accepting the risk means you understand the risk, its consequences, and probability, and you choose to do nothing about it.

• If the risk occurs, the project team will react.

• This is a common strategy when the consequences or probability that a problem will occur are minimal.

• As long as the consequences are cheaper than the cure, this strategy is the best

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Avoid the Risk

• You can avoid a risk by choosing not to do part of the project.

• Risk/return is a tool that may be used

• High return on an investment requires more risk.

• Avoiding risks on projects can have the same effect—low risk, low return.

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Monitor the Risk and Prepare Contingency Plans

• Monitor a risk by choosing some predictive indicator to watch as the project nears the risk point.

• Contingency plans are courses of action prepared before the risk event occurs.

• Extra money, a contingency fund, to draw on in the event of unforeseen cost overruns.

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Monitor the Risk and Prepare Contingency Plans

• An example of a contingency—the project team is using a new technology, but they are also creating an alternative design that uses more stable technology.

• If the new technology did not work, project team will have an alternative.

• Contingency plans can be looked on as a kind of insurance and, like insurance policies, they can be expensive.

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Transfer the Risk

• Many large projects purchase insurance for a variety of risks, ranging from theft to fire.

• By doing this, they have effectively transferred risk to the insurance company

• Hiring an expert to do the work can also transfer risk.

• Use a contract for service, transfer the cost and schedule risks from the project to the subcontracting firm

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Mitigate the Risk

• Mitigation means working hard at reducing the risk.”

• Mitigation covers nearly all the actions the project team can take to overcome risks from the project environment.

• Several ways to mitigate, or reduce, the productivity loss associated with using a new software tool such as learning, training.

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Establish Contingency and Reserve

• Step Three: Establish contingency and reserve

• Project manager must prepare the fund for implementing any strategy to deal with risks

• This fund will be used if the risk in the risk profile materializes.

• Not every contingency plan will be executed as risk deal with known unknown

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Project Manager must estimate the contingency reserve following these steps:

1. Identify all the risks in the risk log and prepare a contingency plan.

2. For each of these risks, estimate the additional cost of executing the contingency plan.

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Derive an expected value of the contingency for each risk by multiplying the probability the risk will occur times the cost of the contingency plan

expected value of contingency =

(cost of contingency × probability of risk event).

3. Sum the expected value of contingency for each of these risks.

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Continuous Risk Management

• Step Four: Continuous Risk Management

• The risk plan is based on the best information available when the project begins. As the project is performed, new information emerges—some favorable and some unfavorable.

• Project Manager must know how that affects the known risks and whether any new risks emerge.

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Continuous Risk Management

• As a project manager you must monitor known risks with a risk log. Each risk in the risk log can be updated before every project status meeting to reflect the most recent information—even if that means “no change.”

• Project manager must check for new risks at regular status meetings, not the same level of thoroughness but by routinely

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Continuous Risk Management

• When team members do sense a risk, they’ll know where to report it.

• Repeat the major risk identification activities at preplanned milestones within the project (every six to nine weeks), or at the beginning of a new phase.

• When new risks are identified, prepare response plans and check whether sufficient contingency or management reserve exists.

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Exercise

Define the Risk from the Statement Below:

The IUG requires that all diagrams for new building project be developed using a software tool that our architecture engineers have not used before. In addition, the only machine that can handle the soil test is a complex product that has been used only a few times by our project team .

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Defining the Risk

• There are two separate risks associated with new technology. Each should be addressed separately.

• This will also make it easier to assess the impact, or consequences, that attempting to use the new technologies could have on the project.

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Exercise

• First: Definition• Condition: The IUG requires that all diagrams

be developed using a software tool that our architecture engineers have not used before.

• Consequence: All diagram generation and document management tasks will take longer. Limitations of the tool will cause rework.

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Exercise

• Second: Probability• On average, the slower work and the rework will

add up to 25% more effort on preparing the drawings tasks.

• Probable labor cost: 1.25 × 20 = 25• Probable schedule: 1.25 × 4 months = 5 months

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Exercise

• Third: Strategy

• Send all the architecture engineers to a 2-day course on the new tool. The training cost is $2,200. This will reduce the productivity factor to 1.1.

• Make one of the architecture engineers the tool expert. It will be his or her job to spend an average of 1 day each week.

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Exercise

• Third: Strategy (Continued)• Training on the tool will assist in find its

limitations and to create standards and templates to build on its strengths.

• This will bring the productivity factor down to 1.0. The tool expert will spend 5 labor days to create document management strategies that ensure a smooth production process and eliminate rework.

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Exercise

• The probability is a subjective estimate based on the average normal productivity of a junior architectural engineer versus a senior architectural engineer. Since all architectural engineer will be new to the tool, all are assigned the junior productivity factor.

• The normal cost for the required documentation is 20 labor months and the normal duration is 4 months.

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Exercise

• The strategy is to shorten the learning curve. It will cost 2 days of training (duration) and the time spent by the tool expert on experimentation adds a cost of 21 days (1 day a week for four months plus 5 days). So the new tool’s duration consequence is cut to 5 days and the cost consequence is 21 days labor plus the cost of training.

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Exercise

• The strategy is shown in the project plan, which shows the cost and duration of training and who will attend.

• Tasks are added for experimenting with the tool and developing tool standards.

• These additional tasks result in increased labor costs.

• This risk strategy is referred to as “risk mitigation,” because the project working hard at reducing the risk through training and learning.

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Exercise

• First: Definition• Condition: The soil conditions test in the area

require a complex machine with which we have little experience.

• Consequence: Incorrectly operating the machine will damage it and/or the test will fail. Damage to the machine could cost from $50,000 to $250,000 in repairs and 2 to 4 weeks in lost time. Soil test will also prevent us from obtaining permits for building.

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Exercise

• Second: Probability• Probability of $75K equipment damage—20%• Probability of $200K equipment damage—20%• Probability of no equipment damage—60%• Probable cost of equipment damage—$55K• Probability of soil test and permits delay—25%

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Exercise

• Third: Strategy

• The equipment provider will supply an operator for an estimated cost of $10,000.

• Using their operator reduces the chance of equipment damage to less than 5% and they will bear the cost of repair. The probability of test delay and permits damage is also reduced to 5%.

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Exercise

• The probability was determined from the experience of this company and interviews with two other companies who use the product.

• Probable cost of damage = (75K × 20%) + (200K × 20%)

• The strategy adds $10,000 to the project cost, but reduces the risk of cost damage to zero and the schedule risk to less than 5%. The risk of intangible cost due to riverbank damage is also reduced.

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Exercise

• This risk strategy is referred to as “risk transfer,” because the project paid the equipment operator to take the risk.

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Exercise

• The strategy is described in two project management tools:

1. Communication plan—includes increased monitoring and coordination activities with the equipment vendor.

2. Project plan—Shows the equipment vendor as the resource on the task and the additional $10,000 in labor.

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