Only a few potential risk events meet these criteria. These are the critical few potential risk events that the project management team should focus on when developing a project risk mitigation or management plan. Risk evaluation is about developing an understanding of which potential risks have the greatest possibility of occurring and can have the greatest negative impact on the project Figure These become the critical few. There is a positive correlation—both increase or decrease together—between project risk and project complexity.
A project with new and emerging technology will have a high-complexity rating and a correspondingly high risk. The project management team will assign the appropriate resources to the technology managers to ensure the accomplishment of project goals. The more complex the technology, the more resources the technology manager typically needs to meet project goals, and each of those resources could face unexpected problems. Risk evaluation often occurs in a workshop setting.
Building on the identification of the risks, each risk event is analyzed to determine the likelihood of occurrence and the potential cost if it did occur.
The likelihood and impact are both rated as high, medium, or low. A risk mitigation plan addresses the items that have high ratings on both factors—likelihood and impact. A project team analyzed the risk of some important equipment not arriving at the project on time. The team identified three pieces of equipment that were critical to the project and would significantly increase costs if they were late in arriving. One of the vendors, who was selected to deliver an important piece of equipment, had a history of being late on other projects.
The vendor was good and often took on more work than it could deliver on time. This risk event the identified equipment arriving late was rated as high likelihood with a high impact.
The other two pieces of equipment were potentially a high impact on the project but with a low probability of occurring. Not all project managers conduct a formal risk assessment on a project. One reason, as found by David Parker and Alison Mobey in their phenomenological study of project managers, was a low understanding of the tools and benefits of a structured analysis of project risks The lack of formal risk management tools was also seen as a barrier to implementing a risk management program.
Some project managers are more proactive and develop elaborate risk management programs for their projects. Other managers are reactive and are more confident in their ability to handle unexpected events when they occur. Yet others are risk averse, and prefer to be optimistic and not consider risks or avoid taking risks whenever possible.
On projects with a low-complexity profile, the project manager may informally track items that may be considered risk items. On more complex projects, the project management team may develop a list of items perceived to be higher risk and track them during project reviews. On projects of even greater complexity, the process for evaluating risk is more formal with a risk assessment meeting or series of meetings during the life of the project to assess risks at different phases of the project.
On highly complex projects, an outside expert may be included in the risk assessment process, and the risk assessment plan may take a more prominent place in the project implementation plan. On complex projects, statistical models are sometimes used to evaluate risk because there are too many different possible combinations of risks to calculate them one at a time. One example of the statistical model used on projects is the Monte Carlo simulation, which simulates a possible range of outcomes by trying many different combinations of risks based on their likelihood.
The output from a Monte Carlo simulation provides the project team with the probability of an event occurring within a range and for combinations of events. After the risk has been identified and evaluated, the project team develops a risk mitigation plan, which is a plan to reduce the impact of an unexpected event. The project team mitigates risks in various ways:. Each of these mitigation techniques can be an effective tool in reducing individual risks and the risk profile of the project.
The risk mitigation plan captures the risk mitigation approach for each identified risk event and the actions the project management team will take to reduce or eliminate the risk.
Risk avoidance usually involves developing an alternative strategy that has a higher probability of success but usually at a higher cost associated with accomplishing a project task. A common risk avoidance technique is to use proven and existing technologies rather than adopt new techniques, even though the new techniques may show promise of better performance or lower costs. A project team may choose a vendor with a proven track record over a new vendor that is providing significant price incentives to avoid the risk of working with a new vendor.
The project team that requires drug testing for team members is practising risk avoidance by avoiding damage done by someone under the influence of drugs. Risk sharing involves partnering with others to share responsibility for the risky activities. Many organizations that work on international projects will reduce political, legal, labour, and others risk types associated with international projects by developing a joint venture with a company located in that country.
Partnering with another company to share the risk associated with a portion of the project is advantageous when the other company has expertise and experience the project team does not have. If a risk event does occur, then the partnering company absorbs some or all of the negative impact of the event.
The company will also derive some of the profit or benefit gained by a successful project. Risk reduction is an investment of funds to reduce the risk on a project.
On international projects, companies will often purchase the guarantee of a currency rate to reduce the risk associated with fluctuations in the currency exchange rate. A project manager may hire an expert to review the technical plans or the cost estimate on a project to increase the confidence in that plan and reduce the project risk.
Assigning highly skilled project personnel to manage the high-risk activities is another risk-reduction method. Experts managing a high-risk activity can often predict problems and find solutions that prevent the activities from having a negative impact on the project. Some companies reduce risk by forbidding key executives or technology experts to ride on the same airplane.
Risk transfer is a risk reduction method that shifts the risk from the project to another party. The purchase of insurance on certain items is a risk-transfer method.
The risk is transferred from the project to the insurance company. A construction project in the Caribbean may purchase hurricane insurance that would cover the cost of a hurricane damaging the construction site. The purchase of insurance is usually in areas outside the control of the project team. Weather, political unrest, and labour strikes are examples of events that can significantly impact the project and that are outside the control of the project team.
Think through both how you will detect the onset of the event and how to respond. It may be wise to stop production and shipping when product failures, even one, has a major consequence starts a home on fire, for example. Have plans in place. This strategy is to shift the burden of the risk consequence to another party. This may include giving up some control, yet when something goes wrong your organization is not responsible.
This approach may not work to protect your brand image if the product is associated with your organization. Even if the power supply vendor pays for all damages due to failures in their unit, the customer only knows that your product has failed and caused damage.
Use this approach with caution. A conventional means to transfer risk to another organization is with the purchase of insurance. This may require a careful analysis of the presenting risks and probabilities, yet is a viable option in some situations. Contract terms with suppliers, vendors, contractors, etc may provide a means to shift risk away from your organization. For example, if a power supply fails in an expensive server causing the loss of revenue for a customer, in typical situations, you might ask for and receive a replacement power supply.
Or, you could require the power supply vendor to cover the cost of the entire server which the power supply caused to fail and the loss experienced by the customer. For each risk you encounter, you and your organization will have to deal with it.
A little forethought and work enable more options than just a major product recall or bankruptcy filing. Engineers and managers throughout the organization make decisions concerning risks every day. Providing a set of clear strategies along with guidance allows the entire organization to appropriately mitigate risks on a daily basis. Options may cost money, but they also add value by allowing managers to shift risk or capture added value, depending on the outcome of one or more uncertain parameters.
For example, a contract clause permitting termination of a contract if a critical technology is not developed provides an opportunity but not an obligation to terminate.
An options approach also improves strategic thinking and project planning by helping to recognize, design, and use flexible alternatives to manage uncertainty.
Increasing options and decision points is a valid risk mitigation strategy for project owners. For example, the option to terminate a contract can be of value to owners. Delaying commitment to a single strategy or solution by carrying alternative optional strategies until sufficient information becomes available to resolve the uncertainty is an example of the use of options as a form of managerial flexibility.
Another example of an options approach was that used by the Manhattan Engineer District in World War II, in which both an enriched uranium and a plutonium device were developed so that there would be an available alternative; information gained from one was used in making a decision about the other i. This is similar to power plants that can run on gas or oil and switch between the fuels based on their relative price.
In the case of the Manhattan Project we can safely assume that the progress and relative effectiveness of the alternative efforts were compared in order to make informed choices, including ultimately the choice that was used in the war. Both worked, but the additional cost to buy the option was considered justifiable.
The use of these options may, however, require some imagination and changes from the usual methods and practices. Because risk is uncertainty and information reduces uncertainty, many options involve the creation or. It should be stressed that creating options to generate new information is not the same as simply postponing decisions in the hope that some new data will materialize to save the situation.
The use of options is premised on specific rules for implementation that define the conditions that would trigger a change in strategy. The process includes continuing to monitor the uncertain parameters, evaluating their status and impact, and changing strategies if alternative options are warranted. This should be a proactive not a reactive process. As an illustration of a risk assessment applied to both downside risk and upside opportunity, consider the case of a risk associated with two alternate technologies or processes.
Process 1 is newer, and the cost estimates for this process are highly uncertain, compared to Process 2, which is more established and for which the cost estimates are much less uncertain than those of Process 1. If the estimated construction cost of using either of the two processes is the same, then there is a substantially greater risk of obtaining a high project cost with Process 1 than with Process 2.
It is assumed that the probable costs of these two processes are statistically independent—that is, there is no correlation between the cost of one and the other. Figure , which plots the probability that the project. Figure shows these two options plus a third, which is to pursue both Process 1 and Process 2. Note that in this third approach, the expected cost is less than for either of the two processes individually, and the probability of a cost overrun is less than with either of the others for any budget.
Obviously, one does not construct two facilities just to find out which process is cheaper. However, this elementary illustration indicates that the best approach may be to pursue the engineering of both options until, using a series of decision points, enough additional information is obtained to refine the cost estimates and thus determine which process should be chosen. If project directors seek to manage the risks, not simply to compute them, then they should recognize that project engineering and design can be conducted in a series of steps, such that after each step—e.
Based on the new information generated by the engineering, design, and procurement process, the estimates at each quarter will provide better guidance about the economics of the final facility. Then the sponsor can make a decision to continue the project or to terminate it. The principal benefit of the options approach is that by reliance on sequential decisions made as more and better information is available, rather than on a single decision made at the beginning of a project, and using the high uncertainty as an opportunity not simply a risk, the net value of a project can be increased.
Thus a project that might have been canceled can instead be turned into a highly beneficial one. Although this example is simple, the fundamental point it illustrates is that the purpose of risk analysis is to support decisions. The objective of risk management should be to decide whether or not to build a project, and which of alternative process technologies to use, not merely to compute risks or probability distributions.
The example also shows that adding management decision points increases the value of the project to the owner. Risk assumption is the last resort. It means that if risks remain that cannot be avoided, transferred, insured, eliminated, controlled, or otherwise mitigated, then they must simply be accepted so that the project can proceed. Presumably, this implies that the risks associated with going ahead are less than, or more acceptable than, the risks of not going forward.
If risk assumption is the appropriate approach, it needs to be clearly defined, understood, and communicated to all project participants. Effective risk management is essential for the success of large projects built and operated by the Department of Energy DOE , particularly for the one-of-a-kind projects that characterize much of its mission.
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Responding to the Level of Uncertainty. Page 43 Share Cite. Risk Transfer and Contracting. Page 44 Share Cite. Risk Buffering. Page 45 Share Cite.
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