MANAGEMENT A GUIDE BY THE ASSOCIATION FOR PROJECT MANAGEMENT (formerly The Association Of Project Managers) Compi l ed from i nformati on provi ded by members of the Speci al Interest Group on Ri sk Management Catri ona Norri s - UMIST Professor John Perry - The Universi ty of Bi rmingham Peter Si mon - CPS Project Management Project Ri sk Anal ysi s & Management PROJECT RISK ANALYSIS AND MANAGEMENT Contents Page 1. Introduction -------------------------------------------------------------------------------------------3 2. What Is Project Risk Analysis And Management?------------------------------------------3 3. What Is Involved-------------------------------------------------------------------------------------3 4. Why Is It Used?---------------------------------------------------------------------------------------4 5. When Should It Be Used and Who Should Do It?-------------------------------------------5 6. How To Do It - Techniques And Methods----------------------------------------------------6 7. What Experience Is Available?-----------------------------------------------------------------10 ! Thi s Gui de may not be reproduced wi thout wri tten permi ssi on of The Associ ati on of Project Managers. The Associ ati on for Project Management, 85 Oxford Road, Hi gh Wycombe, Bucki nghamshi re HP11 2DX March1992, republ i shed January 2000 Thi s mi ni gui de has been expanded, updated and rewri tten as the Project Ri sk Anal ysi s and Management (PRAM) Gui de edi ted by P Si mon, D Hi l l son and K Newl and, publ i shed by the APM 1997, ISBN 0953159000. Project Ri sk Anal ysi s & Management 3 PROJECT RISK ANALYSIS AND MANAGEMENT 1. Introduction Thi s Gui de provi des an i ntroducti on to the processes i nvol ved i n Project Ri sk Anal ysi s and Management, offeri ng a si mpl e but robust and practi cal framework to hel p new users get started. It i s not a defi ni ti ve expl anati on of al l the techni ques and methods that can be used i n the process. Project Ri sk Anal ysi s and Management can be used on al l projects, whatever the i ndustry or envi ronment, and whatever the ti mescal e or budget. 2. What Is Project Risk Analysis And Management? Project Ri sk Anal ysi s and Management i s a process whi ch enabl es the anal ysi s and management of the ri sks associ ated wi th a project. Properl y undertaken i t wi l l i ncrease the l i kel i hood of successful compl eti on of a project to cost, ti me and performance objecti ves. Ri sks for whi ch there i s ampl e data can be assessed stati sti cal l y. However, no two projects are the same. Often thi ngs go wrong for reasons uni que to a parti cul ar project, i ndustry or worki ng envi ronment. Deal i ng wi th ri sks i n projects i s therefore di fferent from si tuati ons where there i s suffi ci ent data to adopt an actuari al approach. Because projects i nvari abl y i nvol ve a strong techni cal , engi neeri ng, i nnovati ve or strategi c content a systemati c process has proven preferabl e to an i ntui ti ve approach. Project Ri sk Anal ysi s and Management has been devel oped to meet thi s requi rement. 3. What Is Involved The fi rst step i s to recogni se that ri sk exi sts as a consequence of uncertai nty. In any project there wi l l be ri sks and uncertai nti es of vari ous types as i l l ustrated by the fol l owi ng exampl es: the management and fi nancial authority structure are not yet establ i shed a the technol ogy i s not yet proven i ndustri al rel ati ons probl ems seem l i kel y resources may not be avai l abl e at the requi red l evel . Al l uncertai nty produces an exposure to ri sk whi ch, i n project management terms, may cause a fai l ure to: keep wi thi n budget achi eve the requi red compl eti on date achi eve the requi red performance objecti ve. Project Risk Analysis and Management i s a process desi gned to remove or reduce the ri sks whi ch threaten the achi evement of project objecti ves. The next section of this Guide descri bes the benefi ts whi ch Project Ri sk Anal ysi s and Management can bri ng to a project and al so the wi der benefi ts to the organi sati on and i ts customers. It shoul d be regarded as an i ntegral part of project or busi ness management and not just as a set of tool s or techni ques. The Project Risk Analysis and Management Process Experi enced ri sk anal ysts and managers hol d percepti ons of thi s process whi ch are subtl e and di verse. In order to si mpl i fy the process thi s Gui de di vi des the overal l process i nto two consti tuents or stages: Ri sk Anal ysi s Ri sk Management. Risk Analysis Thi s stage of the process i s general l y spl i t i nto two 'sub-stages'; a qual i tati ve anal ysi s 'sub- stage' that focuses on i denti fi cati on and subjecti ve assessment of ri sks and a quanti tati ve anal ysi s 'sub-stage' that focuses on an objecti ve assessment of the ri sks. QualitativeAnalysis A Qual i tati ve Anal ysi s al l ows the mai n ri sk sources or factors to be identified. Thi s can be done, for exampl e, wi th the ai d of check l i sts, i ntervi ews or brai nstormi ng sessi ons. Thi s i s usual l y associ ated wi th some form of assessment whi ch coul d be the descri pti on of each ri sk and i ts i mpacts or a subjecti ve l abel l i ng of each ri sk (e.g. Project Ri sk Anal ysi s & Management 4 hi gh/ l ow) i n terms of both i ts i mpact and i ts probabi l i ty of occurrence. A sound ai m i s to i denti fy the key ri sks, perhaps between fi ve and ten, for each project (or part-project on l arge projects) whi ch are then anal ysed and managed i n more detai l . QuantitativeAnalysis A Quanti tati ve Anal ysi s often i nvol ves more sophi sti cated techni ques, usual l y requi ri ng computer software. To some peopl e thi s i s the most formal aspect of the whol e process requi ri ng: measurement of uncertai nty i n cost and ti me esti mates probabi l i sti c combi nati on of i ndi vi dual uncertai nti es. Such techni ques can be appl i ed wi th varyi ng l evel s of effort rangi ng from modest to extensi vel y thorough. It i s recommended that new users start sl owl y, perhaps even i gnori ng thi s 'sub-stage', unti l a cl i mate of acceptabi l i ty has been devel oped for Project Ri sk Anal ysi s and Management i n the organi sati on. An i ni ti al qual i tati ve anal ysi s i s essenti al . It bri ngs consi derabl e benefi t i n terms of understandi ng the project and i ts probl ems i rrespecti ve of whether or not a quanti tati ve anal ysi s i s carri ed out. It may al so serve to hi ghl i ght possi bi l i ti es for ri sk 'cl osure' i .e. the devel opment of a speci fi c pl an to deal wi th a speci fi c ri sk i ssue. Experi ence has shown that qual i tati ve anal ysi s - Identi fyi ng and Assessi ng Ri sks - usual l y l eads to an i ni ti al , i f si mpl e, l evel of quanti tati ve anal ysi s. If, for any reason - such as ti me or resource pressure or cost constrai nts - both a qual i tati ve and quanti tati ve anal ysi s are i mpossi bl e, i t i s the qual i tati ve anal ysi s that shoul d remai n. It shoul d be noted that procedures for deci si on maki ng wi l l need to be modi fi ed i f ri sk anal ysi s i s adopted. An exampl e whi ch i l l ustrates thi s poi nt i s the sancti on deci si on for cl i ents, where esti mates of cost and ti me wi l l be produced i n the form of ranges and associ ated probabi l i ti es rather than si ngl e val ue fi gures. Risk Management Thi s stage of the process i nvol ves the formulati on of management responses to the mai n ri sks. Ri sk Management may start duri ng the qual i tati ve anal ysi s phase as the need to respond to ri sks may be urgent and the sol uti on fai rl y obvi ous. Iterati on between the Ri sk Anal ysi s and Ri sk Management stages i s l i kel y. Ri sk Management can i nvol ve: i denti fyi ng preventi ve measures to avoi d a ri sk or to reduce i ts effect establ i shi ng conti ngency pl ans to deal wi th ri sks i f they shoul d occur i ni ti ati ng further i nvesti gati ons to reduce uncertai nty through better i nformati on consi deri ng ri sk transfer to i nsurers consi deri ng ri sk al l ocati on i n contracts setti ng conti ngenci es i n cost esti mates, fl oat i n programmes and tol erances or 'space' i n performance speci fi cati ons. Section 6 of thi s Guide considers some of the techni ques of Project Ri sk Anal ysi s and Management i n more detai l . 4. Why Is It Used? There are many reasons for usi ng Project Ri sk Anal ysi s and Management, but the mai n reason i s that i t can provi de si gni fi cant benefi ts far in excess of the cost of performi ng i t. Benefits The benefi ts gai ned from usi ng Project Ri sk Anal ysi s and Management techni ques serve not onl y the project but al so other parti es such as the organi sati on and i ts customers. Some exampl es of the mai n benefi ts are: an i ncreased understandi ng of the project, which in turn leads to the formulati on of more real i sti c pl ans, i n terms of both cost esti mates and ti mescal es an i ncreased understandi ng of the ri sks i n a project and thei r possi bl e i mpact, whi ch can lead to the mi ni misati on of ri sks for a party and/ or the al l ocati on of ri sks to the party best abl e to handl e them an understandi ng of how ri sks i n a project can l ead to the use of a more sui tabl e type of contract an i ndependent vi ew of the project ri sks whi ch can hel p to justi fy deci si ons and enabl e more effi ci ent and effecti ve management of the ri sks a knowl edge of the ri sks i n a project whi ch allows assessment of contingencies that actual l y refl ect the ri sks and whi ch al so tends to di scourage the acceptance of fi nanci al l y unsound projects Project Ri sk Anal ysi s & Management 5 a contri buti on to the bui l d-up of stati sti cal information of hi storical ri sks that wi ll assi st i n better model l i ng of future projects faci l i tati on of greater, but more rati onal , ri sk taki ng, thus i ncreasi ng the benefi ts that can be gai ned from ri sk taki ng assi stance i n the di sti ncti on between good l uck and good management and bad l uck and bad management. Who benefits from its use? an organi sation and its senior management for whom a knowledge of the ri sks attached to proposed projects i s i mportant when consi deri ng the sancti on of capi tal expendi ture and capi tal budgets cl i ents, both i nternal and external , as they are more l i kel y to get what they want, when they want i t and for a cost they can afford project managers who want to i mprove the qual i ty of thei r work i .e. they want to bri ng thei r projects i n to cost, on ti me and to the requi red performance. What are the costs of using it? The costs of usi ng Project Ri sk Anal ysi s and Management techni ques vary accordi ng to the scope of the work and the commi tment to the process. Bel ow are some exampl e costs, ti me- scal es and resource requi rements for carryi ng out the process. Cost The cost of usi ng the process can be as l i ttl e as the cost of one or two days of a person's ti me up to a maxi mum of 5-10% of the management costs of the project, even thi s hi gher cost, as a percentage of the total project cost, i s rel ati vel y smal l . It can be argued that the cost i ncurred i s an i nvestment i f ri sks are i denti fi ed duri ng the process that may otherwi se have remai ned uni denti fi ed unti l i t was too l ate to react. Time The ti me taken to carry out a ri sk anal ysi s i s parti al l y dependent upon the avai l abi l i ty of i nformati on. A detai l ed cost and ti me ri sk anal ysi s usual l y requi res anywhere from one to three months dependi ng upon the scal e and compl exi ty of the project and the extent of pl anni ng and cost preparati on al ready carri ed out. However, as i ndi cated above, a useful anal ysi s can take as l i ttl e as one or two days. Resources The mi nimum resource requirement is obvi ousl y just one person wi thi n a organi sati on wi th experi ence of usi ng Project Ri sk Anal ysi s and Management techni ques. However, i f experti se does not exi st wi thi n the organi sati on i t can be readi l y acqui red from outsi de consul tants. It i s l i kel y that once Project Ri sk Anal ysi s and Management has been i ntroduced to an organi sati on, i n-house experti se wi l l devel op rapi dl y. As stated i n Secti on 3, Project Ri sk Anal ysi s and Management i s rel evant to al l projects and i s an i ntegral part of project management. Thi s can make i t very di ffi cul t to separate the costs of performi ng i t. Some organi sati ons treat these costs as an overhead to the organi sati on, and not to the project. 5. When Should It Be Used and Who Should Do It? Project Ri sk Anal ysi s and Management i s a conti nuous process that can be started at al most any stage i n the l i fe-cycl e of a project and can be conti nued unti l the costs of usi ng i t are greater than the potenti al benefi ts to be gai ned. As ti me progresses, the effecti veness of usi ng Project Ri sk Anal ysi s and Management tends to di mi ni sh, therefore i t i s most benefi ci al to use i t i n the earl i er stages of project. There are fi ve poi nts i n a project where parti cul ar benefi ts can be achi eved by usi ng i t. Feasibility Study - At thi s stage the project i s most fl exi bl e enabl i ng changes to be made whi ch can reduce the ri sks at a rel ati vel y l ow cost. It can al so hel p i n deci di ng between vari ous i mpl ementati on opti ons for the project. Sanction - The cl i ent can make use of i t to vi ew the ri sk exposure associ ated wi th the project and can check that al l possi bl e steps to reduce or manage the ri sks have been taken. If a quanti tati ve anal ysi s has been carri ed out then the cl i ent wi l l be abl e to understand the 'chance' that he has of achi evi ng the project objecti ves (cost, ti me and performance). Tendering - The contractor can make use of i t to ensure that al l ri sks have been i denti fi ed and to hel p hi m set hi s ri sk conti ngency or check hi s ri sk exposure. Project Ri sk Anal ysi s & Management 6 Post Tender - The cl i ent can make use of i t to ensure that al l ri sks have been i denti fi ed by the contractor and to assess the l i kel i hood of tendered programmes bei ng achi eved. At Interval s Duri ng Impl ementati on - It can hel p to i mprove the l i kel i hood of compl eti ng the project to cost and ti me- scal e i f al l ri sks are i denti fi ed and are correctl y managed as they occur. Which projects are suitable? Many experi enced users of Project Ri sk Anal ysi s and Management woul d say 'any and al l ' i n answer to thi s questi on, and experi ence does show that thi s i s the case - the reasons were stated earl i er i n the Gui de. Al l projects contai n ri sk and ri sk anal ysi s and management i s an i ntegral part of project or busi ness management. Attend any conference or read any l i terature on ri sk and i t i s cl ear that the most extensi ve appl i cati ons have occurred on l arge capi tal projects such as defence, oi l and gas, aerospace and ci vi l engi neeri ng - these projects have been the provi ng ground for many of the techni ques. However the process has been appl i ed to smal l er constructi on projects such as a water suppl y rehabi l i tati on project i n West Afri ca and the proposed constructi on of a gas pi pel i ne across Hampstead Heath i n London. In other fi el ds there are exampl es of ri sk anal ysi s and management appl i ed to i nsurance, IT projects and software devel opment and projects for organi sati onal change. The onl y general gui dance i s that the more the ri sks or more i nnovati ve the project the greater wi l l be the benefi ts. On smal l projects, the budget wi l l probabl y justi fy onl y a l ow l evel of appl i cati on, perhaps omi tti ng the quanti tati ve anal ysi s. What type of project? It can be used on any type of project, but i t i s more benefi ci al for some projects than others. Some exampl es of projects whi ch woul d benefi t from Project Ri sk Anal ysi s and Management are: i nnovati ve, new technol ogy projects projects requi ri ng l arge capi tal outl ay or i nvestment fast-track projects projects whi ch i nterrupt cruci al revenue streams unusual agreements (l egal , i nsurance or contractual ) projects wi th sensi ti ve i ssues (environment/ rel ocation) projects wi th stri ngent requi rements (regul atory/ safety) projects wi th i mportant pol i ti cal / economi c/ fi nanci al parameters. When should it be done? There are a few ci rcumstances when i t i s parti cul arl y advi sabl e to use Project Ri sk Anal ysi s and Management techni ques, these are: when there are speci fi c targets that must be met when there i s an unexpected new devel opment i n a project at poi nts of change i n the l i fe-cycl e of a project. When shouldn't it be done? There are no parti cul ar ci rcumstances under whi ch Project Ri sk Anal ysi s and Management techni ques shoul d not be used except perhaps for repeat projects, where such anal yses have al ready been carri ed out, unl ess, of course, there are speci fi c di fferences between the projects. In the presence of uncertai nty, where severe constrai nts gi ve ri se to si gni fi cant ri sk, the absence of rel evant data may make a quanti tati ve assessment not worthwhi l e. However, such ci rcumstances must never prevent a ri gorous qual i tati ve anal ysi s bei ng carri ed out. Who should do it? Many peopl e advocate the use of an i ndependent expert or external consul tant to ensure that they recei ve an unbi ased vi ew, whereas others suggest that Project Ri sk Anal ysi s and Management support shoul d be an i nternal functi on. Opi ni ons di ffer wi del y at thi s stage but essenti al l y anyone can do i t provi ded consi derati on i s gi ven to the 'angl e' from whi ch they are vi ewi ng the project. In any event, the project management team shoul d be cl osel y i nvol ved i n the anal yti cal process to ensure val i di ty of the anal ysi s and al so to al l ow them to bel i eve i n the resul ts. 6. How To Do It - Techniques And Methods As outl i ned i n Secti on 3, Project Ri sk Anal ysi s and Management can be spl i t i nto i ts two consti tuents or stages - Ri sk Anal ysi s (Qual i tati ve and Quanti tati ve) and Ri sk Management. There i s no one techni que or method for carryi ng out ei ther stage of the Project Ri sk Anal ysi s & Management 7 process. Some of the techni ques and methods that can be empl oyed are detai l ed bel ow. Qualitative Risk Analysis The fi rst phase of the qual i tati ve anal ysi s i s i denti fi cati on. Thi s i s consi dered by some as the most important el ement of the process si nce once a ri sk has been i denti fi ed i t i s possi bl e to do somethi ng about i t. Identi fi cati on can be achi eved by: i ntervi ewi ng key members of the project team organi si ng brai nstormi ng meeti ngs wi th al l i nterested parti es by usi ng the personal experi ence of the ri sk anal yst revi ewi ng past corporate experi ence i f apprai sal records are kept. Al l of the above methods are greatl y enhanced by the use of check l i sts whi ch can ei ther be generi c i n nature i .e. appl i cabl e to any project or speci fi c to the type of project bei ng anal ysed. Once i denti fi ed, the ri sks are then subjected to an i ni ti al assessment that categori ses the ri sks i nto hi gh/ l ow probabi l i ty of occurrence and major/ mi nor i mpact on the project shoul d the ri sk materi al i se. It i s often advi sabl e to prepare i ni ti al responses to each i denti fi ed ri sk, especi al l y i f ri sks are i denti fi ed that requi re urgent attenti on. The anal ysi s may be termi nated duri ng thi s phase i f the assessment i mmedi atel y suggests a way i n whi ch many i denti fi ed ri sks can be mi ti gated. It may be necessary to revi si t the i denti fi cati on phase after the assessment phase to see i f any consequenti al 'secondary' ri sks can be i denti fi ed: a secondary ri sk may resul t from a proposed response to an i ni ti al ri sk and mi ght therefore l ead to the response bei ng unsuccessful . The necessi ty of doi ng thi s wi l l l argel y be dependent on the si ze and/ or compl exi ty of the project. Quantitative Risk Analysis Once al l ri sks have been i denti fi ed, duri ng the qual i tati ve anal ysi s, i t may be appropri ate to enter i nto a detai l ed quanti tati ve anal ysi s. Thi s wi l l enabl e the i mpacts of the ri sks to be quanti fi ed agai nst the three basi c project success cri teri a: cost, ti me and performance. Several techni ques have been devel oped for anal ysi ng the effect of ri sks on the fi nal cost and ti me-scale of projects. However, such techni ques do not al ways readi l y appl y themsel ves to the anal ysi s of performance objectives. The mai n techni ques currentl y i n use are: Sensitivity Analysis, often considered to be the si mpl est form of ri sk anal ysi s. Essenti al l y, i t si mpl y determi nes the effect on the whol e project of changi ng one of i ts ri sk vari abl es such as del ays i n desi gn or the cost of materi al s. Its i mportance i s that it often hi ghlights how the effect of a single change i n one ri sk vari abl e can produce a marked di fference i n the project outcome. In practi ce, a sensi ti vi ty anal ysi s wi l l be performed for more than one ri sk, perhaps al l i denti fi ed ri sks, i n order to establ i sh those whi ch have a potenti al l y hi gh i mpact on the cost or ti me-scal e of the project. The techni que can al so be used to address the i mpact of ri sk on the economi c return of a project. Fi gure 1 shows an exampl e of a sensi ti vi ty di agram. Project Ri sk Anal ysi s & Management 8 Sens it i vi t y Di agr am f or a manuf act ur i ng Plant -100 -50 0 50 100 150 -40% -20% 0% 20% 40% % Change in Variables %
C h a n g e
i n
I R R Demand for product Cos t of Raw Materials Revenue from Product Energy Costs Figure 1 Sensitivity Diagram for a New Manufacturing Plant This diagram shows that theproject is very sensitive, as measured against theinternal rateof return, to any changes in both thedemand for the product and therevenuefrom theproduct, however, changes in energy costs or thecost of raw material havemuch less impact. Probabilistic Analysis speci fi es a probabi l i ty di stri buti on for each ri sk and then consi ders the effect of ri sks i n combi nati on. Thi s i s perhaps the most common method of performi ng a quanti tati ve ri sk anal ysi s and i s the one most peopl e consi der, i ncorrectl y, to be synonymous wi th the whol e Project Ri sk Anal ysi s and Management process. In fact, as thi s Gui de i l l ustrates, i t i s but one facet of that process. The most common form of probabi l i sti c anal ysi s uses 'sampl i ng techni ques', usual l y referred to as 'Monte Carl o Si mul ati on'. Thi s method rel i es on the random cal cul ati on of val ues that fal l wi thi n a speci fi ed probabi l i ty di stri buti on often descri bed by usi ng three esti mates: mi ni mum or opti mi sti c, mean or most l i kel y and maxi mum or pessi mi sti c. The overal l outcome for the project i s deri ved by the combi nati on of val ues sel ected for each one of the ri sks. The cal cul ati on i s repeated a number of ti mes, perhaps between 100 and 1000, to obtai n the probabi l i ty di stri buti on of the project outcome. It i s usual to carry out a probabi l i sti c ti me anal ysi s wi th the ai d of a CPM network to model the project schedul e. The same method can be used for probabi l i sti c cost anal ysi s especi al l y when the cost esti mate can be broken down i nto the same categori es or acti vi ti es as the schedul e and when cost ri sks are rel ated to ti me ri sks. If an i ndependent cost anal ysi s i s undertaken then It may be appropri ate to use a spreadsheet method. Fi gure 2 shows an exampl e of a hi stogram and cumul ati ve curve deri ved from a probabi l i sti c ti me anal ysi s usi ng a model based on a CPM network. Project Ri sk Anal ysi s & Management 9
0 1 2 3 4 5 6 31 Mar 90 30 Apr 90 30 May 90 29 J un 90 29 J ul 90 28 Aug 90 Period Ending % F r e q u e n c y 0 20 40 60 80 100 120 Based on 1000 trials Mean =29 J un 90 Standard deviation =25 days Each bar represents 3 days % C u m u l a t i v e An Oilfield Development Early Finish Histogramfor Activity G44 (First Oil) Figure 2 Time Probability Histogram and S-curve for a New Oil Field Development This diagram shows the distribution of finish dates for the achievement of first oil. It is based on 1000 iterations using Monte Carlo Sampling. The actual finish date of this particular project was achieved within 2 days of themean. Another techni que i s the Controlled Interval and Memory Method for combi ni ng probabi l i ty di stri buti ons whi ch provi des an al ternati ve to Monte Carl o Si mulati on. This techni que can offer greater preci si on for much l ess computeri sed effort if ei ther complex CPM networks or 'feedback l oops' are not i nvol ved.
Mill ion A New Office Building Project Cost 0% 20% 40% 60% 80% 100% 120% P r o b a b i l i t y
o f
C o m p l e t i n g
w i t h i n
a
C o s t 85% - upper limit 22.1m 15% - lower limit 13.1m 7 0 %
C o n f i d e n c e
I n t e r v a l Accuracy Range +ve -ve 54% - expected cost 17.4m 41% - unadjusted cost 16.1m Unallocated Provision Figure 3 Cost Probability S-curve for a New Office Building This diagram shows the distribution around a cost estimate for the final, out-turn cost for a new building. It is based on 1000 iterations using Monte Carlo Sampling. Thehighlighted figures represent the unadjusted cost i.e. the sum of all the cost elements without any risk treatment, theexpected cost derived from the statistical mean and a suggested accuracy range. Thedifferencebetween theunadjusted cost and the expected cost is considered to be an unallocated provision. Project Ri sk Anal ysi s & Management 10 Influence Diagrams are a relati vel y new techni que for ri sk anal ysi s. They provi de a powerful means of constructi ng model s of the i ssues i n a project whi ch are subject to ri sk. As a resul t i nfl uence di agrams are now used as the user i nterface to a computer based ri sk model l i ng tool thus al l owi ng the devel opment of very compl ex ri sk model s that can be used to anal yse the cost, ti me and economi c parameters of projects. Decision Trees are another graphical method of structuri ng model s. They bri ng together the i nformati on needed to make project deci si ons and show the present possi bl e courses of acti on and al l future possi bl e outcomes. Each outcome must be gi ven a probabi l i ty val ue i ndi cati ng i ts l i kel i hood of occurrence. Thi s form of ri sk anal ysi s i s often used i n the cost ri sk anal ysi s of projects. Risk Management Risk management uses the i nformation col l ected duri ng the ri sk anal ysi s phase to make deci si ons on how to i mprove the probabi l i ty of the project achi evi ng i ts cost, ti me and performance objectives. This i s done by reduci ng the ri sk where advantageous to do so and monitori ng and managi ng the ri sk which remai ns. The project manager uses the i nformati on at hi s di sposal to choose between the feasi bl e responses to each ri sk i denti fi ed duri ng the qual i tati ve phase. Thi s may i nvol ve amendi ng the project pl ans to reduce the ri sk e.g. movi ng hi gh ri sk acti vi ti es off the cri ti cal path, devel opi ng conti ngency pl ans to al l ow rapi d response i f certai n ri sks occur or setti ng up moni tori ng procedures for cri ti cal areas i n order to get earl y warni ng of ri sks occurri ng. There are two types of response to a ri sk immedi ate and conti ngency which can be defi ned as fol l ows: immediateresponse: an al terati on to the project pl an such that the i denti fi ed ri sk i s mi ti gated or el i mi nated contingency response: a provi si on i n the project pl an for a course of acti on that wi l l onl y be i mpl emented shoul d the adverse consequences of the identifi ed ri sk materi al i se. Responses to ri sks can do one or a combi nati on of fi ve thi ngs: remove- ri sks that can be el i mi nated from the project and therefore no l onger propose a threat reduce- ri sks that can be decreased by taki ng certai n acti ons i mmedi atel y avoid - ri sks that can be mi ti gated by taki ng conti ngency acti ons shoul d they occur transfer - ri sks can be passed on to other parti es, unfortunatel y thi s does not normal l y el i mi nate the ri sk i t just makes someone el se worry about it acceptance- the benefi ts that can be gai ned from taki ng the ri sk shoul d be bal anced agai nst the penal ti es. The ri sk management phase begi ns i mmedi atel y the qual i tati ve anal ysi s i s compl ete and i s then a conti nui ng process through the compl ete l i fe-cycl e of the project. The i nformati on gai ned duri ng the quanti tati ve anal ysi s al l ows the project manager to trade off taki ng acti ons now agai nst the l i kel i hood and i mpact of ri sk occurri ng. The project manager may choose to i mmedi atel y amend hi s overal l ti me and cost pl an i n order to i ncrease the probabi l i ty of achi evi ng his ti me and cost objectives. 7. What Experience Is Available? The majori ty of the methods, techni ques and processes descri bed i n thi s Gui de have been used i n a number of i ndustri es si nce the earl y 1970s. Project Ri sk Anal ysi s and Management has hi stori cal l y been associ ated wi th very l arge, hi gh capi tal projects i n speci fi c i ndustri es such as defence, oi l and gas, aerospace and ci vi l engi neeri ng. The experi ence gai ned i n these i ndustri es si nce the 70s has now begun to di ssemi nate through other industri es such as i nformati on technol ogy and manufacturi ng. The number of compani es practi si ng Project Ri sk Anal ysi s and Management i s conti nui ng to increase due to the realisati on that the methods, techni ques and processes i nvol ved form an i ntegral part of project and busi ness management. The i ncrease i n i ts use has l ed not onl y to experti se bei ng gai ned by i ndi vi dual s wi thi n compani es but the arri val of speci al i st consultancies that can trai n, advise and carry out Project Ri sk Anal ysi s and Management for thei r cl i ents. Project Ri sk Anal ysi s and Management has al so establ i shed i tsel f as an i mportant el ement i n the syl l abuses of many uni versi ti es and hi gher educati onal establ i shments. Project Ri sk Anal ysi s & Management 11 ! Further i nformati on regardi ng computer software avai l abl e to assi st i n performi ng quanti tati ve ri sk anal ysi s and references to further i nformati on, papers and publ i cati ons can be obtai ned from: The Secretary The Associ ati on of Project Managers 85 Oxford Road, Hi gh Wycombe Bucki nghamshi re HP11 2DX