UNIT II

Project Planning
The primary purpose of planning is to establish a set of directions in enough detail to tell the
project team exactly what must be done. The purpose of planning is to facilitate later
accomplishment.
Project Planning Process:

Step 1:Defining the Project Scope

Step 2:Establishing Project Priorities
Step 3:Creating the Work Breakdown Structure
Step 4:Integrating the WBS with the Organization
Step 5:Coding the WBS for the Information System

Step 1:Defining the Project Scope

Project Scope
– A definition of the end result or mission of the project—a product or service for
the client/customer—in specific, tangible, and measurable terms.
• Purpose of the Scope Statement
– To clearly define the deliverable(s) for the end user.
– To focus the project on successful completion of its goals.
– To be used by the project owner and participants as a planning tool and for
measuring project success.
Project scope checklist
1. Project objective
2. Deliverables
3. Milestones
4. Technical requirements
5. Limits and exclusions
6. Reviews with customer
 • Scope Statements
– Also called statements of work (SOW)
• Project Charter
– Can contain an expanded version of scope statement
– A document authorizing the project manager to initiate and lead the project.
• Project Creep
– The tendency for the project scope to expand over time due to changing
requirements, specifications, and priorities.

Step 2:Establishing Project Priorities

• Causes of Project Trade-offs
– Shifts in the relative importance of criterions related to cost, time, and
performance parameters
• Budget–Cost
• Schedule–Time
• Performance–Scope
• Managing the Priorities of Project Trade-offs
– Constrain: a parameter is a fixed requirement.
– Enhance: optimizing a parameter over others.
– Accept: reducing (or not meeting) a parameter requirement.
Project Trade-offs

Project Priority Matrix

Step 3:Creating the Work Breakdown Structure
The WBS picture a project subdivided into hierarchical units of tasks, subtasks, work packages,
etc.The Work Breakdown Structure (WBS) can take a variety of forms that serve a variety of
purposes. The WBS often appears as an outline with Level I tasks on the left and successive
levels appropriately indented.
– An hierarchical outline (map) that identifies the products and work elements
involved in a project.
– Defines the relationship of the final deliverable (the project) to its subdeliverables,
and in turn, their relationships to work packages.
– Best suited for design and build projects that have tangible outcomes rather than
process-oriented projects.
– Facilitates evaluation of cost, time, and technical performance of the organization
on a project.
– Provides management with information appropriate to each organizational level.
– Helps in the development of the organization breakdown structure (OBS). which
assigns project responsibilities to organizational units and individuals
– Helps manage plan, schedule, and budget.
– Defines communication channels and assists in coordinating the various project
elements.
A work package is the lowest level of the WBS.
– It is output-oriented in that it:
• Defines work (what).
• Identifies time to complete a work package (how long)
• Identifies a time-phased budget to complete a work package (cost)
• Identifies resources needed to complete a work package (how much)
• Identifies a single person responsible for units of work (who)
• Identifies monitoring points (milestones) for measuring success.

General steps for designing and using the WBS:

1. Using information from the action plan, list the task breakdown in successively finer
levels of detail. Continue until all meaningful tasks or work packages have been identified
 2. For each such work package, identify the data relevant to the WBS. List the personnel
and organizations responsible for each task.
3. All work package information should be reviewed with the individuals or organizations
who have responsibilityfor doing or supporting the work in order to verify the accuracy of
the WBS
4. The total project budget should consist of four elements: direct budgets from each task; an
indirect cost budget for the project; a “contingency” reserve for unexpected emergencies; and
any residual, which includes the profit derived from the project
5. The project master schedule integrates the many different schedules relevant to the
various parts of the project
Items 1-5 focus on the WBS as a planning tool but it may also be used to monitor and
control the project
Items 6 and 7 focus on the WBS as an aid to monitor and control a project:
6. The project manager can examine actual resource use, by work element, work package,
task, up to the full project level. The project manager can identify problems, harden the
estimates of final cost, and make sure that relevant corrections have been designed andare
ready to implement
7. The project schedule may be subjected to the same comparisons as the project budget.
Actual progress is compared to scheduled and corrective action can be taken
Step 4:Integrating the WBS with the Organization

• Organizational Breakdown Structure (OBS)

– Depicts how the firm is organized to discharge its work responsibility for a
project.
• Provides a framework to summarize organization work unit performance.
• Identifies organization units responsible for work packages.
• Ties the organizational units to cost control accounts.
Step 5:Coding the WBS for the Information System

• WBS Coding System

– Defines:
• Levels and elements of the WBS
• Organization elements
• Work packages
• Budget and cost information
– Allows reports to be consolidated at any level in the organization structure
Work Package estimates
Project Roll-up
Cost Account
– The intersection of the WBS and the OBS that is a budgetary control point for
work packages.
– Used to provide a roll-up (summation) of costs incurred over time by a work
package across organization units and levels, and by deliverables.

Process Breakdown Structure

• Process-Oriented Projects
– Are driven by performance requirements in which the final outcome is the product
of a series of steps of phases in which one phase affects the next phase.
• Process Breakdown Structure (PBS)
– Defines deliverables as outputs required to move to the next phase .
– Checklists for managing PBS:
• Deliverables needed to exit one phase and begin the next.
 • Quality checkpoints for complete and accurate deliverables.
• Sign-offs by responsible stakeholders to monitor progress.

Responsibility Matrix
– Also called a linear responsibility chart.
– Summarizes the tasks to be accomplished and who is responsible for what on the
project.
• Lists project activities and participants.
• Clarifies critical interfaces between units and individuals that need
coordination.
• Provide an means for all participants to view their responsibilities and
agree on their assignments.
• Clarifies the extent or type of authority that can be exercised by each
participant.
Project Plan Elements
z The process of developing the project plan varies among organizations, but any project
plan must contain the following elements:
y Overview - a short summary of the objectives and scope of the project
y Objectives - A more detailed statement of the general goals noted in the overview
section
y General Approach - describes both the managerial and technical approaches to
the work
y Contractual Aspects - includes a complete list and description of all reporting
requirements, customer supplied resources, liaison arrangements, advisory
committees, project review and cancellation procedures, etc.
y Schedules - this section outlines the various schedules and lists all the milestone
events
y Resources - this includes the budget (both capital and expense requirements) as
well as cost monitoring and control procedures
y Personnel - this section lists the expected personnel requirements of the project
including special skills, training needs, and security clearances
y Evaluation Methods - every project should be evaluated against standards and by
methods established at the project’s inception
 y Potential Problems - this section should include any potential difficulties such as
subcontractor default, technical failure, tight deadlines, resource limitations and
the like. Preplanning may avert some crises

Role of Multidisciplinary Teams

A multidisciplinary team is a group of workers from different professional backgrounds or
work disciplines that collaborate on specific projects or on an ongoing basis. This type of
work team is common in an office setting because of its value in discussing problems or
challenges with varied perspectives.

Project budgeting is determining the total amount of money that is allocated for the project to
use. The project budget has been estimated by the project manager and or the project
management team. The budget is an estimate of all the costs that should be required to complete
the project. I use the words should be because if a project is poorly estimated then the project
will require more costs. There are four ways for the project manager to estimate the project's
budget. The four estimating techniques that a project manager can use are analogous, parametric,
top-down, and bottom-up. We will discuss each one and look at an example of each one in use to
see how it works.

Estimating Cost
Cost estimating is the practice of forecasting the cost of completing a project with a defined scope. It is
the primary element of project cost management, a knowledge area that involves planning, monitoring,
and controlling a project’s monetary costs. (Project cost management has been practiced since the
1950s.) The approximate total project cost, called the cost estimate, is used to authorize a project’s
budget and manage its costs.

Importance
• Estimates are needed to support good decisions.
• Estimates are needed to schedule work.
• Estimates are needed to determine how long the project should take and its cost.
 • Estimates are needed to determine whether the project is worth doing.
• Estimates are needed to develop cash flow needs.
• Estimates are needed to determine how well the project is progressing.
• Estimates are needed to develop time-phased budgets and establish the project baseline.
Guidelines for estimation
1. Have people familiar with the tasks make the estimate.
2. Use several people to make estimates (crowdsourcing).
3. Base estimates on normal conditions, efficient methods, and a normal level of resources.
4. Use consistent time units in estimating task times.
5. Treat each task as independent, don’t aggregate.
6. Don’t make allowances for contingencies.
7. Adding a risk assessment helps avoid surprises to stakeholders.

Professional estimators use defined techniques to create cost estimates that are used to assess the
financial feasibility of projects, to budget for project costs, and to monitor project spending. An
accurate cost estimate is critical for deciding whether to take on a project, for determining a project’s
eventual scope, and for ensuring that projects remain financially feasible and avoid cost overruns.
Cost estimates are typically revised and updated as the project’s scope becomes more precise and as
project risks are realized — as the Project Management Body of Knowledge (PMBOK) notes, cost
estimating is an iterative process. A cost estimate may also be used to prepare a project cost baseline,
which is the milestone-based point of comparison for assessing a project’s actual cost performance.
Key Components of a Cost Estimate
A cost estimate is a summation of all the costs involved in successfully finishing a project, from
inception to completion (project duration). These project costs can be categorized in a number of ways
and levels of detail, but the simplest classification divides costs into two main categories: direct costs
and indirect costs.
 Direct costs are broadly classified as those directly associated with a single area (such as a
department or a project). In project management, direct costs are expenses billed exclusively to a
specific project. They can include project team wages, the costs of resources to produce physical
products, fuel for equipment, and money spent to address any project-specific risks.
  Indirect costs, on the other hand, cannot be associated with a specific cost center and are
instead incurred by a number of projects simultaneously, sometimes in varying amounts. In
project management, quality control, security costs, and utilities are usually classified as indirect
costs since they are shared across a number of projects and are not directly billable to any one
project.
A cost estimate is more than a simple list of costs, however: it also outlines the assumptions underlying
each cost. These assumptions (along with estimates of cost accuracy) are compiled into a report called
the basis of estimate, which also details cost exclusions and inclusions. The basis of estimate report
allows project stakeholders to interpret project costs and to understand how and where actual costs
might differ from approximated costs.
Beyond the broad classifications of direct and indirect costs, project expenses fall into more specific
categories. Common types of expenses include:
 Labor: The cost of human effort expended towards project objectives.
 Materials: The cost of resources needed to create products.
 Equipment: The cost of buying and maintaining equipment used in project work.
 Services: The cost of external work that a company seeks for any given project (vendors,
contractors, etc.).
 Software: Non-physical computer resources.
 Hardware: Physical computer resources.
 Facilities: The cost of renting or using specialized equipment, services, or locations.
 Contingency costs: Costs added to the project budget to address specific risks.
To create accurate estimates, cost estimators use a combination of estimating techniques that
allow for varying levels of accuracy. While the cost estimator always aims to create the most
accurate estimate possible, they may have to start with less accurate estimates and revise once
project scope and deliverables are fleshed out.
The most widely used cost estimating techniques are:
Analogous estimating: Like expert judgment, analogous estimating — also called top-down
estimating or historical costing — relies on historical project data to form estimates for new projects.
Analogous estimating draws from a purpose-built archive of historical project data, often specific to an
organization. If an organization repeatedly performs similar projects, it becomes easier to draw parallels
between project deliverables and their associated costs, and to adjust these according to the scale and
complexity of a project.
Analogous estimating can be quite accurate if used to form estimates for similar projects and if experts
can precisely assess the factors affecting costs. For example, a similar project conducted three years ago
might be used as the basis for a new project cost estimate. Adjust the estimate upward for inflation,
downward for the amount of resources required, and upward again for the project’s level of difficulty.
These adjustments are typically stated as percentage changes — a new project might require 10 percent
more preparation time and 15 percent more on resources. However, project management professional
Rupen Sharma stresses the need to make sure that projects really are comparable since projects that
appear similar, such as road construction, can actually cost vastly different amounts depending on other
factors — say, local landscapes and climates.
Bottom-up estimating: Also called analytical estimating, this is the most accurate estimating
technique - if a complete work breakdown structure is available. A work breakdown structure divides
project deliverables into a series of work packages (each work package comprised of a series of tasks).
The project team estimates the cost of completing each task, and eventually creates a cost estimate for
the entire project by totaling the costs of all its constituent tasks and work packages — hence the name
bottom-up. Bottom-up estimates can draw from the knowledge of experienced project teams, who are
better equipped to provide task cost estimates.
While deterministic estimating techniques such as bottom-up estimating are undoubtedly the most
accurate, they can also be time-consuming, especially in large and complex projects with numerous
work breakdown structure components. It is not unusual for definitive estimates to also use techniques
such as stochastic, parametric, and expert-judgment-based estimating (if these have proved suitably
accurate in early estimates). That said, bottom-up estimating is also the most versatile estimating
technique and you can use it for many types of projects.
Parametric estimating: For projects that involve similar tasks with high degrees of repeatability, use a
parametric estimating technique to create highly accurate estimates using unit costs. To use parametric
estimating, first divide a project into units of work. Then, you must determine the cost per unit, and
then multiply the number of units by the cost per unit to estimate the total cost. These units might be the
length in feet of pipeline to be laid, or the area in square yards of ceiling to be painted. As long as the
cost per unit is accurate, estimators determine quite precise and accurate estimates.
However, as project management professional Dick Billows, Chief Executive Officer of 4PM.com,
cautions, parametric estimating does not work well with creative projects or those with little
repeatability. It is difficult, for example, to come up with an accurate cost per chapter for editing a book
written by 12 different authors, since each chapter is likely to require a different amount of work.
Similarly, a writer penning a fantasy novel on commission may find herself struggling to advance the
story at some points and fully immersed in its flow at others. Therefore, parametric estimating is a good
choice only for skill-based projects with uniform, repeatable tasks.
Cost of quality: The cost of quality is a concept used in project management - and more broadly in
product manufacturing - to measure the financial cost of ensuring that products meet agreed-upon
specifications. It usually includes the costs of preventing, identifying, and addressing defects. As an
aspect of quality management, the cost of quality is usually an indirect project cost.
Delphi cost estimation: An empirical estimation technique based on expert consensus, Delphi
estimation can help resolve discrepancies among expert estimates. A coordinator has experts prepare
anonymous cost estimates with rationales; once these anonymous estimates are submitted, the
coordinator prepares and distributes a summary of the responses and experts create a new set of
anonymous estimates. This exercise is repeated for several rounds. The coordinator may or may not
allow the experts to discuss estimates after each round. As the exercise progresses, the estimates should
converge (indicating growing consensus between the estimators). When an estimate consensus has
been reached, the coordinator ends the exercise and prepares a final consensus-based estimate.
Empirical costing methods: Empirical costing methods draw from previous project experiences using
software- or paper-based systems. These methods work well for projects that are similar and frequently
conducted in certain industries. A project manager wanting to obtain an empirical cost estimate
completes a form detailing the project’s characteristics and parameters, and the system estimates a cost
based on the kind of project. Since empirical costing methods draw from existing data and are
increasingly automated, they are accurate, time-effective choices for less complicated projects. The
Royal Institution of Chartered Surveyors’ Building Cost Information Service (BCIS), which computes
rebuilding costs for houses, is an example of an empirical costing method.
Expert judgment: Most commonly used in order of magnitude and intermediate estimates, expert
judgment estimating is conducted by specialists who know how much similar projects have cost in the
past. As such, it relies mainly on drawing parallels between past and future projects to create and adjust
estimates. Since any two projects are unlikely to be identical and project work is typically complex,
expert judgment estimates are presented as a range. While a wide range typically means these estimates
have limited use, project management professional Billows points out that such broad estimates are
only meant to indicate project feasibility and provide a ballpark figure to hold project managers
accountable. In this regard, they “are better than commitments you can’t keep,” Billows says.
Reserve analysis: Reserve analysis is an umbrella term for a number of methods used to determine the
size of contingency reserves, which are budgetary allocations for the incidence of known risks. One
outcome of reserve analysis is a technique called padding, which involves increasing the budgeted cost
for each scheduled activity beyond the actual expected cost by a fixed percentage. Critical
path activities may have larger percentages assigned as padding. The Project Management Institute
(PMI) also suggests other methods for managing contingency reserves, including the use of zero-
duration activitiesthat run in tandem with scheduled activities and the use of buffer activities that
contain both time and cost contingency reserves.
Resource costing: Resource costing is a simple mathematical method to compute the costs of hiring
resources for a project. It is easily done by multiplying the hourly cost of hiring a resource by the
number of projected employment hours.
Three-point estimating: Three-point estimating has roots in a statistical method called the Program
Analysis and Review Technique (PERT), which is used to analyze activity, project costs, or durations
by determining optimistic, pessimistic, and most likely estimates for each activity. Three-point
estimating uses a variety of weighted formula methods to compute expected costs/durations from
optimistic, pessimistic, and most likely costs/durations. One commonly used formula for creating
estimates is:

Expected value = [Optimistic estimate + Pessimistic estimate + (4 x Most likely estimate)] ÷   6

The standard deviation is also calculated to create confidence intervals for estimates:

Standard deviation = (Pessimistic estimate – Optimistic estimate) ÷ 6

Three-point estimating can construct probability distributions of estimates in a number of fields. In

project cost estimating, estimators may create a three-point estimate of cost using optimistic,
pessimistic, and most likely costs. Alternatively, for projects that measure deliverables in units of time
with fixed costs, estimators may use expected durations as the number of units and determine costs via
parametric estimates. However, remember that three-point estimates are only as good as their initial
optimistic, pessimistic, and most likely estimates - if these are not accurate, the expected values are
useless.

Conditions for Preferring Top-Down or Bottom-up Time and Cost Estimates

Condition Macro Estimates Micro Estimates

Strategic decision making X
Cost and time important X
High uncertainty X
Internal, small project X
Fixed-price contract X
Customer wants details X
Unstable scope X

Project Estimation Process

Work element costing
• Determine resource requirements and then costs for each task
– costs (e.g., materials)
– labor time
– labor rate
– equipment time
– equipment rate
– overhead
Developing Budgets
• Time-Phased Budgets
– A cost estimate is not a budget unless it is time-phased.
• Time phasing begins with the time estimate for a project.
• Time-phased budgets mirror how the project’s cash needs (costs) will
occur or when cash flows from the project can be expected.
• Budget variances occur when actual and forecast events do not coincide.
Three views of cost
Types of cost
• Direct Costs
– Costs that are clearly chargeable to a specific work package.
• Labor, materials, equipment, and other
• Direct (Project) Overhead Costs
– Costs incurred that are directly tied to an identifiable project deliverable or work
package.
• Salary, rents, supplies, specialized machinery
• General and Administrative Overhead Costs
– Organization costs indirectly linked to a specific package that are apportioned to
the project

Refining estimates
• Reasons for Adjusting Estimates
– Interaction costs are hidden in estimates.
– Normal conditions do not apply.
– Things go wrong on projects.
– Changes in project scope and plans.
• Adjusting Estimates
– Time and cost estimates of specific activities are adjusted as the risks, resources,
and situation particulars become more clearly defined.
• Contingency Funds and Time Buffers
 – Are created independently to offset uncertainty.
– Reduce the likelihood of cost and completion time overruns for a project.
– Can be added to the overall project or to specific activities or work packages.
– Can be determined from previous similar projects.
• Changing Baseline Schedule and Budget
– Unforeseen events may dictate a reformulation of the budget and schedule.

Characteristics of good cost estimate

The usefulness of a cost estimate depends on how well it performs in areas like reliability and
precision. There are several characteristics for judging cost estimate quality. These include:  
Accuracy: A cost estimate is only as useful as it is accurate. Aside from selecting the most accurate
estimating techniques available, accuracy can be improved by revising estimates as the project is
detailed and by building allowances into the estimate for resource downtime, project assessment and
course correction, and contingencies.
Confidence level: Since even the best estimates contain some degree of uncertainty, it is important to
communicate the amount of potential variability in any estimate to stakeholders. Confidence levels can
communicate estimates as ranges, such as those produced by three-point estimating techniques or
Monte Carlo simulations.
Credibility: Stakeholders or sponsors preparing to authorize budgets want to know that estimates are
founded in established fact or in practical experience. Increase the credibility of an estimate by
incorporating expert judgment and by using set values for variables, such as unit costs and work rates.
Documentation: Since project managers are eventually held accountable to cost estimates, it is
important that the assumptions underlying estimates are identified and recorded in writing, and that
regular budget statements are provided. Thorough documentation precludes misunderstandings and
helps stakeholders understand the reasons behind estimate revisions.
Precision: To reduce the variation in cost estimates due to techniques used, estimators should compare
and corroborate estimates. Cost estimating software makes this fairly easy.
Reliability: Reliability is a concept based on the extent to which historical cost estimates for a certain
type of project have been accurate. For new projects that are similar to successfully-completed past
projects, analogous estimating techniques will allow reliable estimates.
Risk detailing: All projects can be affected by negative risks, so it is important to build allowances into
cost estimates. Thorough risk identification and allocation of contingency reserves is the most common
approach. Estimates should be overestimated rather than underestimated, and estimators should
establish tolerance levels for cost deviation.
Uniformity: For performing organizations that conduct many projects of the same type, expect unit
costs to be reasonably consistent across projects and only adjusted for inflation. This type of unit cost
uniformity is possible for organizations that have undertaken several similar projects, which enables
them to create reference lists for recommended unit costs.
Validity: Confirming the validity of a cost estimate involves checking the underlying data for
accuracy. Improve validity by relying on established cost literature, and on cost indices when up-to-
date literature is unavailable.
Verification: Cost verification is the act of checking that mathematical operations used in an estimate
were performed correctly. Cost verification is much easier if estimates are properly documented.

Causes of inaccurate cost estimate

Lack of experience with similar projects: Accuracy in cost estimating tends to increase as estimators,
project teams, and organizations gain experience working with similar projects. Inexperienced
estimators and project teams may not be familiar with the scope of a project, which may lead to
inaccuracies with - even with deterministic estimating techniques. At an organizational level, the use of
analogous estimating techniques is typically not reliable if the organization has not conducted similar
projects before.
Length of the planning horizon and of the project: Professional estimators stress the importance of
not making premature estimates. As we have discussed, accurate estimating depends on the degree to
which a project is defined. For large, complex projects, approaches such as rolling wave planning mean
that future work is less well defined. It is important that cost estimating practices reflect this and that
cost estimates are revised as more up-to-date information becomes available. For mega projects that
take several years to complete, it’s important to take currency value fluctuation and political climates
into account.
Human resources: Creating accurate estimates becomes more difficult as the number of human
resources involved in a project increases. While it is standard practice to assume that any resource will
only be productive 80% of the time and to create estimates accordingly, it becomes harder to account
for costs in managing and organizing people. This is especially noticeable in project activities that
involve building consensus or coordinating tasks across many people.
Difficulty also arises when estimating costs of human resources via resource costing or parametric
estimating. Both estimating techniques revolve around the concept of unit-based costing, but the
complexities of managing people make it difficult both to obtain accurate unit costs and to forecast the
task completion time accurately. Further, it’s unlikely that workers’ skill levels will be identical (even if
they are classified as such), so some time deviation is inevitable. This shows the value of systematically
overestimating instead of underestimating, especially when dealing with human workers.
Several other common mistakes can affect the accuracy of estimates:
Not fully understanding the work involved in completing work packages: This is sometimes a
problem for inexperienced project teams who have not worked on similar projects before.
Expecting that resources will work at maximum productivity: A more appropriate rule of thumb is
to assume 80% productivity.
Dividing tasks between multiple resources: Having more than one resource working on a task
typically necessitates additional planning and management time, but this extra time is sometimes not
taken into account.
Failing to identify risks and to prepare adequate contingency plans and reserves: Negative risks
can both raise costs and extend durations.
Not updating cost estimates after project scope changes: Updated cost estimates are an integral part
of scope change management procedures, as project scope changes render prior estimates useless.
Creating hasty, inaccurate estimates because of stakeholder pressure: Since project managers are
held accountable for estimates, order of magnitude estimates are a much better choice than numbers
pulled out of thin air.
Stating estimates as fixed sums, rather than ranges: Point estimates are misleading. All estimates
have inherent degrees of uncertainty, and it is important to adequately communicate these via estimate
ranges.
Making a project fit a fixed budget amount: The scope of a project should determine its budget, not
the other way around. As Trevor L. Young explains in his book How to be a Better Project Manager,
estimating is a “decision about how much time and resource are required to carry out a piece of work to
acceptable standards of performance.” The reverse approach — planning projects to fit budgets — is
likely to result in projects that fail to meet requirements and to deliver results.
Creating Database for estimates

BUDGET UNCERTAINTY AND RISK MANAGEMENT

Estimate Made at Project Start

Three Basic Causes for Change in Projects

• Errors made by cost estimator about how to achieve tasks.
• New knowledge about the nature of the performance goal or setting.
• A mandate.

RISK & UNCERTAINITY IN PROJECTS

IN a nutshell,
Risk
Risk is an unplanned event and if it occurs it may affect any of your project objectives.
If it affects your project positively then the risk is positive, and if it affects the project negatively
it is a negative risk.
There are separate risk response strategies for negative and positive risks.
The objective of a negative risk response strategy is to minimize the impact of negative risks and
the objective of a positive risk response strategy is to maximize the chance of positive risks
happening.
You might also hear about two more risks terms: known risks and unknown risks.
Known risks are those risks which you have identified during the identify risks process and
unknown risks are those risks which you couldn’t identify during the identify risks process.
A contingency plan is made for known risks, and you will use the contingency reserve to manage
these risks.
On the other hand, unknown risks are managed through a workaround and the management
reserve is used to manage these kinds of risks.
Uncertainty
Uncertainty is a lack of complete certainty. In uncertainty, the outcome of any event is
completely unknown, and it cannot be measured or guessed. Here you don’t have any
background information on the event.
Now you may argue that uncertainty is the same as unknown risks, however, uncertainty is not
an unknown risk.
In uncertainty, you completely lack the background information of an event even though it is
identified. In the case of an unknown risk, although you have the background information, you
simply miss it during the identify risks process.
A Real-World Example on Risk and Uncertainty
Let us say there are two well-known football teams consisting of renowned players, and they are
going to play a football match the next day.
Can you tell me exactly which team is going to win?
Obviously not. However, you can make an educated guess by reviewing and analyzing the past
performance of each individual player, the team, and the results of matches they played against
each other.
Here you can come up with some number like there is a 40% chance of Team A or Team B
winning, or there is a possibility of Team A or Team B losing the match by 70%.
Now, let us put the same football match in a different scenario.
Let us say again that two football teams are going to play a game, and no players have been
selected for either team.
In this situation, if somebody asked you which team is going to win, what would you say?
You’re completely clueless. You don’t know which team consists of which players, and you
have no idea how the teams will perform, etc.
In this situation, you don’t have any past information, are totally clueless, and hence cannot
predict the outcome of the event, even though the match is the same, the rules are the same, and
even the stadium is the same.
This situation is called uncertainty.
Difference Between Risk and Uncertainty
The following are a few differences between risk and uncertainty:
In risk you can predict the possibility of a future outcome while in uncertainty you cannot predict
the possibility of a future outcome.
Risk can be managed while uncertainty is uncontrollable.
Risks can be measured and quantified while uncertainty cannot.
You can assign a probability to risks events, while with uncertainty you can’t.

Risk
Identification and analysis of project risks are required for effective risk management. One
cannot manage risks if one does not characterize them to know what they are, how likely they
are, and what their impact might be. Project risk management is not limited to the identification
and aggregation of risks, and it cannot be repeated too often that the point of risk assessment is to
be better able to mitigate and manage the project risks. Additional effort is needed to develop
and apply risk management strategies: Project risk management tools and methods, discussed
later, can facilitate this effort.
Inadequate or untimely characterization of risks has a number of consequences, all of them
detrimental to the project:
Time and money may be spent needlessly to prepare for risks that are actually negligible.
The need for contingency allowances may be overstated, tying up the owner’s funds, preventing
other vital projects from being funded (opportunity costs) (Mak and Picken, 2000), and resulting
in increased project costs, as excess contingencies are typically expended rather than returned to
the project sponsor.
Contingency allowances may be understated, leading to budget or schedule overruns and often
performance and quality shortfalls as well, as quality and scope are reduced in an attempt to keep
costs within the budget.
Actual significant risks may be missed and result in unwelcome surprises for the project manager
and owner—cost overruns, completion delays, loss of functions to be provided by the project,
and even cancellation.
GENERAL PROJECT RISK CHARACTERIZATION
The types of project risks addressed in this report include these:
Performance, scope, quality, or technological risks. These include the risks that the project
when complete fails to perform as intended or fails to meet the mission or business requirements
that generated the justification for the project. Performance risks can also lead to schedule and
cost risks if technological problems increase the duration and cost of the project.
Environment, safety, and health risks. These include the risks that the project may have a
detrimental effect on the environment or that hidden hazards may be uncovered during project
execution. Serious incidents can have a severe impact on schedule and costs.
Schedule risk. This is the risk that the project takes longer than scheduled. Schedule risk may
also lead to cost risks, as longer projects always cost more, and to performance risk, if the project
is completed too late to perform its intended mission fully. Even if cost increases are not severe,
delays in project completion reduce the value of the project to the owner.
Cost risk. This is the risk that the project costs more than budgeted. Cost risk may lead to
performance risk if cost overruns lead to reductions in scope or quality to try to stay within the
baseline budget. Cost risk may also lead to schedule risk if the schedule is extended because not
enough funds are available to accomplish the project on time.
Loss of support. Loss of public or stakeholder support for the project’s goals and objectives may
ultimately lead to a reduction of scope and to funding cuts, and thus contribute to poor project
performance. Although the above types of risks may be encountered in an almost infinite variety
of forms and intensity, it is most useful to consider two varieties:
Incremental risks. These include risks that are not significant in themselves but that can
accumulate to constitute a major risk. For example, a cost overrun in one subcontract may not in
itself constitute a risk to the project budget, but if a number of subcontracts overrun due to
random causes or a common cause (i.e., a common mode failure) affecting them all, then there
may be a serious risk to the project budget. While individually such risks may not be serious, the
problem lies in the combination of a number of them and in the lack of recognition that the
cumulative effect is a significant project risk. An obvious example of an incremental risk in
construction is weather-related delays, which are not usually major problems in themselves, but a
long run of inclement weather that impedes progress on the project may create a serious
challenge to the schedule and budget.
Catastrophic risks. These include risks that are individually major threats to the project
performance, ES&H, cost, or schedule. Their likelihood can be very low but their impact can be
very large. Examples of such risks are dependence on critical technologies that might or might
not prove to work, scale-up of bench-level technologies to full-scale operations, discovery of
waste products or contamination that are not expected or not adequately characterized, and
dependence on single suppliers or sources of critical equipment.
CONSEQUENCES OF INCREASED PROJECT UNCERTAINTY
Studies of projects with low and high degrees of uncertainty (see, e.g., Shenhar, 2001) show that
as uncertainty increases there is also an increased likelihood of the following:
Increased project budgets,
Increased project duration,
Increased planning effort,
Increased number of activities in the planning network,
Increased number of design cycles,
Increased number of design reviews,
Delayed final design,
Increased need for exchange of information outside of formal meetings and documentation,
Increased management attention and effort (probabilistic risk assessment, risk mitigation),
Increased systems engineering effort, and
Increased quality management effort.
The use of techniques and skills that are appropriate to low-uncertainty projects may give poor
results when applied to high-uncertainty projects, for which a flexible decision-making approach
focused on risk management may be more successful. The owner can determine whether a
project is very low risk or has significant risks by performing a risk assessment, which starts with
risk characterization.

RISK MANAGEMENT PROCESS

Managing risks on projects is a process that includes risk assessment and a mitigation strategy
for those risks. Risk assessment includes both the identification of potential risk and the
evaluation of the potential impact of the risk. A risk mitigation plan is designed to eliminate or
minimize the impact of the risk events—occurrences that have a negative impact on the project.
Identifying risk is both a creative and a disciplined process. The creative process includes
brainstorming sessions where the team is asked to create a list of everything that could go wrong.
All ideas are welcome at this stage with the evaluation of the ideas coming later.
Risk Identification
A more disciplined process involves using checklists of potential risks and evaluating the
likelihood that those events might happen on the project. Some companies and industries develop
risk checklists based on experience from past projects. These checklists can be helpful to the
project manager and project team in identifying both specific risks on the checklist and
expanding the thinking of the team. The past experience of the project team, project experience
within the company, and experts in the industry can be valuable resources for identifying
potential risk on a project.
Identifying the sources of risk by category is another method for exploring potential risk on a
project. Some examples of categories for potential risks include the following:
 Technical
 Cost
 Schedule
  Client
 Contractual
 Weather
 Financial
 Political
 Environmental
 People
The people category can be subdivided into risks associated with the people. Examples of people
risks include the risk of not finding the skills needed to execute the project or the sudden
unavailability of key people on the project. David Hillson 1 uses the same framework as the work
breakdown structure (WBS) for developing a risk breakdown structure (RBS). A risk
breakdown structure organizes the risks that have been identified into categories using a table
with increasing levels of detail to the right.
Risks in John’s Move
In John’s move, John makes a list of things that might go wrong with his project and uses his
work breakdown structure as a guide. A partial list for the planning portion of the RBS is shown
in Figure 11.1.
Figure 11.1 Risk Breakdown Structure (RBS)
The result is a clearer understanding of where risks are most concentrated. Hillson’s approach
helps the project team identify known risks, but can be restrictive and less creative in identifying
unknown risks and risks not easily found inside the work breakdown structure.

The actual identification of risks may be carried out by the owner’s representatives, by
contractors, and by internal and external consultants or advisors. The risk identification function
should not be left to chance but should be explicitly covered in a number of project documents:
Statement of work (SOW),
Work breakdown structure (WBS),
Budget,
Schedule,
Acquisition plan, and
Execution plan.

Risk Analysis Tools

Tool Characteristics
Two-dimensional impact/ Qualitative, simple to use and most frequently used, can be
probability expanded to three or more dimensions, and can be combined with
FMEA
Pareto diagram Simple qualitative method for prioritizing risk elements
Failure modes and effects Qualitative, used for initial screening only, effective in a team
analysis (FMEA) environment
Project Definition Rating Qualitative, used in front-end project planning, effective in a team
Index environment
Multivariate statistical Quantitative, requires historical database
model
Event tree Quantitative, rarely used for risk analysis
System dynamics model Both qualitative and quantitative, rarely used but effective, requires
skilled modelers
Sensitivity analysis Quantitative, useful regardless of which other process used, useful in
absence of hard data
Project simulation Both qualitative and quantitative, useful for team building,
expensive to implement
Stochastic simulation Quantitative, frequently used, often misused, so limitations must be
made clear
Additive model Quantitative, can be adjusted as project progresses

Risk Evaluation
After the potential risks have been identified, the project team then evaluates the risk based on
the probability that the risk event will occur and the potential loss associated with the event. Not
all risks are equal. Some risk events are more likely to happen than others, and the cost of a risk
event can vary greatly. Evaluating the risk for probability of occurrence and the severity or the
potential loss to the project is the next step in the risk management process.
Having criteria to determine high impact risks can help narrow the focus on a few critical risks
that require mitigation. For example, suppose high-impact risks are those that could increase the
project costs by 5% of the conceptual budget or 2% of the detailed budget. Only a few potential
risk events met 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. These
become the critical few.
Figure 11.2 Risk and Impact

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 assure 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 occurring 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.
Risk Analysis of Equipment Delivery
A project team analyzed the risk of some important equipment not arriving to the project on
time. The team identified three pieces of equipment that were critical to the project and would
significantly increase the costs of the project 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 the project. One reason, as found
by David Parker and Alison Mobey2 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. Additionally, the project manager’s personality and management style play into risk
preparation levels. Some project managers are more proactive and will 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 with 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
execution 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. For example, the typical output from a
Monte Carlo simulation may reflect that there is a 10% chance that one of the three important
pieces of equipment will be late and that the weather will also be unusually bad after the
equipment arrives.
Risk Mitigation
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
the following ways:
 Risk avoidance
 Risk sharing
 Risk reduction
 Risk transfer
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 practicing risk avoidance by avoiding
damage done by someone under the influence of drugs.
Risk sharing involves partnering with others to share responsibility for the risk activities. Many
organizations that work on international projects will reduce political, legal, labor, 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 the 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 labor strikes are examples of events that can significantly impact the project
and that are outside the control of the project team.
Contingency Plan
The project risk plan balances the investment of the mitigation against the benefit for the project.
The project team often develops an alternative method for accomplishing a project goal when a
risk event has been identified that may frustrate the accomplishment of that goal. These plans are
called contingency plans. The risk of a truck drivers’ strike may be mitigated with a contingency
plan that uses a train to transport the needed equipment for the project. If a critical piece of
equipment is late, the impact on the schedule can be mitigated by making changes to the
schedule to accommodate a late equipment delivery.
Contingency funds are funds set aside by the project team to address unforeseen events that
cause the project costs to increase. Projects with a high-risk profile will typically have a large
contingency budget. Although the amount of contingency allocated in the project budget is a
function of the risks identified in the risk analysis process, contingency is typically managed as
one line item in the project budget.
Some project managers allocate the contingency budget to the items in the budget that have high
risk rather than developing one line item in the budget for contingencies. This approach allows
the project team to track the use of contingency against the risk plan. This approach also
allocates the responsibility to manage the risk budget to the managers responsible for those line
items. The availability of contingency funds in the line item budget may also increase the use of
contingency funds to solve problems rather than finding alternative, less costly solutions.