Project Planning & Analysis

GrEg5202

CHAPTER FIVE:

Industrial Project Risk Management

By: Anteneh H.
 Topics For Discussion

 Introduction to Project Risks

 Identification of risks in industrial projects

 Risk Quantification

 Response Development

 Response Control

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 Introduction to Project Risks
 Risk is anything not in the project plan that may occur and cause your project

to be late, cost more or compromise its quality/performance.

….. Project Management Institute USA

 Likelihood of an unfavorable event affecting the achievement of set

objectives to occur. .....Global Internal Audit Services

 Combination of likelihood for a certain problem to occur (an unwanted

situation) with the corresponding value (impact) of the damage caused.

.......... British Standard Institution

 The main issue is related to future events. Tomorrow won’t be like yesterday

3 or today AH
 Features of Risk

 Probability: an event is risky only if there is no certainty of its

future occurrence.

 Negativity: the risky event leads to damage

The occurence of a negative event or the non-occurence of a

positive event...... Global Internal Audit Services

What are your risks during your study here at HU?

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 Introduction to Project Risks
Strict concept of risk

 Likelihood of suffering detriment

Broad concept of risk

 Negative risk (threat): Likelihood of suffering detriment

 Positive risk (opportunity): likelihood of gaining an advantage

 Certain risk (project lien): certain occurence

 Fatality: absolute unpredictability

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 Introduction to Project Risks

Knowledge and rate of occurence

100 Knowledge 0

Certain risk Risk Fatality

100 % Occurence probability ≈0%

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 Introduction to Project Risks

Knowledge phases

uncertainty
certainty
risk

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 Introduction to Project Risks
Cause or nature of the risks

 Natural: floods, hurricanes, earthquakes,…

 Financial: interest rates, exchange rates, market fluctuations, price

fluctuations, increased salary costs, cost of raw materials…

 Commercial: competitors price policy, launch of new products,…

 Technical: new technologies, innovative processes, fault of

equipment, fire, explosions,...

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 Introduction to Project Risks
Cause or nature of the risks

 Political: introduction of new taxes or new laws, government

instability, trade union attitude

 Human: injuries, finding the adequate skills, turn-over, illnesses….

 Social: thefts, negligence, robberies, recession, unemployment,…

 Legal acts: protectionism measures

 Other
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 Introduction to Project Risks
Source of Risks

Internal source: risk which the company may control

 Commercial

 Technical

 Human

External source: risks which the company may NOT control

 Natural

 Economic

 Political AH
 Introduction to Project Risks
Sources of project risks
The origin of risks in a project are related to the following six
questions:
WHO PARTICIPANTS
WHY REASONS (ECONOMIC, OTHER)
WHAT PROJECT FEATURES
WHICH WAY ACTIVITIES, ORGANIZATION
WHEREWITHAL RESOURCES
WHEN TIME

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 Introduction to Project Risks
 In any organization the risk may be split into three related

categories/types/kinds:

 Strategic risks : they arise from the way in which the organization is

driven and managed (e.g. development of new products, strategic

competitors,etc.)

 Financial risks : they include credit, debt situation and cash flow

 Operative risks : they arise from the typical aspects of a business

activity
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 Introduction to Project Risks
Structure of project Risks
Strategic Risks
(uncertainty)

Risk
diversification
Operative and
Financial risks system risks
(opportunity) AH
 Introduction to Project Risks
Contexts of the company risk

Strategy Environment
Others
Company
Commercial
Organization Resources
Finance
Project
Client
Management Process
Product
Contract
Technical definition
Maintenance

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 Risk Management Definition

 “Risk Management is the systematic process of

identifying, analyzing and responding to project risk.

 It includes maximizing the probability and consequences of

positive events and minimizing the probability and consequences

of adverse events to project objectives”

………….P.M.I. Project Management Institute U.S.A.

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 Reasons for Risk Management

 Yesterday:

Only for very large projects or with a significant impact on the

environment, in the following sectors:
Military

Aerospace

Nuclear

Oil & gas pipelines

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 Reasons for Risk Management

Today

Applicable to any project according to the following:

Strict limits of contract budgets

 Shorter time to market

More competitors

Frequent changes in technology

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 Risk Management Steps

1) Risk Assessment (identification and analysis)

1A) Identification

1B) Quantification

2) Risk Response

2A) Response Development or Planning

2B) Response Control

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 Risk Assessment

 A qualitative and quantitative evaluation of the risks arising from

the carrying out of project activities

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Risk Identification

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 Project Risk Causes
Product or Service Requirements
⇒ Not sufficiently detailed
⇒High Probability of Amendments
Product features
⇒ Innovative technologies or new
applications to be discovered
⇒ Productive process to be tested
⇒ Unreliable Suppliers
Contract conditions
⇒ Price revision clause missing
⇒ Difficulty of transport on-site
⇒Payments linked to work progress
Project or product not well-
defined
⇒ WBS incomplete
⇒ Work Packages not completely
defined
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 Project Risk Causes

Costs budgeting Expected duration

⇒ Contract renewals ⇒ Equipment availability
⇒ Local contract law ⇒ Human resources availability
⇒ Raw materials price instability ⇒ Weather conditions
⇒ Logistics
Project Team Composition O.B.S. ambiguity
⇒ Inadequate skills ⇒ Vague definition of roles
⇒ High rate of labor turnover ⇒ Not clearly defined
• responsibilities
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 Risk Description

 Detailed description of the risk by means of:

⇒ Identification of the context

⇒ Identification of the causes

⇒ Identification of the triggering elements

⇒ Identification of the probable period of occurrence

⇒ Identification of the consequences

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Identification of the “owner” of the risk

 In big projects a Risk Manager may be appointed

 In smaller projects this role is one of the Project Manager’s tasks.

 Moreover, for each risk identified responsibility is assigned to a

person who will define the control plan and follow the development.

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Identification of the causes

 Risk cause Identification tools

1. What-if Analysis

2. Cause effect Diagram

3. Event Tree Analysis

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Risk cause Identification tools
1. What-if Analysis

o This method analyses all the steps of the project following a chart of

“what would happen if ….? “ type of questions.

o The aim is to define the potentially critical situations, the possible

consequences, the countermeasures to be taken considering the

precautions already taken.

o This method might lead to amendments to the project, to its

structures and ways of implementing the operations. The information

obtained is arranged in charts presenting: questions, answers,
countermeasures, and recommendations AH
Risk cause Identification tools
2. Cause-effect diagram
o Is also called Ishikawa Diagram or fishbone diagram

• It envisions the identification of the set of unwanted effects, going

backwards to trace the causal chain.

• For each effect it establishes its cause

Human Resources Methodologies
Methodologies
Inaccurate activity
Scarce motivation Unclear output measuring
Lack of mutual Inadequate planning
understanding Lack of Inaccurate project
Lack of procedures reporting
training
Activities
ActivitiesA.1,
A.1,A.3
A.3and
andA.5
A.5
are
arelate
late
Inadequate
Unsuitable
performance Late
materials
Inadequate
Choice of Poor deliveries
machine capacity
unsuitable quality Insufficient
equipment Inadequate quantities
availability
Tools-Means
Tools-Means Materials
Materials AH
 Risk cause Identification tools

3. Event Tree Analysis

• A method considering an initial event and the various paths of

the possible consequences and the eventual results .

• Unlike the Ishikawa method, this analysis goes forward, from one

effect to the following (implicit causes).

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Risk cause Identification tools
3. Event Tree Development
• Identification of initial event, in other words the risky event which may

lead to significant consequences for the project.

• Identification of further events which may contribute to the realization

of the initial risk.

• Drawing of the event tree.

• Description of the consequences arising from each path

• Awarding the probability rate of an event and calculation of the total

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probability for each path
Risk cause Identification tools
Example of Event Tree
•

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 Risk Breakdown Structure (RBS)

 Allows the project team to classify risky events in a hierarchical system,

similar to a WBS

 The set of risk causes is initially split in risk types; each type is in turns

subdivided into classes which are further breakdown into groups, sub-

groups, and so on down to the basic elementary risky event.

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Example of RBS

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Risk Quantification

Objectives

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 Risk Quantification

 Usual quantification of risk is :

 R = p* I; with :

 p : probability that a negative event could happen;

 I : impact, it is the magnitude (gravity) of the negative event.

 In a contract, for example I is an economic loss.

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 Risk Breakdown Structure
 A matrix relationship between all elementary risk causes and the WBS activities
quantify the consequences of a specified risk on an activity
Facilitates creation of Contingency plans,

Mohammed W. EiT-M →Industrial Engineering

35 Department Fig. Matrix View [R = p * I] AH
 Decision tree
It’s a flow diagram used in the analysis of decisions subject to the

influence of future events of which the rate of probability is known

The decision tree shows both the options concerning the decisions

and the further events which may consequently arise.

The decision tree is characterized by three elements:

the decision to be taken

 causal alternatives [Chances]

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 terminations
 Decision Tree Nodes

 Decision (choice) node □

 Chance (event) node O

Terminal (consequence) node

Outcome (cost or benefit)

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E.g. Decision Tree: Build/Upgrade a Plant]

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 Notion of a Risk Premium
 A risk premium is the amount paid by a (risk averse) individual to avoid risk

 Risk premiums are very common – what are some examples?

Insurance premiums

 Higher fees paid by owner to reputable contractors

Higher charges by contractor for risky work

Lower returns from less risky investments

Money paid to ensure flexibility as guard against risk

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Semi Quantitative Risk Evaluation
 If the semi – quantitative approach is used, the descriptive
levels of the qualitative approach are classified numerically.

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Risk Response Development

 To implement the course of actions established to manage the

risk and in particular prevention, monitoring and contrasting.

 Finding all the necessary measures to evaluate the effectiveness

and the cost viability of the risk plan

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Common Responses
 Strategic Responses
1. AVOID – eliminate uncertainty
 Considering alternative technical solutions

 Do something to remove it.

 Use another supplier for example

2. TRANSFER – transfer liability/ownership
 Transfer risks to suppliers;

 Non-insurance transfer (external sub-contracting)

 New type of contract;

 Insurance (transfer the economic consequences) AH

 Common Responses
 Tactical responses
3. MITIGATE – reduction to acceptable
 modifications to procedures and standard processes;

 schedule risky activities away from the critical path to minimize

impacts;

 allocate critical or scarce resources to minimize negative impacts;

 hold design review meetings on critical aspects of the project;.

4. ACCEPT – control and manage residual risks
 introduce monitoring plans dedicated to risky activities;
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 consider recovery plans
Choices of the Correct Course of action

Mohammed W. EiT-M →Industrial Engineering

Department AH
 Risk Control
 The aim of this activity is the evaluation of the actual effectiveness of the risk

management plan, to have a confirmation of its validity or to trigger a

revision phase of the risk management system.

 A written report will be issued for the executives and the parties involved.

 Hold regular risk reviews to identify actions outstanding, risk probability

and impact, remove risks that have passed, and identify new risks.

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Without a plan for risk, the success of the project,
and your reputation as a Project Manager, will be at
stake.

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THE END

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