Project Formulation

-By CA (Dr.) Leena Gadkari

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Contents
 Project formulation
 Evaluation of risks

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Project formulation

 Project formulation is defined as taking a first look

carefully and critically at a project idea by an
entrepreneur to build up an all-round perspective
beneficial to project after carefully weighing its
various components.
 It is formulated by the entrepreneur with the
assistance of specialists or consultants.
 It is the assessment of feasibility of the proposal or
a scheme of a borrower based on the examination
of factors such as capacity of the unit, repayment
capacity of the funds asked for, the assets and
liabilities and so on.

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Project Risks
 It is a normal practice of banks and financial
institutions to include a summary of project risks in
the appraisal report.
 Projects are confronted with various types of
financial and nonfinancial risks.
 While it is not possible to eliminate the risks it is
essential to minimise them.
 A project manager’s work should not focus on
dealing with problems; it should focus on
preventing them.
 The challenge is in revealing the risk areas that
need further attention, the unknown hazards that
lead to reality and disrupt the project flow.

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What is a risk?
 Risk is broadly defined as the likelihood
that a harmful consequence will occur as
the result of an action or condition. 
 A risk is an uncertain event that could have

a positive or negative effect on your

project.
 Project risk is defined by PMI as 'an
uncertain event or condition that, if it
occurs, has a positive or negative effect on
a project's objectives'.

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Different types of project risks
 Scope Risk
 Design Risk
 Schedule Risk
 Operational Risk
 Environmental Risk
 Financial Risk
 Interest Rate Risk
 Human Resource Risk
 Execution Risk
 Management Risk
 Technology Risk
 Disruption Risk
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Scope Risk

 Thisrisk includes changes in scope

caused by the following factors:
◦ Scope creep – the project grows in
complexity as clients add to the
requirements and developers start
additions to the scope
◦ Integration issues
◦ Hardware & Software defects
◦ Change in dependencies

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Design Risk
 Low quality design is a risk.
 A key contributor to almost all of the potential
project risk scenarios is the conception,
development and execution of the design process
for the project.
 Design risks deal with the risk that the design of
any dimension of the solution may not be what you
wanted or intended.
 The design process has numerous areas of
potential risk which must be managed or mitigated.
 Some times design risk mitigation parameters are
needed to be printed and displayed, made part of
each staff member's induction kit and reinforced
through the evaluation of all project solutions and
deliverables against these criteria.

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Schedule Risk

 Keeping to timelines and agreed critical paths

is one of the most difficult situations that
project managers face.
 There are a number of reasons why the

project might not proceed in the way it is

scheduled.
 These include unexpected delays at an
external vendor, natural factors, errors in
estimation and delays in acquisition of parts
etc.

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Operational Risk

 It is needed to consider whether the project

involves potential interruptions to normal
plant operations.
 It is also needed to see if the project involves

operational safety issues.

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Environmental Risk
 Environmental risk assessment (EnRA) deals
with the interactions of hazards, humans and
ecological resources.
 The use of EnRA in urban and regional

environmental planning and management is

fast becoming a standard practice
 Identifying environmental risks on a potential

project requires intricate knowledge of both

the site and the national, state, and local
statutes, regulations, and other rules that
define the scope of liability.

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Financial Risk
 It is the risk that the firm will be unable to meet
its financial obligations.
 This risk is primarily a function of the relative
amount of debt that the firm uses to finance its
assets.
 A higher proportion of debt increases the
likelihood that at some point of time the firm will
be unable to make the required interest and
principal payments.
 It is needed to see if the project delivers the
savings predicted during scoping.
 It is also needed to see if the funds requested for
the project will be sufficient to deliver the project.

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Interest Rate Risk

 It is the variation in the single

period rates of return due to
fluctuations in the market interest
rates.
 This risk affects the price of

bonds, debentures and stocks.

 It is caused by the change in the

government policy.
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Human Resource Risk

 If the people are unskilled or incompetent to

perform the task at hand, if the project is
under-staffed from the beginning, or if key
project members come on aboard far after
the inception of the project, there is an
obvious project risk that has ill-planned
human resources as its base.

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Execution Risk
 Execution risk covers areas related to
the people aspects of a project such
as information needs, expectations of
each other, deliverable requirements,
thoroughness of the plan and
resource availability etc.
 Project execution risks by and large

lack the attention they need.

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Management Risk

 Management risk refers to the

chance that
company managers will put their
own interests ahead of the interest
of the company and stakeholders.
 It is also a risk of loss due to an

incompetent management.

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Technology Risk
 There are various quality factors for technical
components e.g.
• Stability
• Availability
• Scalability
• Usability
• Security
 It is a risk that components of your
technology stack may be low quality.
 This risk includes delays arising out of

software & hardware defects or the failure of

an underlying service or a platform.
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Disruption Risk

 Itis related to the disruption of:

o supply chain
o market of the product
o business infrastructure

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Project Management Processes with
Risk Management
 Risk Planning –Having a plan on conducting
risk management. 
 Identify Risks – Attempting to identify most

of project risks.
o Identifying Risks can’t be completed without

the project scope statement and Work

Breakdown Structure (WBS)
o Risks can be identified at any time and during

any phase of the project

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Project Management Processes with
risk management (contd.)
 Qualitative analysis – This is a subjective
analysis of risks that produces a risk ranking,
usually in the order of high, medium, low, or
on an ordinal scale which are by agreement of
the project team, sponsors and key
stakeholders 
 Quantitative Analysis –It is a numerical
analysis of the probability and impact of the
risk on project.

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Project Management Processes with
risk management (contd.)
 Plan Risk Response– a course of
action you will take to deal with
your risks should they go from
risk to issue
 Monitor & Control Risks –
monitoring your risks to enact a
risk response plan

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Risk Factors
 The probability the risk will occur
 The range of possible outcomes (impact)
 When in the project lifecycle the risk is likely

to occur (the timing); * once the expected

timeframe of the risk has passed and it is no
longer a risk, it can be removed from the risk
list
 How often the risk is expected to occur on

the project (frequency)

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Plan Risk Management
 The process of defining how to
conduct risk management activities
for a project
 Important to provide sufficient
resources and time for risk
management activities, and to
establish an agreed upon basis for
evaluating risk.

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STRATEGIES FOR NEGATIVE RISKS OR THREATS

 Avoidance / Risk prevention

 Changing the plan to eliminate a risk by

avoiding the cause/source of risk

 Protect project from impact of risk
 Examples: – Change the supplier /

engineer – Do it yourself (do not

subcontract)
 Reduce scope to avoid high risk
deliverables
 Adopt a familiar technology or product

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STRATEGIES FOR NEGATIVE RISKS OR THREATS

 Mitigation
o Seeks to reduce the impact or
probability of the risk event to an
acceptable threshold
o Be proactive: Take early actions to

reduce impact/probability and don‟t

wait until the risk hits your project
o Examples: – More testing – Use more

qualified resources

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STRATEGIES FOR NEGATIVE RISKS OR THREATS

 Transfer
o Shift responsibility of risk
consequence to another party
o Does NOT eliminate risk
o Most effective in dealing with financial

exposure
o Examples: – Buy/subcontract, move

liabilities, Insurance

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STRATEGIES FOR POSTIVE RISKS OR
OPPORTUNITIES
 Strategies to exploit opportunities
o Ensure opportunity is realized
o Ex: Assigning organization most talented

resources to the project to reduce cost

lower than originally planned.
o Increase the probability and/or the
positive impact of the opportunity • Ex:
Adding more resources to finish early

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STRATEGIES FOR POSTIVE RISKS OR
OPPORTUNITIES (contd.)
 Strategies for Opportunities Share
o Allocating some or all of the ownership to
third party
o Ex: Joint ventures, special-purpose
companies

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Acceptance
 Active Acceptance – Develop a
contingency plan to execute if the risk
occur
 Passive Acceptance – Deal with the

risks as they occur(Usually for low

ranked risks)

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Thank You

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