Project Risk

Management

Syed Waqar Hasan

 Estimation & Budgeting:
Risk Management Perspective

Lecture 03
 Work Breakdown Structure (WBS)

 It is a hierarchical decomposition of the total scope of work to be

carried out by project team to accomplish project objectives and
create the deliverables.

 The level of decomposition is often guided by the degree of control

needed to effectively manage the project, e.g. 4-40, 8-80 rules.

 The planned work is contained within the lowest level of

WBS
components, which are called work packages.

 In context of WBS, work refers to work products or deliverables that

are the result of activity and not to the activity itself.
 Work Breakdown Structure (WBS)

 If an agile approach is used, epics can be decomposed into

user
stories.

 The total of the work at the lowest levels should roll up to the higher
levels so that nothing is left out (what all is necessary) and no extra
work is performed (only what is necessary), A.K.A. 100% rule.

 Decomposition may not be possible for a deliverable or

subcomponent that will be accomplished far into the future and
project team usually waits until the details of the WBS can be
developed (rolling wave planning).
Sample WBS Organized by Phases (Ref: PMBoK Guide, 6th Edition)
Sample WBS with Major Deliverables (Ref: PMBoK Guide, 6th Edition)
 Cost Baseline

 It is developed as a summation of the approved budgets for the different

schedule activities.

 Cost estimates for the various project activities, along with any contingency
reserves for these activities, are aggregated into associated work package costs.

 The work package cost estimates, along with any contingency

reserves estimated for the work packages, are aggregated into control
accounts.

 The summation of the control accounts make up the cost baseline.

 LECTURE 4

Project Risk
Management

Syed Waqar Hasan

 Estimation & Budgeting:
Risk Management Perspective

Lecture 03
 Elements of Contract Baseline

The contract baseline is comprised of eight key

elements:
 Total Contract Price  Performance Measurement Baseline
 Total Contract Cost (PMB)
 Profit / Fee  Management Reserve (MR)
 Contract Budget Base  Distributed Budgets
(CBB)  Undistributed Budgets (UB)
The relationship between these eight elements is depicted
below.
 Total Contract Price

Total Contract Price is the total negotiated contract cost plus profit/fee.
 Total Contract Cost

Total Contract Cost is the total negotiated contract cost without profit/fee.
 Profit/Fee

Profit/Fee is the estimated profit or fee realized by executing the contract or

project.
Profit/Fee is not part of the Contract Budget Base (CBB).
 Contract Budget Base

The Contract Budget Base (CBB) represents the total budget for all authorized
contractual work, minus Profit/Fee. The CBB can only be modified when duly
authorized changes to the contract are received. CBB is always calculated as follows:
Current Estimated cost of additional
negotiated
contract cost
+ authorized un-priced work = CBB
(yet to be negotiated)
 Performance Measurement Baseline (PMB)

The Performance Measurement Baseline (PMB) is the time-phased budget plan against which
contract performance is measured. It includes all allocated or Distributed Budgets plus the
Undistributed Budget. PMB does not include Management Reserve.
PMB = Sum of Control Accounts
PMB = Distributed Budgets + Undistributed
Budgets PMB = Contract Base Budget –
Management Reserve
 Management Reserve

Once the CBB is established, the Program Manager establishes a Management Reserve (MR)
prior to distributing budgets to the performing organizations. The purpose of MR is to have a
budget for the Program Manager to allocate for unforeseen problems.
MR is not part of the Performance Measurement Baseline because it is held at the program level
only. Transactions into and out of MR are approved by the Program Manager.
 Distributed Budgets

Distributed Budgets reflect the contractually authorized efforts allocated to the WBS elements.
Distributed Budgets include budgets assigned to control accounts during baseline establishment as
well as work packages and planning packages.
Distributed Budgets = Budgets assigned to Control Accounts
 Undistributed Budgets

Undistributed budget (UB) applies to contractually authorized efforts not yet allocated to WBS elements.
Undistributed budget is an element of the Performance Measurement Baseline, but it is not time-phased.
Many organizations keep contingency reserve under this head, but it largely depends on the practices of those
organization the way they design their contingency reserves. Lump Sum Contingency reserve is placed under
undistributed budget. Whereas, risk events based contingency can be argued as distributed or undistributed
budget. Undistributed budgets are controlled by the Project Manager.