RISK AND UNCERTAINTY IN PROJECT MANAGEMENT

That is, the probability that the expected result will not be achieved. From conception or identification to implementation, risks issues arise and do affect the project in a number of ways. risks may be due to environmental or managerial factors

Types of Risk
Completion Risks Permitting Risks Price Risks Resource Risks Operating Risks Casualty Risks Technology Risks

Classification of risks
Measurable Risks Immeasurable Risks Manageable Risks Insurable Risks Investment Risks

Risk Management Plan

Risk Identification Risks Quantification Risk Response Risk Monitoring and Control

 Risk Identification Risk identification determines what might happen that could affect the objectives of the project, and how those things might happen. identification process must be comprehensive

 The process should be structured using the key elements to examine risks systematically, in each area of the project to be addressed Techniques
brainstorming

Info for Risk Identification

Historical Data, Theoretical Analysis, Empirical Data And Analysis, Informed Opinions Of The Project Team And Other Experts, And The Concerns Of Stakeholders To identify and name the risks

Risk Quantification
Risk need to be quantified in two dimensions

Economic condition Boom Normal

Cash ()

flow Probability

100,000,000 20% or 0.20 50,000,000 50% or 0.50

Recession

-10,000,000

30% or 0.30

 The Range The Standard Deviation

Expected cashflow for A

0.20

0.5 100,000,000 + 0

50,000,0 + 00

0.3 0

10,000,0 00 3,000,00 0

Expected cashflow for A

20,000,000

25,000,0 00

Expected cashflow for A

42,000,000

x Coefficient of Variation E ( x)

Economic Condition s Boom Normal Recession

Cashflow

Cashflow times Probabi lity 0.20 0.50 0.30 E(x)

Deviation

Squared

Weighted Squared

100,000,00 0 50,000,000 -10,000,000

Probability
20,000,000 25,000,000 -3,000,000 43,500,000 56,500,000 6,500,000 -52,000,000

Deviation
3,192,250 x 10^9 42,250 x 10^9 2,704,000 x 10^9 sigma squared sigma

Deviation
638,450 x 10^9 21,125 x 10^9 811,200 x 10^9 1,516,000 x 10^9 38,935,845

 Sensitivity Analysis
scenario analysis or simulation analysis examination of possible cash flows and returns on an investment when one uncertain element is altered "what if?" analysis Sensitivity analysis illustrates the effects of changes in assumptions

 Sensitivity Analysis
can be used to get an idea of a project's possible future cash flows and their risk.

 Sales Cost of goods sold and gross profit Operating expenses Interest rates Accounts receivable days Inventory days Accounts payable days on hand Major fixed asset purchases or reductions Acquisitions or closings

Risk Response
Strategies
Avoid the risk.
Do something to remove it. Use another supplier for example.

Transfer the risk.

Make someone else responsible. Perhaps a supplier can be made responsible for a particularly risky part of the project.

 Mitigate the risk.

Take actions to lessen the impact or chance of the risk occurring. If the risk relates to availability of resources, draw up an agreement and get sign-off for the resource to be available.

Accept the risk.

The risk might be so small the effort to do anything is not worth while.

 A risk response plan

Strategy action items to address the strategy.
what needs to be done, who is doing it, when it should be completed.

Risk Control
continually monitor risks to identify any change in the status, or if they turn into an issue. best to hold regular risk reviews to :
identify actions outstanding, identify risk probability and impact, remove risks that have passed, new risks.

Incorporating Risk into Discount Rate

The discount rate itself has an element of risk To take account of additional risk; increase the discount rate Refer to theories guiding choice of discount rate