7/1/2014

PMP® Exam Review

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Chapter 11
PROJECT RISK MANAGEMENT

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What is a Risk ?

* An uncertain event or condition that, if it occurs, has a positive or negative

effect on one or more project objectives.

Uncertainty Cause and Effect Project Objectives

A state of having limited A risk is triggered by one or more
1 Scope
knowledge where it is impossible causes and it may have one or
to exactly describe the existing more impacts. 2 Schedule
state, a future outcome, or more
than one possible outcome. The effect can be positive or 3 Cost
negative. 4 Quality
* These definitions are taken from the Glossary of the Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK ® Guide) - Fifth Edition, Project Management Institute, Inc., 2013.

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What is Project Risk Management ?

* Project Risk Management includes the processes of conducting risk management planning,
identification, analysis, response planning, and controlling risk on a project.

Increase positive events Decrease negative events

probability and Impact probability and Impact

Objective of Project Risk Management

* These definitions are taken from the Glossary of the Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK ® Guide) - Fifth Edition, Project Management Institute, Inc., 2013.

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Risk, Uncertainty & Cost of changes

Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) - Fifth Edition, Project Management Institute, Inc., 2013, Figure 2-9, Page 40.

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• Identified, analyzed and responses created.

(proactive)
Known risks
• Assign contingency reserve if it can’t be managed
proactively.

• Can’t be managed proactively.

Unknown risks
• Requires Management reserve.

Issue – an occurred negative risk

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Individual Overall
project risks project risk

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Risk attitude among organization and stakeholders

Risk appetite – the degree of Risk tolerance – the degree, amount Risk threshold – measures along the level
uncertainty an entity is willing to take or volume of risk that an organization of uncertainty or the level of impact at
on in anticipation of a reward. or individual will withstand. which a stakeholder may have specific
interest.

The organization is willing to accept The organization or stakeholder is willing to The organization or stakeholder will NOT
reasonable risk to the cost on this project. accept risk of up to 8% increase in the project accept a risk that may increase the project
cost. cost by more than 9%.

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To be successful, an organization should be dedicated to address risk

management proactively and consistently throughout the project.
KEY POINTS

Project risk could

Positive and negative risks are commonly
exist from initiation
known as opportunities and threats.
till closing.

Risk Aversion Risk Taker Risk Neutral

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Project Risk Management Processes

11.1 Plan Risk Management —The process of defining how to conduct risk
management activities for a project.*
11.2 Identify Risks—The process of determining which risks may affect the
project and documenting their characteristics.*
11.3 Perform Qualitative Risk Analysis—The process of prioritizing risks for
further analysis or action by assessing and combining their probability of
occurrence and impact. *
11.4 Perform Quantitative Risk Analysis—The process of numerically
analyzing the effect of identified risks on overall project objectives.*
11.5 Plan Risk Responses—The process of developing options and actions to
enhance opportunities and to reduce threats to project objectives.*
11.6 Control Risks—The process of implementing risk response plans, tracking
identified risks, monitoring residual risks, identifying new risks, and evaluating
risk process effectiveness throughout the project.*
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Project Risk Management

11.1 PLAN RISK MANAGEMENT

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Plan Risk Management

* The process of defining how to conduct risk

management activities for a project.
* These definitions are taken from the Glossary of the Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK ® Guide) - Fifth Edition, Project Management Institute, Inc., 2013.

Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) - Fifth Edition, Project Management Institute, Inc., 2013, Figure 11-2, Page 313.
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Why do we need these inputs?

• The project management plan provides current scope,
schedule, and cost baseline that can show risk-affected
areas.
• The project charter can provide information on high-
level risks, project descriptions, and requirements.
• The stakeholder register, contains full details of
stakeholders which could be helpful to assign risk
management roles.
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Why do we need these inputs?

• The enterprise environmental factors examples includes risk
attitudes, thresholds, and tolerances which was described
earlier.
• The organizational process assets examples:
– Risk categories,
– Common definitions of concepts and terms,
– Risk management templates,
– Roles and responsibilities,
– Decision making authority level, and
– Lessons learned documents.
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Plan Risk Management: Tools and Techniques

• Analytical techniques
– Analytical techniques are used to understand and define
the overall risk management context of the project.
• Stakeholder risk analysis means identifying the stakeholders,
types of risks, extent of risks, levels of stakeholder
commitment, and degree of influence.

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Plan Risk Management: Tools and Techniques

• Expert Judgment
– To ensure a comprehensive establishment of the risk
management plan, judgment, and expertise should be
considered from groups or individuals with specialized
training or knowledge on the subject area.

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Plan Risk Management: Tools and Techniques

• Meetings
– Meetings should be a common way to develop risk management plan
with project team members. Meetings can include stakeholders who
have vested interested in the project and subject matter experts.
– Several decision can be made this meeting including but not limited to
1. Plans to conduct risk management activities
2. Assign budget and schedule for risk management
3. Assign responsibility in risk management
4. Develop templates for risk categories

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Plan Risk Management: Outputs

• Risk Management Plan
– This will layout the risk management activities structure and
plan.
• Methodology
• Roles and responsibilities
• Budgeting
• Timing
• Risk categories
• Definitions of risk probability and impact

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Definitions of risk probability and impact

Defined Conditions for Impact Scales of a Risk on Major Project Objectives

Relative or numerical scales are shown

Project
Objectives
Very low / 0.1 Low / 0.2 Moderate /0.3 High /0.5 Very High /0.8

Insignificant cost 3% - 5% cost 5%-10% cost > 10% cost

Cost increase
< 3% cost increase
increase increase increase

Insignificant time
Time increase
< 10 days delay 10 to 20 days delay 20 to 30 days delay > 30 days delay

Scope reduction Project end item

Scope decrease Minor areas of Major areas of
Scope barely noticeable scope affected scope affected
unacceptable to is effectively
sponsor useless

Only very demanding Quality reduction Quality reduction Project end item
Quality degradation
Quality barely noticeable
applications requires sponsor unacceptable to is effectively
are affected approval sponsor useless

Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) - Fifth Edition, Project Management Institute, Inc., 2013, Table 11.1, Page 318.
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Plan Risk Management: Outputs

• Risk Management Plan
– Probability and impact matrix
– Revised stakeholders’ tolerances
– Reporting formats
– Tracking

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Risk Threshold
Probability & Impact Matrix
Probability Threats Opportunities
0.9 0.09 0.18 0.27 0.45 0.72 0.72 0.45 0.27 0.18 0.09
0.8 0.08 0.16 0.24 0.40 0.64 0.64 0.4 0.24 0.16 0.08
0.7 0.07 0.14 0.21 0.35 0.56 0.56 0.35 0.21 0.14 0.07
0.6 0.06 0.12 0.18 0.30 0.48 0.48 0.30 0.18 0.12 0.06
0.5 0.05 0.10 0.15 0.25 0.40 0.40 0.25 0.15 0.10 0.05
0.4 0.04 0.08 0.12 0.20 0.32 0.32 0.20 0.12 0.08 0.04
0.3 0.03 0.06 0.09 0.15 0.24 0.24 0.15 0.09 0.06 0.03
0.2 0.02 0.04 0.06 0.10 0.16 0.16 0.10 0.06 0.04 0.02
0.1 0.01 0.02 0.03 0.05 0.08 0.08 0.05 0.03 0.02 0.01
Impact 0.1 0.2 0.3 0.5 0.8 0.8 0.5 0.3 0.2 0.1
Red – High Risk, Yellow – Medium Risk, Green – Low Risk
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Project Risk Management

11.2 IDENTIFY RISKS

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Identify Risks
* Identify Risks is the process of determining
which risks may affect the project and
documenting their characteristics.

This process will help you identify and anticipate

uncertain events.

* These definitions are taken from the Glossary of the Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK ® Guide) - Fifth Edition, Project Management Institute, Inc., 2013.

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Identify Risk Process

Who can help you with identifying risks?

Project Manager, Project Team Members,
Risk Management Team (If assigned), Customers, Subject
Matter Experts from outside the Project Team, End Users,
other Project Managers, Stakeholders, and Risk
Management Experts.

Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) - Fifth Edition, Project Management Institute, Inc., 2013, figure11-5, Page 319.
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Key Points
Frequency of Participation in
Iterative process
iteration each cycle

This process should involve the project New risks may

team evolve

Stakeholders outside the project team may provide additional

objective information.

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Identify Risks: Inputs

Risk, Cost,
Enterprise
Schedule, Quality Activity cost
environmental
and HR estimates
factors
Management Plan

Procurement Organizational Activity duration

documents process assets estimates

Stakeholder
Project documents Scope baseline
register

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Tools & Techniques

1. Documentation Reviews
2. Information Gathering Techniques
3. Checklist Analysis
4. Assumptions Analysis
5. Diagramming Techniques
6. SWOT Analysis
7. Expert Judgment

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1. Documentation reviews

Project documents such as project charter, issue log,

scope statement, etc., will help the project team to
Project
Documents identify project risks and it will also improve cross-team
and stakeholder communications.

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2. Information Gathering Techniques

• Brainstorming
• Delphi technique
• Interviewing
• Root cause analysis

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Brainstorming

* A general data gathering and creativity

technique that can be used to identify risks,
ideas, or solutions to issues by using a group of
team members or subject matter experts.

* These definitions are taken from the Glossary of the Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK ® Guide) - Fifth Edition, Project Management Institute, Inc., 2013.

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2. Delphi technique
1. An information gathering technique used as a
way to reach a consensus of experts on a
subject.
2. Experts on the subject participate in this
technique anonymously.
3. A facilitator uses a questionnaire to solicit ideas
about the important project points related to
the subject.
4. The responses are summarized and are then re-
circulated to the experts for further comment.
5. Consensus may be reached in a few rounds of
this process.
6. The Delphi technique helps reduce bias in the
data and keeps any one person from having
undue influence on the outcome.
* These definitions are taken from the Glossary of the Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK ® Guide) - Fifth Edition, Project Management Institute, Inc., 2013.

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3. Interviewing

* A formal or informal approach to elicit

information from stakeholders by talking to
them directly.

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Root Cause Analysis

An analytical technique used to determine

the basic underlying reason that causes a
risk. A root cause may underlie more than
one risk.

* These definitions are taken from the Glossary of the Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK ® Guide) - Fifth Edition, Project Management Institute, Inc., 2013.

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3. Checklist Analysis

Risk identification checklists are developed based

on historical information. The checklist should be
reviewed during project closure to incorporate
new lessons learned and improve it for use on
future projects.

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4. Assumptions Analysis

* A technique that explores the accuracy of

assumptions and identifies risks to the project
from inaccuracy, inconsistency, or
incompleteness of assumptions.

* These definitions are taken from the Glossary of the Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK ® Guide) - Fifth Edition, Project Management Institute, Inc., 2013.

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5. Diagramming Techniques
• Cause and effect diagrams
– * A decomposition technique that helps trace an undesirable
effect back to its root causes .

• System or process flow charts

– These show how various elements of a system interrelate and the
mechanism of causation.
• Influence diagrams
– * A graphical representation of situations showing causal
influences, time ordering of events, and other relationships among
variables and outcomes.
* These definitions are taken from the Glossary of the Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK ® Guide) - Fifth Edition, Project Management Institute, Inc., 2013.

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6. SWOT Analysis

Analysis of strengths, weaknesses,

opportunities, and threats of an
organization, project, or option.

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7. Expert Judgment

Risks may be identified directly by experts with

relevant experience with similar projects or
business areas.

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Identify Risks: Outputs

• Risk Register
– A document in which the results of risk analysis and risk
response planning are recorded.
• List of identified risks.
• List of potential responses.

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Perform Qualitative Risk Analysis

* The process of prioritizing risks for further analysis or action by assessing and
combining their probability of occurrence and impact.

Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) - Fifth Edition, Project Management Institute, Inc., 2013, figure11-8, Page 328.
* These definitions are taken from the Glossary of the Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK ® Guide) - Fifth Edition, Project Management Institute, Inc., 2013.

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Project Risk Management

11.3 PERFORM QUALITATIVE RISK ANALYSIS

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Things to know
It enables project
Assesses the priority of Focus on high-priority
managers to reduce the
identified risks risks.
level of uncertainty

This process can lead into

Performed regularly throughout the project life cycle perform quantitative risk
analysis

It is usually a rapid and cost-effective means of establishing

priorities for plan risk responses

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Perform Qualitative Risk Analysis: Inputs

Risk
Management Scope Baseline Risk Register
Plan

Organizational
Scope baseline
Process Assets

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Perform Qualitative Risk Analysis: Tools and Techniques

1. Risk probability and impact assessment

2. Probability and impact matrix
3. Risk data quality assessment
4. Risk categorization
5. Risk urgency assessment
6. Expert judgment
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1. Risk probability and impact assessment

• Risk probability assessment investigates the

likelihood that each specific risk will occur.

• Risk impact assessment investigates the potential

effect on a project objective such as schedule, cost,
quality, or performance, including both negative
effects for threats and positive effects for
opportunities.

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2. Probability and Impact Matrix

Evaluation of each risk’s

importance and priority for
attention is typically conducted
using a look-up table or a
probability and impact matrix.

Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) - Fifth Edition, Project Management Institute, Inc., 2013, Figure 11.10, Page 331.
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3. Risk Data Quality Assessment

* Technique to evaluate the degree to

which the data about risks is useful for
risk management.

* These definitions are taken from the Glossary of the Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK ® Guide) - Fifth Edition, Project Management Institute, Inc., 2013.

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4. Risk Categorization

* Organization by sources of risk (e.g.,

using the RBS), the area of the project
affected (e.g., using the WBS), or other
useful category (e.g., project phase) to
determine the areas of the project
most exposed to the effects of
uncertainty.

* These definitions are taken from the Glossary of the Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK ® Guide) - Fifth Edition, Project Management Institute, Inc., 2013.

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5. Risk Urgency Assessment

* Review and determination of the

timing of actions that may need to
occur sooner than other risk items.

* These definitions are taken from the Glossary of the Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK ® Guide) - Fifth Edition, Project Management Institute, Inc., 2013.

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6. Expert Judgment

Expert judgment is required to assess the

probability and impact of each risk.

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Perform Qualitative Risk Analysis: Outputs

• Project Documents Updates
– Project documents that may be updated include, but are
not limited to:
– Risk register updates
– Assumptions log updates

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Project Risk Management

11.4 PERFORM QUANTITATIVE RISK
ANALYSIS

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Perform Quantitative Risk Analysis

* The process of numerically analyzing the effect of identified

risks on overall project objectives.
Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) - Fifth Edition, Project Management Institute, Inc., 2013, figure11-11, Page 334.
* These definitions are taken from the Glossary of the Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK ® Guide) - Fifth Edition, Project Management Institute, Inc., 2013.

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Perform Quantitative Risk Analysis: Inputs

Risk Cost Schedule Enterprise

Organizational
Management Management Management Environmental Risk Register
Process Assets
Plan Plan Plan Factors

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Perform Quantitative Risk Analysis: Tools and Techniques

1. Data gathering and representation techniques

2. Quantitative risk analysis and modeling techniques
3. Expert judgment

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1. Data gathering and representation techniques

• Interviewing. Interviewing techniques draw on

experience and historical data to quantify the probability
and impact of risks on project objectives.
• The information needed depends upon the type of
probability distributions that will be used. For instance,
information would be gathered on the optimistic (low),
pessimistic (high), and most likely scenarios for some
commonly used distributions.

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Probability Distribution

Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) - Fifth Edition, Project Management Institute, Inc., 2013, figure11-11, Page 334.
* These definitions are taken from the Glossary of the Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK ® Guide) - Fifth Edition, Project Management Institute, Inc., 2013.

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2. Quantitative Risk Analysis and Modeling Techniques

1. Sensitivity analysis
2. Expected monetary value analysis
3. Modeling and simulation

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Sensitivity analysis • * A quantitative risk analysis

and modeling technique used to
help determine which risks have
• the most potential impact on
the project.
• It examines the extent to which
the uncertainty of each project
element
• affects the objective being
examined when all other
uncertain elements are held at
their baseline values.
• The typical display of results is
in the form of a tornado
diagram.
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Expected monetary value analysis

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Modeling and simulation

A project simulation uses
a model that translates
the specified detailed
uncertainties of the
project into their potential
impact on project
objectives. Simulations
are typically performed
using the Monte Carlo
technique.
Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) - Fifth Edition, Project Management Institute, Inc., 2013, figure11-17, Page 340.
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3. Expert Judgment

Expert judgment (ideally using experts

with relevant, recent experience) is
required to identify potential cost and
schedule impacts, to evaluate
probability, and to define inputs such
as probability distributions into the
tools.

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Perform Quantitative Risk Analysis: Outputs

Project Documents Updates
• Probabilistic analysis of the project.
• Probability of achieving cost and time objectives.
• Prioritized list of quantified risks.
• Trends in quantitative risk analysis results.

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Project Risk Management

11.5 PLAN RISK RESPONSES

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Plan Risk Responses

* The process of developing options and actions to enhance

opportunities and to reduce threats to project objectives.
Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) - Fifth Edition, Project Management Institute, Inc., 2013, figure11-18, Page 342.
* These definitions are taken from the Glossary of the Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK ® Guide) - Fifth Edition, Project Management Institute, Inc., 2013.

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Plan Risk Responses: Inputs

Risk management
Risk register
plan

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Key Points
Follows of
Optimum risk
qualitative and or Realistic
response
quantitative analysis

Agreed upon by all

Cost-effective in meeting the challenge
parties involved

Identification and assignment of one person (an owner for risk

response) to take responsibility for each agreed-to and funded
risk response

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Plan Risk Responses: Tools and Techniques

1. Strategies for negative risks or threats
2. Strategies for positive risks or opportunities
3. Contingent response strategies
4. Expert judgment

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1. Strategies for negative risks or threats

• Risk avoidance is a risk response strategy whereby the project team acts
Avoid to eliminate the threat or protect the project from its impact.

• Risk transference is a risk response strategy whereby the project team

Transfer shifts the impact of a threat to a third party, together with ownership of
the response.

• Risk mitigation is a risk response strategy whereby the project team acts

Mitigate to reduce the probability of occurrence or impact of a risk.

• Risk acceptance is a risk response strategy whereby the project team

Accept decides to acknowledge the risk and not take any action unless the risk
occurs.

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2. Strategies for Positive Risks or Opportunities

• The exploit strategy may be selected for risks with positive impacts
Exploit where the organization wishes to ensure that the opportunity is realized.

• The enhance strategy is used to increase the probability and/or the

Share positive impacts of an opportunity.

• Sharing a positive risk involves allocating some or all of the ownership of

Enhance the opportunity to a third party who is best able to capture the
opportunity for the benefit of the project.

• Accepting an opportunity is being willing to take advantage of the

Accept opportunity if it arises, but not actively pursuing it.

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3. Contingent Response Strategies

• Some responses are designed for use only if certain
events occur.
• For some risks, it is appropriate for the project team
to make a response plan that will only be executed
under certain predefined conditions.
• Risk responses identified using this technique are
often called contingency plans or fallback plans.
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4. Expert Judgment

Expert judgment is input from

knowledgeable parties pertaining to the
actions to be taken on a specific and
defined risk.

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Plan Risk Responses: Outputs

1. Project Management Plan Updates
 Schedule management plan
 Cost management plan
 Quality management plan
 Procurement management plan
 Human resource management plan
 Scope baseline
 Schedule baseline
 Cost baseline
2. Project Documents Updates

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Terminologies
Trigger

Management
Fallback plans
Reserves

Risk Owner

Contingency
Residual risks
reserves

Secondary
risks

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Project Risk Management

11.6 CONTROL RISKS

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Control Risks

* Control Risks is the process of implementing risk response plans, tracking

identified risks, monitoring residual risks, identifying new risks, and evaluating
risk process effectiveness throughout the project.
Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) - Fifth Edition, Project Management Institute, Inc., 2013, figure11-20, Page 349.
* These definitions are taken from the Glossary of the Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK ® Guide) - Fifth Edition, Project Management Institute, Inc., 2013.

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Things to know
Contingency reserves for cost or
Risk response owner reports
schedule should be adjusted
Project assumptions are still valid. periodically to the project
based on the current risk
manager
assessment.

Analysis shows an
Risk management policies and procedures are being followed assessed risk has changed
or can be retired.

Project work should be continuously monitored for new,

changing, and outdated risks.

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Control Risks: Inputs

Project Work Work

management Risk register performance performance
plan data reports

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Control Risks: Tools and Techniques

1. Risk reassessment
2. Risk audits
3. Variance and trend analysis
4. Technical performance measurement
5. Reserve analysis
6. Meetings
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1. Risk reassessment

* Risk reassessment is the

identification of new risks,
reassessment of current risks, and
the closing of risks that are
outdated.

* These definitions are taken from the Glossary of the Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK ® Guide) - Fifth Edition, Project Management Institute, Inc., 2013.

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2. Risk Audit

* Examination and documentation of

the effectiveness of risk responses in
dealing with identified risks and their
root causes, as well as the effectiveness
of the risk management process.

* These definitions are taken from the Glossary of the Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK ® Guide) - Fifth Edition, Project Management Institute, Inc., 2013.

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3. Variance and trend analysis

A technique for determining the
cause and degree of difference
between the baseline and
actual performance. (Variance
Analysis)

An analytical technique that uses

mathematical models to forecast
future outcomes based on
historical results. (Trend Analysis)
* These definitions are taken from the Glossary of the Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK ® Guide) - Fifth Edition, Project Management Institute, Inc., 2013.

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4. Technical performance measurement

Technical performance measurement

compares technical accomplishments
during project execution to the
schedule of technical achievement.

* These definitions are taken from the Glossary of the Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK ® Guide) - Fifth Edition, Project Management Institute, Inc., 2013.

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5. Reserve analysis

* An analytical technique to
determine the essential features and
relationships of components in the
project management plan to establish
a reserve for the schedule duration,
budget, estimated cost, or funds for
a project.

* These definitions are taken from the Glossary of the Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK ® Guide) - Fifth Edition, Project Management Institute, Inc., 2013.

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6. Meetings

Project risk management should be

an agenda item at periodic status
meetings. The amount of time
required for that item will vary,
depending upon the risks that have
been identified, their priority, and
difficulty of response.

* These definitions are taken from the Glossary of the Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK ® Guide) - Fifth Edition, Project Management Institute, Inc., 2013.

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Control Risks: Outputs

1. Work performance information
2. Change requests
3. Project management plan updates
4. Project documents updates
5. Organizational process assets updates

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