Emrm5103 (Project Risk Management)

EMRM5103
MAY SEMESTER 2011 PROJECT RISK MANAGEMENT (EMRM5103)
ASSIGNMENT
LECTURER ASSOC. PROF SAMIAPPAN MARAPPAN
STUDENT SYAHRIFENDI LUKMANILHAKIM MASTERS IN PROJECT MANAGEMENT CGS00560517
Syahrifendi Lukmanilhakim
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TABLE OF CONTENTS
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PART A Question 1 Question 2 (a) Question 2 (b) Question 3 Question 4 (a) Question 4 (b) Question 5 (a) i 27 Question 5 (a) ii Question 5 (b) Question 5 (c) 29 36 37 3 4 7 18 21 25
PART B Question (a) Question (b) i Question (b) ii Question (b) iii Question (c) Question (d) i Question (d) ii Question (d) iii 39 42 44 45 47 49 50 51
REFERENCE
52
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LIST OF FIGURES
Figure 1 Figure 2 Figure 3 Figure 4 Figure 5 Figure 6 Figure 7 Figure 8 Figure 9 Figure 10 Figure 11
9 10 11 13 15 16 29 31 32 34 35
LIST OF TABLES
Table 1 Table 2 Table 3 Table 4 Table 5
26 26 27 33 37
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PART A QUESTION 1 See Presentation slides attached.
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QUESTION 2 a) Identify the key features of the commercial project management software available in the market.
There are so many project management software available in the market Project management software is a computer applications specifically designed to aid planning and controlling resources, costs and schedules of a project. Software project management is designed to avoid high failure rate. Software project management is a sub-discipline of project management. The various project management software available in the market, are namely Microsoft Office Project, Primavera, Project Manager Software, Web Based Project Management Software, Project Tracking Software, Software Project Management Tools, Project Management Software Tool, CPM Software, PERT Software, Gantt software and other such as PrioSofts Contractor Office, Basecamp, Central Desktop, Go Plan, Project Desk, Zoho, DotProject, CS Project Crest Software and others. The followings are including but not limited to the following key features of the various commercial project management softwares; Record the WBS- the deliverables Break the deliverables into activities Assign durations, constraints, predecessors and successors to activities Calculate the start and finish dates Assign resources and/ or costs to activities
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Optimize the project plan Set Baselines to compare progress Approve work Record the actual progress Compare progress against the original plan Amend the plan for scope changes etc. and Produce management reports. Import/export format. Project management software covers many areas, including estimation, planning, scheduling, cost control and budget management, resource allocation, collaboration software, communication, quick access to information and effective leveraging of existing data, which are used to deal with the complexity of large projects. Project management software can be very useful especially when there involve large and multiple larger projects. Effective work planning features shall be used to plan schedules, allocate resources, manage budgets, and set realistic expectations for the team, management, and customers. The data can easily track and estimates such as percent complete, budget versus actual cost, and earned value by using a set of predefined metrics. For example in construction works, we shall be able to manage the times and the budget efficiently. Scheduling is the process to allowed project managers to shift schedules such in easily way. The software leverages all task dependencies and types to automatically update the project schedule if the schedule changes. The following are the summary of features that offers by one of the project management software called Primavera. It was introduced in early 80s, since then it has became very popular tool by schedulers, project managers, QS and claims consultants. In 1999, Primavera introduced an entirely new Critical Path Method (CPM) scheduling package designed for enterprise-wide project management which changed names almost yearly. P3 remained P3 while this new
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enterprise-wide software is now called either P5 (short-hand for Primavera Project Manager) or P6 (for the Enterprise Version 6.) Primavera project management software e.g. Primavera P6 assists in tracking project scheduling, used for costs, estimation, resource leveling, time tracking, cost comparison and planning to measure progress toward objectives. It is the most powerful software, robust, and easy to use solution for globally prioritizing, managing and executing projects, programs and portfolios across the entire organization. Primavera is a user friendly data entries for all users even the beginner users shall also be able to operate the system easily. In other words, primavera is considered as. In addition the new features are more simplified and reduce training time and speed up adoption to all users. Primavera P6 are powerful web access for all users and all projects simultaneously, easy display for all the software functionality, easy Gantt use such as graphic tool which objective is to show the estimated time investment for different tasks or activities in a determined total period, use of control panels for advanced decision making control and other. Primavera Project Manager Deployment & Implementation including but not limited to the following: 1.1. Software Installation, standalone and or network installation 1.2 Develop Organizational Structures 1.2.1 Enterprise Project Structure (EPS) 1.2.2 Organization Breakdown Structure (OBS) 1.2.3 Resource Breakdown Structure (RBS) 1.3 Finance Graph. 1.4. Develop Global and Resource calendars 1.5. Create customized layouts, filters and reports 1.6. Develop schedule development, updating, control procedures
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b) Explain in some detail how such software enables project risk management.
Most large corporations or large projects require project risk analysis to verify feasibility of the project and whether the project is time or resource sensitive. Risk analysis helps to identify problem areas and help to formulate a mitigation plan. Risk Management Softwares shall help in identifying risk factors and handling those risk factors. Risk should be established early in a software project and continuously addressed throughout the system lifecycle. A Project Risk is a potential problem that would be detrimental to a projects success therefore it is crucial to identify and respond to the potential problems with sufficient lead time to avoid a crisis. The first step in Risk Management is identification of project risk factors, as risk cannot be analyzed or handled until they are identified and described in an understandable way. Risk Identification is an organized, through approach to seeking out the real risks associated with a program. Tracking risk enables companies or project for better assess uncertainties. Project management software aids them in identification, definition, estimation and analyses of those uncertainties, which improves their competitive position. Most project management software e.g. Primavera can also be used to identify, quantify risks, plan, monitor and manage project risk. Identify high risk task Identify high risk task is about examine those tasks that are most likely to take longer than expected, end beyond their finish dates, delay the start or finish of other tasks, or cause the
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project schedule to drag. This shall be able to be reviewed through the task of list, scheduling and CPM. Identify the high risk task are including shows the task with start and end date, estimated durations, task with long durations, shows the critical path, shows the task with external dependencies, review the task constraints and check the task that are behind schedule. The estimated durations shall allow Primavera to see the tasks that has information pending. Tasks with uncertain lengths contribute to uncertainty in determining the project end date. An estimated duration is a current best guess at how long users believe a task will take to complete.
Figure 1: Critical Path There is a function in Primavera that allows the project team to monitor/track the work progress versus planned. The purpose is to meet a specific finish date and to keep eye on the critical path towards success. This shall help the project team to monitor or trigger the
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problem shall any of the task are dragged or they can adjust the completion of non critical task not to finished beyond the critical task. Tasks with long duration will allow us to see the tasks for which schedule or cost increases may have a significant impact on the project end date or total cost and able to see the tasks that represent greater risk to the project finish date and cost. This process shall allow us to check for tasks that are behind schedule is to see those tasks for which the actual progress lags behind the planned progress, which may cause the project end date to slip. By set a baseline for the project, we can see how tasks progress over time and see whether their start and finish dates are slipping. Shall this happen the project team can carry out the catch up plan e.g. to increase man power or lengthen the working time to catch up with the completion time. Identify the budget risk Identify the budget risk is the process to view and handle those tasks that are over budget, likely to become over budget, or likely to cause the entire project to go over budget. Using project management software e.g. Primavera, tie it budget with the project plan. By doing this we can monitor the actual cost versus plan, find out shall the cost are over budget, view cost variances and analyse the project cost. To review the cost can be done in many ways either to check the overall status of project costs at every task, resource, assignment, or for each project or monthly cost. Increases on cost may put the overall project budget at risk. Figure 2: Simplifies Tracking Resources and Cost
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By applying a cost over budget filter, we can quickly trigger on cost overruns for each tasks, assignments or monthly budget. We can also, view the cost variances to compare the baseline costs for tasks, resources, or assignments with actual costs.
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Figure 3: Once your projects are underway, Primavera enables you to store actual quantity and cost data per update period so you can compare historical information to the current period using resource profiles and reports.
Identify the resource risk and defined risk Identify risk resources is the process to identify whether a project may be at risk shall they are using highly specialized resources that are/only available through limited suppliers, if the resources are not being used efficiently, or if they are working on multiple projects. In some risk management software they allows to identify specialized skills to see which resources have skills that might be difficult to replace, identify materials which can delay the project if the supplier is unable to deliver on time, check for over allocated or under allocated resources to review each resource's total amount of work to ensure that neither too much nor too little work has been assigned and identify resource allocation problems across multiple projects to see which resources are working at or over their maximum availability. Resource sheet shall give a better overview of resource allocated will and also to avoid doing mistakes. Define risks is the process after we identify the potential risks, project management software e.g. Primavera can easily analyse the impact of risks if they occur. Quantify risk using PERT Project management software e.g. Primavera can be use to analyse risks using quantitative method by quantifying effects of risk events on the project such as determining probability of achieving cost and time objectives, calculating contingency reserves, identifying trends in quantitative analysis and ranking risks by estimated cost. Primavera implements qualitative risk analysis methodology, quantitative risk analysis that gives the project manager chances to see how project schedule get affected if certain risks occur. This shall help project managers to mitigate risk factors and manage their projects better. Quantitative Risk Analysis
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technique can be implemented by using PERT (Program Evaluation and Review Technique). PERT chart is the best way to break-down a project structure and chart the various steps needed to complete a project and predict the earliest possible completion date. Work breakdown structure can be used to break the affected activities. PERT can perform to analyze the estimation of duration task by taking into account the expected task duration is calculated as the weighted average of the most optimistic, the most pessimistic, and the most likely time estimates. PERT Chart contains a complete Critical Path Scheduling that calculates critical and non-critical tasks. Using PERT chart we identify which tasks gave critical impact on the schedule. Primavera has views that help users to enter data for PERT analysis: separate views for optimistic, expected, and pessimistic duration, as well as a PERT entry sheet. The most powerful view is the last one as it allows the user to enter and see all durations together. To assign the probability for each risk, determine how likely risk it is to occur, Primavera PERT analysis tools to see how likely able to hit the dates. If the tasks durations in the project plan are differ significantly from those in the PERT analysis, then the tasks are at higher risk.
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Figure 4: Display the PERT Chart Grouped by Summary Tasks PERT chart schedules tasks based on the information you enter such as the duration, dependencies and constraints. Use the calendar to define workdays, non workdays and work hours per day. PERT chart automatically calculates the critical path so that we can see which tasks have the most impact on project schedule.
Quantify Risk- Monte Carlo Simulations Monte Carlo simulations can be used as an alternative to overcome the challenges, associated with the PERT method. It is a mathematical method used on risk analysis in many areas and is used to approximate the distribution of potential results based on probabilistic inputs.
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Each simulation is generated by randomly pulling a sample value for each input variable from its defined probability distribution, e.g. uniform, normal, lognormal, triangular, beta and others. These input sample values are then used to calculate the results such as total project duration, total project cost and project finish time. Monte Carlo simulations have been proven to be an effective methodology for the analysis of project schedule with uncertainties; calculate the critical path and slack values. Its allowing user to see all the possible outcomes of the decisions and assess the impact of risk, allowing for better decision. Monte Carlo computerized mathematical simulation is a technique that allows people to calculate risk in quantitative analysis and in making a decision. It is verified project logic and design. Identify common scheduling pitfalls that may result in misleading schedule or risk analysis results. To verify whether the plan is practical based on identified risk events, to pin point likelihood of finishing project on time and on-budget, to identify key risk drivers based on criticality, risk sensitivity and/or duration sensitivity, to reformulate project logic / sequencing based on risk analysis results, to identify minimum, most likely, and maximum task durations based on three point estimate. Its model both qualitatively and quantitatively positive and negative risk events (threats and opportunities). Can design a mitigation plan for possible risk events and give report on project likelihood of completing on-time and on-budget based on both premitigated and post-mitigated schedule.
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Figure 5: Risk Histogram Sample Monte Carlo Simulation Results Plan for risk When risks are identified and quantified, the next process is to plan for risk. Risk planning can take a lot of time and effort therefore users might only plan for the high priority risks or the medium- to high-priority risks. Planning involves identifying triggers for each risk and also identifying proactive, contingency, or mitigation plans for each one of them. Start with developing a list of risk events and mitigation strategies to monitor throughout execution of the project. To help interested parties correct expectations regarding project deliverables. Determine confidence levels regarding project cost and schedule success. Determine confidence levels, P-schedules and quick determination of contingency. Identify key risk drivers. Find out what task or risk event is causing your schedule to not perform as expected. Determine the combined probability of achieving both given budgets and completion dates together. what if analysis by interactively varying cost and schedule thresholds to reveal
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the resultant chance of success. Compare scenarios and determine the cost/benefit ratio of selected mitigation plans.
Figure 6: Sampling of Risk Result Tornado chart able to identify the risk Monitor and Manage Risks Once the risk management plan is in place, the next task is to ensure the project team to follow them. To take any actions necessary according to the proactive, mitigation and contingency plans towards successful of project. As conclusion, project management software enable project risk management by identify the risk, quantify risk, plan for risk efficiently then monitor and manage the risk. The best project-management tool may not come in single software, it depends primarily on our needs. Did we need a tool that will allow our internal team detailed control over tasks and workflow, or something that will allow external stakeholders to easily get in and know what's going on?
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Risk Management Software can help users to make decisions on risk management by showing the most critical risks and how they would occur. By using techniques such as Monte Carlo analysis, we can also determine the likely cost of each particular risk. The most important is how to deal with them.
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QUESTION 3 Describe the salient aspects of project risk management processes adopted in PMBOK of PMI. Project risk management process is an effective management of project risks both threat and opportunities. The project management team will jointly develop a procedure or plan that will enables them to identify, measure, quantify and prepare responses, monitor, control and put in place contingency and mitigating plan of the associated risks. Risk management should be an ongoing process which involves frequent reviews of project risks and progress made in dealing with those risks. A good monitoring process will allows the project manager to check progress and indicates whether that risk are being effectively mitigated or handled and if additional resources is required. Project risk is an uncertain event or conditions that, if it occurs, have a positive or a negative effect on at least one project objective. (Project Risk Management Handbook, 2007). Project risk management process help project sponsors and team to make decisions with regards to alternative approach when handling risks to ensure success chances is increased. Project risk management process is divided into six steps which are risk management planning, risk identification, qualitative risk analysis, quantitative risk analysis, risk response planning and risk monitoring and control. Risk management planning is the first step in the project risk management process. It is an important step and is critical to ensure that it is completed early during project planning. The results of risk management planning are a risk management plan. It outlines and details out risks, resources required and time involves for each risks. Risk identification is the process of identifying project potential risks threat and opportunities which is documented in a live document called the Risk Register. Since it is an iterative process and new risks might develop as the project progresses it is critical that project team appointed a caretaker for the project risk register. It is best that every participant
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in the project is involved during the first risk identification activities from all level of project stakeholders. Everyone that is involved in the project has their own interest to safeguard and by including everybody the project risk register will be able to capture all risks that might affect the project. The project team shall consider but not limited to:
Threats : a risk that present negative impact to the project if it occurs Opportunities: a risk that present positive impact to the project if it occurs Triggers: signs which indicate that a risk is becoming a certain event Residual risks: balance risk that is still there even after responding to original risks Secondary risks: this risks are caused by responding to original risks Risk interaction: when two risks interact causing more damage than each risk individually
The next process involves is the Qualitative Risk Analysis which involves prioritizing the identified risks, sharing the assessment with team members and placing risks with same levels of probability and impact in a group. Project sponsor would determine how to assess risks qualitatively and the team member would assess the identified risks with the pre-set variables determined by the project sponsors. Quantitative risks analysis is similar to qualitative risk analysis; however the probability is numerically estimated. It usually involves statistical technique primarily Monte Carlo simulation that are widely used and accepted. There is also specialized software to assists the simulation. Risk Response Planning is the step involves in developing options and actions to deal with risks. It will also appoint responsible parties that will follow up in mitigating and responding appropriately to the risks. The strategies vary when dealing with positive or negative risks.
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When dealing with negative risks, the team can choose to avoid, transfer or mitigate the risks. With positive risks, the team can choose to exploit, share or enhance the risks. A strategy that can be used for both positive and negative risks are acceptance which is active acceptance and passive acceptance. The final step in risk management process is Risk Monitoring and Control. This process starts and ends with the project. Every risk has to be monitored and controlled accordingly. Plainly put, project risk management process involves risk identification, risks handling, risks monitoring and risks control.
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QUESTION 4
a) Explain the use of the event-chain methodology in project risk management.
Uncertainties can occur at any phase of the entire project lifecycle and in turn lead to project mishaps. At times project managers ignore the risks which lay outside of the project scope. The key objective of event chain methodology is to identify the risks or event chains affecting processes or project outcomes. By identifying these event chains, project managers gain as follows: Simplify schedule network analysis models for project planning and meet deadlines appropriately. Diminish the impact of known or unknown project planning prejudice. Create error-free project schedules by providing flexible layouts. Increase the ability in project managers to visualize chain of events disturbing project outcomes. Give a way to lot of quantitative analysis models that are very accurate to identify potential events affecting projects.
As an essence, event chain methodology helps project managers to identify and avoid project delays, revenue losses and overall project failures. There are six principles practised in project management using event chain methodology and is explained in details below.
Ground States and Excited States Be it a real project or a virtual project, the procedures in projects is not always designed in a uniformed manner or a continuous process. Both external and internal events change these processes from one state to another. The ground state is nothing but the original state or how
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the activity was planned. Event chain methodology defines the changed state as an excited state. The event chains sometimes create significant changes in project activities which can lead to project closure or failures. To avoid such scenarios, event chain methodology is used to analyze the project activities and risk chain is identified. Monte Carlo simulation or statistical distributions are the widely used methods in event chain methodology to identify such events.
Chain of Events Occasionally, a ripple effect is created when one event leads project activities to a chain of events and in turn, develops positivity or negativity in project objectives. Below example is shown to understand how the chain of events creates an impact on the project deliverables:
A key member X in project activity A goes on medical leave suddenly for an indefinite period
Project manager pulls another key resource Y from project activity B to handle the responsibilities of X
Resource Y is put in a situation to handle many different responsibilities at the same time
Resource Y has to hand over or train a new resource to take care of Ys role and learn the activities X was already performing.
How is the project affected due to above situation?

Resource Y struggles and loses motivation which can spread among the team Delay in both the project activities A and B subsequently affects the interrelated or interconnected activities
Project failure or closure due to inability of completing project activities on time.

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How can Event Chain Methodology help in such a Situation?
As a first step, the new human resource requirement in project activity A changes the ground state to an excited state. The sourcing completed state changes to resource required state.
As a second step, a new resource is replaced in project activity A from project activity B. This process changes the ground state of project activity B to an excited state as resource required. If the state is not changed, appropriate resource utilization for project B may not occur.
If project activity B proceeds with less number of resources, the excited state is further changed to the extended lead time to complete project activity B
Once the responsibility of resource Y in project activity A is stabilized, he / she will be able to either train a new resource or manage both A and B activities. The extended period in project activity B will not delay the overall project.
In such methods, a project manager will be able to avoid project closure or failure by completing the chain of activities appropriately. According to Project Management Institute (PMI), there are four strategies such as risk acceptance, risk mitigation, risk transfer and risk avoidance used greatly in the chain of event principle. Event State Tables and Chain Diagrams In the case of complex chain of events, Gantt charts are used to simplify the events and identify solutions. Event chain diagrams and state tables are the visualizations used to clarify the relationship between chain of events and how they affect project activities. Such diagrams are used to simplify the risk analysis methods and find out uncertainties in advance.
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Event Chains related to Duration and Cost The uncertainties related to duration and costs are common in real time and virtual projects. These uncertainties cause major problems in projects and can lead to project failures. The Monte Carlo simulation is used to identify such fluctuations in projects. The events are identified and the moments are calculated by using statistical distribution methods. The quantitative analysis through the Monte Carlo method is used to calculate the cumulative consequences of the events. The results normally include statistical distributions of event chains or a single event such as project duration, costs and in turn, the success of each activity in the project. Critical Event Chains At times, there is a single event or a chain of events that causes major project issues. Such crucial events or event chains are known as critical event chains. To avoid the occurrence of such project issues, it is important for project managers to identify these critical event chains and mitigate them. The sensitivity analysis is used widely in event chain methodology to find out these critical event chains. This method helps to identify events, variations, responses and project activity changes occurring under different conditions. Remember, even a single critical event can create an impact on multiple project activities. Performance Measurement related to Event and Event Chains There is different performance measurement system models used in projects. Normally, historical data is used to measure the performance of any project. By using historical data, project managers decide whether any particular event or event chain can have an impact on the project outcomes or not. However, it is not easy to understand which historical data is appropriate to identify such events.
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Remember, projects differ from each other a lot and variations are more than common in project activities. In such scenarios, event chain methodology using the Bayesian belief network analysis method helps the project manager. Additionally, project managers also use events that occur based on the actual project. Project management using event chain methodology is a great model to identify an event or event chains that are affecting projects. Occasionally, these methodologies also create interesting situations. The closed or completed activity in a project gets started again or new activities that are not planned originally get triggered suddenly. However, a very well developed mathematical model in event chain methodology helps project managers to get rid of events causing issues in the projects.
b) b)In light of the above identified event chains, revise the figures furnished by expert
opinion for the project managers benefit. Give n the probability of the component failing before the completion period of 10 days is: = Pr [x, x < 10 days] => Pr(x = 6 days or x = 8 days) The component can fail in 6 days or 8 days but not on both days, this is mutually exclusive. = Pr(6 days) + Pr(8 days) = 0.15 + 0.15 = 0.30 The failed component needs to be repair then the 2 events are dependent hence the product rule can be applied. The calculated value is the probability of the component failing before 10 days and the probability of completing the repairs from 2-10 days. The number of days needs to be repaired is represented by variable rd.
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rd (days) 2 4 6 8 10
Pr(Rd = rd) 0.35 0.25 0.20 0.15 0.05
0.3 Pr(Rd = rd) 0.105 0.075 0.060 0.045 0.015
Table 1 : The probability of component failing before 10 days and complete repair in n days
The revised days are: T (days) 10 12 14 16 18 20 Pr(T = t) 0.700 0.105 0.075 0.060 0.045 0.015 t.Pr(T=t) t. Pr(T =t ) 7.00 1.26 1.05 0.96 0.81 0.30 11.38
Table 2: The revised calculation for component repairs estimation Applying the formula: C(d) = 200 e 0.04 (11.38 10) = 200 e 0.0552 = 200 1.05675 = 211.35 The revised estimate for completion is 11.38 days and the cost is 211.35.
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QUESTION 5 a) Discuss the appropriateness, or otherwise, of the following risk measures: i) Likelihood of Loss times Impact of Loss
Likelihood can be defined as a probability that a risk will happen. This probability can be expressed in an event that can happen individually or condition or series of repeated events. The meaning of risk or the loss or threat is uncertain event, the condition will occurs resulting in unwanted outcomes such as damage, injury, delay and economic loss. Defining likelihood and consequences By using a method called Rio Tinto Risk analysis, likelihood and consequences can be defined. The person leading the risk analysis must either:
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Before commencing the risk analysis, the person must confirm the applicability of the standard method for the particular application.
Define and justify alternative scales to be used for a particular analysis.
Usually likelihood and consequences scales are defined using three, four or five points i.e. 3x3, 4x4, and 5x5. Four points scales are most appropriate to apply the Rio Tinto Risk analysis, this is because the three points scales is not adequate to thoroughly discriminate between different classes of risks while five points scales can be too complex. An example of four points scales is shown in table below. The table defines the probability values for a single risk event, and time based frequency values for repeated events. Table 31: Definitions of likelihood
LIKELIHOOD TYPE PROBABLILT Y FREQUENCY (Time) CLASS PROBAB UNLIKELY LE x% - y% Once p - q months y% - z% q-r months
VERY UNLIKELY < x% Less than once per p months
LIKELY >z% More than once per r months
Since risk analysis must address both threats and opportunities, it is necessary to define both downside and upside economic consequence scales. Threats have unfavourable economic consequences (increased capital expenditure or operating cost, delayed schedule or production, delayed or lost revenue); opportunities have favourable economic consequences. Economic consequences are scaled to support risk analysis at different levels in the organisation, since risk acceptance thresholds for smaller projects or business units have lower absolute values than the thresholds for larger projects or business units. Risk Acceptance Threshold Risk acceptance threshold must also be well defined in order for the level of risk can be tolerated. The thresholds are based by on defined scales of likelihood and consequences.
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Then the risks are assessed and classified using a risk determination matrix, the same matrix for both threats and opportunities. A 4x4 matrix is shown below where both likelihood and consequence are assessed against four points scales. The white zone which is the class II risk is the risk acceptances threshold. In this matrix, risk can have more than one type of consequence. The risk position in the matrix determines highest scoring consequence and classification of classes I, II, III or IV. These classes indicate where the risk is positioned in relation to the risk acceptance threshold.
HIGHEST CONSEQUENCE
VERY LOW HIGHLY LIKELY PROBABLE UNLIKELY VERY UNLIKELY CLASS CLASS RISKS CLASS RISKS CLASS RSIKS I RISKS II III IV LOW MODERAT E HIG H
LIKELIHOOD
Figure 71: Risk Determination Matrix
High Consequence Low Likelihood Risks
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For risks which are having a very high negative consequence and a very low likelihood, it must be paid with special attention. Examples of this kind of risks are multiple fatalities, massive environmental incident or plant failure. These risks must be identified and noted in the Risk register as special cases. It must be urgently evaluated and treated separately from the standard risk analysis process.
ii)
The Expected Monetary Value
The phrase Expected Monetary Value refers to a specific analytical technique or analysis in which a calculation is made to determine the average of all potential outcomes when the future includes a number of particular scenarios that may or may not ultimately happen. These scenarios can all be interpreted as potential happening individually, or that may happen in various groups. One common utilization of this technique takes place within a technique such as Decision Tree Analysis. It is also recommended that a project team utilize simulations and modelling when conducting cost and/or a schedule risk analysis because it is in reality significantly more powerful and is typically subject to less erroneous application than other analytical methods. The expected monetary value analysis can be conducted at any time during the project life cycle but should be done as soon as possible. The following details will illustrate how to use the Decision Tree Analysis in Project Risk Management. Decision Tree Analysis Decision Trees are excellent tools for helping you to choose between several courses of action. They provide a highly effective structure within which you can lay out options and investigate the possible outcomes of choosing those options. They also help you to form a balanced picture of the risks and rewards associated with each possible course of action.
Drawing a Decision Tree
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You start a Decision Tree with a decision that you need to make. Draw a small square to represent this towards the left of a large piece of paper. From this box draw out lines towards the right for each possible solution, and write that solution along the line. Keep the lines apart as far as possible so that you can expand your thoughts. At the end of each line, consider the results. If the result of taking that decision is uncertain, draw a small circle. If the result is another decision that you need to make, draw another square. Squares represent decisions, and circles represent uncertain outcomes. Write the decision or factor above the square or circle. If you have completed the solution at the end of the line, just leave it blank. Starting from the new decision squares on your diagram, draw out lines representing the options that you could select. From the circles draw lines representing possible outcomes. Again make a brief note on the line saying what it means. Keep on doing this until you have drawn out as many of the possible outcomes and decisions as you can see leading on from the original decisions
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Figure 82: Example Decision Tree (Should we develop a new product or consolidate?)
Once you have done this, review your tree diagram. Challenge each square and circle to see if there are any solutions or outcomes you have not considered. If there are, draw them in. If necessary, redraft your tree if parts of it are too congested or untidy. You should now have a good understanding of the range of possible outcomes of your decisions. Evaluating the Decision Tree Now you are ready to evaluate the decision tree. This is where you can work out which option has the greatest worth to you. Start by assigning a cash value or score to each possible outcome. Estimate how much you think it would be worth to you if that outcome came about.
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Next look at each circle (representing an uncertainty point) and estimate the probability of each outcome. If you use percentages, the total must come to 100% at each circle. If you use fractions, these must add up to 1. If you have data on past events you may be able to make rigorous estimates of the probabilities. Otherwise write down your best guess.
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Calculating Tree Values Once you have worked out the value of the outcomes, and have assessed the probability of the outcomes of uncertainty, it is time to start calculating the values that will help you make your decision. Start on the right hand side of the decision tree, and work back towards the left. As you complete a set of calculations on a node (decision square or uncertainty circle), all you need to do is to record the result. You can ignore all the calculations that lead to that result from then on.
Calculating The Value of Uncertain Outcome Nodes Where you are calculating the value of uncertain outcomes (circles on the diagram), do this by multiplying the value of the outcomes by their probability. The total for that node of the tree is the total of these values. In the example in Figure 93 , the value for 'new product, thorough development' is:
0.4 (probability good outcome) x $1,000,000 (value) = $400,000 0.4 (probability moderate outcome) x $50,000 (value) = $20,000 0.2 (probability poor outcome) x $2,000 (value) = $400 + $420,400 Table 4: Value of new product after development 0.4 (probability good outcome) x $1,000,000 (value) = $400,000 0.4 (probability moderate outcome) x $50,000 (value) = $20,000 0.2 (probability poor outcome) x $2,000 (value) = $400 + $420,400
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Figure 104: Example Decision Tree (Should we develop a new product or consolidate?) Calculating the Value of each Decision Nodes When you are evaluating a decision node, write down the cost of each option along each decision line. Then subtract the cost from the outcome value that you have already calculated. This will give you a value that represents the benefit of that decision. Note that amounts already spent do not count for this analysis these are 'sunk costs' and (despite emotional counter-arguments) should not be factored into the decision. When you have calculated these decision benefits, choose the option that has the largest benefit, and take that as the decision made. This is the value of that decision node.
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In this example, the benefit we previously calculated for 'new product, thorough development' was $420,400. We estimate the future cost of this approach as $150,000. This gives a net benefit of $270,400. The net benefit of 'new product, rapid development' was $31,400. On this branch we therefore choose the most valuable option, 'new product, thorough development', and allocate this value to the decision node.
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Result By applying this technique we can see that the best option is to develop a new product. It is worth much more to us to take our time and get the product right, than to rush the product to market. It is better just to improve our existing products than to botch a new product, even though it costs us less.
b) Identify the various risk exposures in a large project that can be effectively managed by transferring them to various other external competent parties. Projects are complex undertakings involving a unique set of tasks and activities conducted within a set of constraints to meet defined objectives. One of the key areas requiring proactive management within projects is risk, arising from uncertainties which could affect achievement of objectives. Risk in projects is also complex, arising from a wide range of sources and having a broad scope of possible effects on the project. Given these two dimensions of project complexity, in both the tasks to be performed and the risks inherent in the project environment, managing the relationship between project work and project risk is a key success factor for every project manager. As discussed previously, project complexity is characterized by two dimensions: structural complexity and uncertainty. These two factors are the two main risk exposure usually found in large projects and can be effectively managed using tools and techniques. Structural complexity can be defined as a project for example in the design-and-manufacture industry where the product is the physical deliverable (the product being designed and manufactured). We can also see in a different perspective where a project to develop a more complex product must obviously or normally be a more complex project but it is better to distinguish the cause and effect of product type of complexity first.
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c) You have $1,000,000 worth of equipment at the job site and wish to minimize
your risk of direct property damage by taking out an insurance policy. The insurance company provides you with their statistical data as shown below:
Property Damage Type Total Medium Low No Damage Probabilit y % 0.02 0.08 0.10 99.8
Loss Amount ($) 1,000,000 400,000 200,000 0
Assuming that the insurance company adds on $300 for handling and profit and uses expected value to calculate premiums, calculate: i) The expected loss and its variance;
Property Damage Type Total Medium Low No Damage
Probabilit y % 0.0002 0.0008 0.001 0.998
Loss Amount (RM) 1,000,000 400,000 200,000 0
Probability Loss Amount (RM) 200 320 200 0
Table 5: Probability Loss Amount Thus expected value loss = E(X) = ai Pr(X = ai) = (200 + 320 + 200 + 0)/1 = RM 720.00 Mean =(1,000,000 + 400,000 + 200,000 + 0)/4 = 400,000 Variance:
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Var (X) = E( (X - )2) = 2 = _(ai - )2 Pr(X = ai) = (1,000,000-400,000)2 x 0.0002 + (400,000-400,000)2 x 0.0008 + (200,000400,000)2 x 0.001 + (0-400,000)2 x 0.998 = 159,792,000,000 ii) The premium the insurer is likely to charge for: - full cover against any loss - cover against losses in excess of $200,000 Likely premium charge: Full cover against any loss: = RM720 + RM300 = RM 1,020.00 Therefore, covering against losses in excess of RM200,000. = (200 + 320) (0.999) = 520/0.999 = RM 520.52 = 520.52 + RM300 = RM 820.52
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PART B a) Describe the key documents that contain information on the financial position of a firm. In order to best understand the financial position of a firm, one must start from the basics. There are several key documents that contain information and it is called the financial statements. These financial statements will help to determine a firm's financial position at a point in time and over a period of time as well as the cash position at any point in time. Many businesses fail because the owner loses a grip on the firm's financial position. Below are the details for each key document that are essential to determine the financial position of a firm. Income Statement The income statement is also called the profit and loss statement. It is the major statement for measuring a firm's profitability over a period of time. The income statement is developed in a step-by-step process starting with the amount of revenue that a firm have earned. Then subtract each item your firm has expensed to see what your profit or loss is after each is deducted. The income statements can be prepare for a short period of time like a month and for tax purposes, it can be extend out and develop the firm income statement for the tax year. Statement of Retained Earnings The Statement of Retained Earnings is the second financial statement must be prepare in the accounting cycle. After the firm arrive at its profit or loss figure from the income statement, it must prepare this statement in order to see what is the total retained earnings to date are and
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how much will the firm pay out to its investors in dividends, if any. Total retained earnings are then transferred to the balance sheet.
Balance Sheet The balance sheet is a statement showing what the firm own (assets) and what it owes (liabilities and equity). The firm assets must equal its liabilities (debt) plus the equity (owner's investment). The firm may have used its liabilities and equity to purchase assets. The balance sheet shows the firm's financial position with regard to assets and liabilities/equity at a point in time. Statement of Cash Flows Even if the firm is turning a profit, it may be falling short because it does not have the have adequate cash flow. It is just as important to prepare a Statement of Cash Flows as it is to prepare the income statement and balance sheet. This statement compares two time periods of financial data and shows how cash has changed in the revenue, expense, asset, liability, and equity accounts during those time periods. The statement divides the cash flows into operating cash flows, investment cash flows, and financing cash flows. The final result is the net change in cash flows for a particular time period and gives the owner a very comprehensive picture of the cash position of the firm. These four financial statements are prepared at the end of the accounting cycle and should be prepared in this order. Information from the Income Statement comes from the revenue and expense accounts on the general ledger and information for the Statement of Retained Earnings comes from the Income Statement and the dividend account. The Balance Sheet is prepared next and the information is taken from the asset, liability and equity accounts on the general ledger as well as from the
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Statement of Retained Earnings. Last, the Statement of Cash Flows is prepared from all the previous financial statements. Financial statement can be prepared for a company for any length of time and at any point in time. Some companies prepare financial statements monthly to keep a tight handle on the financial position of the firm. Other companies have a longer accounting cycle. Financial statements must be prepared at the end of the company's tax year
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b) You are the project manager for a chosen new project activity to be undertaken by a firm. Discuss, in the contexts of this new project. i) The major risk exposures the firm might exposed to: Risk is another name for uncertainty, which include the complete range of positive and negative impacts on the future outcomes of a project. A projects exposure to risk can range from acts of nature to simple mistakes. The usual end result of a deviation from the original project plan, or schedule is additional cost to the project. By using risk management methodology, we can limit the exposures that can be caused by these events. As a project manager, any new project activity assigned may have its risk exposures the firm might expose to. In this example of a new project activity, well take the Boeing Company to explain the risk exposures it may face in order to design and manufacture a new commercial airplane. The Boeing Company is among the largest global aircraft manufacturers and the third largest aerospace and defence contractor in the world based on defence related revenue. This year, the Boeing Company will manufacture the new wide body 747-8 for the world commercial airline markets. The company will design and manufacture a new airplane and it requires ten full years to complete from research level up to signing a new contract to customers. This project will requires a financial investments of more than USD5 billion and surely a project risk management must be implemented to overcome the major risk exposures. Below are the forecast of major risks exposures explained in more detail. Financial
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In order to undertake this huge project, The Boeing Company must have financial stability to design and manufacture one of the best commercial transport aircraft in the world. This requires sufficient money to build and construct the airplane. The company must up front allocate sufficient budget to fund the project and this will more or less influence the companys other business field sales performance since it is focusing all their resources for this main project. The company also needs to strategically calculate the number of planes sold based on customer request. This is crucial since it will determined the payback period for the Boeing Company to receive back their initial financial funding to complete the project. Up front funding and payback period based upon number of planes sold Market Air travel remains a large and rowing industry. It facilitates the growth, world trade, international investment and tourism and is therefore central to the globalization taking place in many other countries. The Boeing Company must forecast the customer expectations on cost, configuration and amenities. This factor is based on year life of the plane spanning from 30 to 40 years. Technical A conventional commercial aircraft lifetime usually is based on the landing and takeoff cycles and sometimes on the pressurization cycles. Each time an aircraft is pressurized during flight, its fuselage and wings are stressed. Both the fuselage and wings are made of large, plate-like parts connected with fasteners and rivets, and over time, cracks develop around the fastener holes due to metal fatigue. Because of the long lifetime for an airplane, the Boeing Company must forecast the current technology and its impact on cost, safety, reliability and maintainability. Production
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Coordination of manufacturing and assembly of a large number of subcontractors without impacting cost, schedule, quality and safety.
ii) How you propose, in broad terms, to mitigate the downside effects of the undesirable risks that have been identified; and Financial Funding by life cycle phases Continuous financial risk management Sharing risk with subcontractors Risk re-evaluation based upon sales commitments
Market Close customer contact and input Willingness to custom-design per customer Develop a baseline design that allows for customization
Technical A structured change management process Using proven design rather and technology rather than unproven designs and high risk technology Parallel product improvement and new product development process
Production Close working relationships with subcontractors A structured change management process
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Lesson learned from other new airplanes program Use of learning curves.
iii) How you would assess the risk-bearing capacity of the firm in the light of implementing this project. There is no single number that represents a companys risk-bearing capacity. A risk-bearing capacity analysis looks at:

Financial Strength Competitive Dynamics Risk Management Systems
These dimensions are looks into individually and in interaction with one another to provide both qualitative and quantitative indicators of overall capacity, as well as currently employed and identified reserve capacity. To measure the risk bearing capacity for the Boeing Company to embark on a new project developing a new fleet of airplanes requires an analysis on above dimensions to successfully deliver the project. The first assessments are to measure the company financial strength or capacity to manage the project. Boeing is organized into two business units: Boeing Commercial Airplanes and Boeing Defence, Space & Security. Supporting these units is Boeing Capital Corporation, a global provider of financing solutions. Boeing Capital Corporation is a global provider of financing solutions. Working closely with Commercial Airplanes and Defence, Space & Security, Boeing Capital Corporation arranges, structures and provides financing to facilitate the sale and delivery of Boeing commercial and military aircraft, satellites and launch vehicles. With a year-end 2009
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portfolio of approximately $5.7 billion, Boeing Capital Corporation combines Boeing's financial strength and global reach, detailed knowledge of Boeing customers and equipment, and the expertise of a seasoned group of financial professionals. From this explanation, theres no doubt the Boeing Company backed by The Boeing Capital Corporation will have the sufficient cash flow to provide payments for contractors in manufacturing and delivery of the its fleet of commercial aircrafts. The second assessment is to analyze the competitive dynamics of The Boeing Company compared to other aviation company such as Airbus and Lockheed Martin Corporation. Competitive dynamics refers to a companys position in the marketplace relative to its competitors and market trends. Selling an airplane is not easy. After all, capable players like Lockheed and General Dynamics decided civilian aircraft manufacturing is not their cup of tea. Indeed, airlines prefer buying planes from firms like Boeing and Airbus, which boast established product lines and have a long history of successful aircraft. Finally the ability of the company to deliver the project successfully is to evaluate the risk management systems. Risk management systems include the people, technology, systems and processes that a company employs to identify, measure, mitigate and monitor its risk exposures and protect its solvency and stability. The protective dimension includes disaster recovery, business continuity planning and crisis management planning.
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c) Describe how you would use the Monte Carlo Simulation Technique for project risk management. Monte Carlo is a mathematical method used on risk analysis in many areas and is used to approximate the distribution of potential results based on probabilistic inputs. Each simulation is generated by randomly pulling a sample value for each input variable from its defined probability distribution, e.g. uniform, normal, lognormal, triangular, beta, etc. These input sample values are then used to calculate the results, i.e. total project duration, total project cost, project finish time. The inputs can be task duration, cost, start and finish time. This procedure is then repeated until the probability distributions are sufficiently well represented to achieve the desired level of accuracy. They are used to calculate the critical path, slack values, etc. Monte Carlo simulations have been proven an effective methodology for the analysis of project schedule with uncertainties. By using the Monte Carlo simulation technique, will help to answer questions below during undertaking a project risk management. What is the chance of your project being completed on schedule and within budget? What is the chance that the particular task will be on the critical path? What tasks affect the project duration at most? What is the project success rate?
There are many software tools for Monte Carlo simulation techniques in the market for example Microsoft Project. This software tool will enable project managers to perform risk management systematically by utilizing all the features inside it. First, all these software will
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allow the user to assign different statistical distributions to project inputs i.e. task duration, cost and perform the Monte Carlo simulation to get a different format of output results. For example, you can use a frequency or cumulative probability charts or histograms to see the chance that the project will be completed within a given period of time and to calculate the criticality index or probability that a task lies on the critical tasks. By using the simulation, a project manager can perform a sensitivity analysis to calculate how sensitive the project outputs that are project duration, cost, risks and finish times towards the uncertainties of the project inputs. Monte Carlo simulation tools also provide probabilistic analysis or conditional branching. An example of probabilistic branching is when the user defines that there is 40% chance that task A will be successor of task B and 60% chance that task C will be successor of task B. An example of conditional branching is when the user defines that task A task will be followed by task B if task A duration is greater or less than a certain value.
d) RM ('000,000) Assets Net fixed assets Cash and current assets Total assets Financed by: 7 % Debentures Equity capital Current liabilities Total capital 70 30 100 RM ('000,00)
30 60 10 100
Its fixed assets are expected to provide a 15% return over the planned investment horizon. This firm intends to embark on projects that require an initial sinking of RM 30million and
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are expected to provide in aggregate a 20% return with a standard deviation of 30% over the planned investment horizon. These projects are to be financed wholly by the internally available funds and the debentures are to be redeemed at the end of the planned investment horizon.
i) evaluate, stating your assumptions, the probability that the firm is financially better off by embarking on the intended projects; Assuming: 1. Assets growth by 15% 2. Project growth by 20% with standard deviation of 30% (either +30% or 30%) By end of year, where; V1 = V0er , rf= 0.15 and rp = 0.20 thus, value of fixed assets: Vf1 = 70e0.15 = 81.328 Million
a) and value of projects: (deviation - 30%) VP1 = 30e0.2x0.7 VP1 = 30e0.14 = 34.508 Million b) and value of projects: (deviation + 30%) VP1 = 30e0.2x1.3 VP1 = 30e0.26 = 38.907 Million
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Base on the above the company financial status shall become better as the Fixed asset shall be increased from 70 to 81.328 Million and the current & cash asset will be either 34.508 Million or 38.907 Million from the current year amount of 30 Million. Therefore the probability that the firm is financially better off by embarking on the intended projects is 100% or equal to 1. ii) Assuming that it is only able to earn actual returns of 12% on its fixed assets and 15% on its projects, derive the projected balance sheet at the end of the planned investment horizon; Assuming: 1. Assets growth by 12% 2. Project growth by 15% By end of year, the projected balance sheet: Where: V1 = V0er , rf = 0.12 and rp = 0.15 thus, value of fixed assets: Vf1 = 70e0.12 = 78.9247 Million and value of projects: VP1 = 30e0.15 = 34.855 Million 7% debentures: 7% x 30 = 2.1
Net asset = Vf1 + VP1 = 111.675 Million
RM ('000,000) Assets Net fixed assets Cash and current assets Less charges on income Total Assets Financed by: Syahrifendi Lukmanilhakim 78.92 34.86 -2.10
RM ('000,00)
111.68
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iii) Assuming that the projects' expected returns are normally distributed, represent the provided information in suitable mathematical notations; rp~ N (0.2 , 0.09) rf~ 0.12 iv)Assuming that the projects' expected returns are normally distributed, derive an expression for the firms value at the end of the planned investment horizon; and V1 = 70e0.12 + 30erp 2.1
v) Stating your other relevant assumptions, derive the probability of its ruin brought about by embarking on these projects. When V0 < 60, 70e0.12 + 30erp 2.1 < 60 78.92 + 30erp 2.1 < 60 30er p< 60 + 2.1 78.92 30e rp< -16.92 Since the value is negative, need further clarification. Shall this value is correct, this is meaning the business have no chance to get bankrupt.
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REFERENCE
Kerzner, H. (2009). Project Manager: A Systems Approach to Planning, Scheduling and Controlling (Rev. 10). Project Management Institute. (2008). Project Management Body of Knowledge. Project Management Institute. Intaver Institute Inc. (2011). Event Chain Methodology. from Intaver Institute: http://www.intaver.com/index-5.html Research Wikis. Aircraft Manufacturing Research and Marketing Research: http://researchwikis.com/Aircraft_Manufacturing_Marketing_Research Risk Management Methodology. A company Risk Management Methodology: http://www.eurolog.co.uk/apmrisksig/meetings/pgerzon.pdf D. Van Well Stam (2004). Project Risk Management: An essential tool for managing and controlling projects.
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EMRM5103

MAY SEMESTER 2011 PROJECT RISK MANAGEMENT (EMRM5103)

LECTURER ASSOC. PROF SAMIAPPAN MARAPPAN

STUDENT SYAHRIFENDI LUKMANILHAKIM MASTERS IN PROJECT MANAGEMENT CGS00560517

Table 1 Table 2 Table 3 Table 4 Table 5

PART A QUESTION 1 See Presentation slides attached.

How is the project affected due to above situation?

Project failure or closure due to inability of completing project activities on time.

How can Event Chain Methodology help in such a Situation?

Pr(Rd = rd) 0.35 0.25 0.20 0.15 0.05

0.3 Pr(Rd = rd) 0.105 0.075 0.060 0.045 0.015

Define and justify alternative scales to be used for a particular analysis.

VERY UNLIKELY < x% Less than once per p months

LIKELY >z% More than once per r months

Figure 71: Risk Determination Matrix

High Consequence Low Likelihood Risks

The Expected Monetary Value

Drawing a Decision Tree

Loss Amount ($) 1,000,000 400,000 200,000 0

Property Damage Type Total Medium Low No Damage

Probabilit y % 0.0002 0.0008 0.001 0.998

Loss Amount (RM) 1,000,000 400,000 200,000 0

Probability Loss Amount (RM) 200 320 200 0

Financial Strength Competitive Dynamics Risk Management Systems

Net asset = Vf1 + VP1 = 111.675 Million

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