Project Procurement and Risk

Chapter 12
12.1 Plan Procurements 12.2 Conduct Procurements 12.3 Administer Procurements 12.4 Close Procurements
Project Procurement Management includes the processes to purchase or acquire the products, services, or results needed from outside the project team to perform the work. This chapter presents two perspectives of procurement. The organization can be either the buyer or seller of the product, service, or results under a contract.
Project Procurement Management includes the contract management and change control processes required to administer contracts or purchase orders issued by authorized project team members.
Project Procurement Management also includes administering any contract issued by an outside organization (the buyer) that is acquiring the project from the performing organization (the seller), and administering contractual obligations placed on the project team by the contract.
Buyer The customer
Seller Contractor; vendor; supplier external to the performing organization The terms and conditions of the contract become key inputs to many of the sellers processes
Procurement
9 2
1
Planning
Process 12.1
Inputs
Scope Baseline Requirements Documentation Teaming Agreements Risk Register Risk Related Contract Decisions Activity Resource Requirements Project Schedule Activity Cost Estimates Cost
Tools and Techniques

Make-or-Buy Analysis Expert Judgment Contract Types ___________
Outputs
Procurement Management Plan Procurement Statements of Work Make-or-Buy Decisions Procurement Documents Source Selection Reference: Figure 12.2. Criteria PMBOK Guide, 4th Ed
Plan Procurements
The process of documenting project purchasing decisions, specifying the approach and identifying the potential sellers. It identifies those project needs which can best be, or must be, met by acquiring products, services or results outside of the project organization, versus those project needs which can be accomplished by the project team.
Plan Procurements: Inputs

1.
Scope Baseline
Scope statement. The scope statement contains the product scope description, service description and result description and the list of deliverable and the acceptance criteria. WBS WBS Dictionary

Requirements Documentation Requirements documentation may include:
2.
Important information about project requirements that is considered during planning for procurements. Requirements with contractual and legal implications that may include health, safety, security etc .

Teaming Agreements Teaming agreements are legal contractual agreements between two or more entities to form a partnership or joint venture, or some other arrangement as defined by the parties. The agreement defines buyer-seller roles for each party.
3.

4.
5.
6. 7. 8. 9. 10.
Risk Register Risk Related Contract Decisions Activity Resources Requirements Project Schedule Activity Cost Estimates Cost Performance Baseline Enterprise Environmental Factors

10.
Organizational Process Assets

The organizational process includes
Formal procurement policies, procedures and guidelines. Management systems that are considered in developing the procurement management plan and selecting the contract types to be used. An established multi-tier system of pre qualified sellers based on previous experience.
Plan Procurements: Tools and Techniques

1.
Make-or-Buy Decision A make-or-buy decision is a general management technique used to determine whether particular work can be best accomplished by the project team or must be purchased from outside sources.

2.
Expert Judgment Expert technical Judgment will often be used to assess the inputs from this process. Expert purchasing judgment can also be used to develop or modify the criteria that will be used to evaluate seller proposal.

3.
Contract Types
The risk shared between the buyer and seller is determined by the contract type. All legal contractual relationships generally fall into one of two broad families, either Fixed-Price or Cost-reimbursable.
Fixed Price Contracts This category of contracts involves setting a fixed total price for a defined product or service to be provided. It further includes following types based amount of risk involved and amount of incentive included.

Firm Fixed Price Contracts (FFP) Firm Fixed Incentive Fee contracts (FPIP) Fixed Price with Economic Price Adjustment Contracts (FP-EPA)
Seller Risk
LOW
HIGH
HIGH
LOW
Buyer Risk
CPPC
CPFF
CPIF
FPI
FFP
100 0
Variable Sharing Ratio
0 100
Cost Plus Percentage of Costs (CPPC)
Cost Plus Fixed Fee (CPFF)
Cost Plus Incentive Fee (CPIF)
Fixed Price Incentive (FPI)
Firm Fixed Price
Spectrum of risk (For contracts)

Cost-reimbursable Contracts This category of contracts involves payments (Cost reimbursements) to the seller for all legitimate actual cost incurred for the completed work, plus a fee representing seller profit.
Three of more common types of cost reimbursable in use are:

Cost Plus Fixed Fee Contracts (CPFF) Cost Plus Incentive Fee Contracts(CPIF) Cost Plus Award Fee Contracts (CPAF)
Plan Procurements: Outputs

1.
Procurement Management Plan
The procurement management plan describes how the procurement will be managed from developing procurement document through contract closure.
The procurement management plan can include guidance for types of contracts to be used, risk management issues etc A procurement management plan can formal or informal, can be highly detailed or broadly farmed, and is based on the needs of each project.

2.
Procurement Statement of Work

The statement of work describes the procurement item in sufficient detail to allow prospective sellers to determine if they are capable of providing the products, services.
3. 4.
Make-or-Buy Decisions Procurement Documents

Procurement document is used to solicit proposals from prospective sellers.
5.
Common terms are used for different types of procurement documents and may include request for information (RFI), invitation for bid (IFB), request for proposal (RFP), request for quotation (RFQ) etc. Change Request
Procurement
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Executing
Process 12.2
Inputs
Project Management Plan Procurement Documents Source Selection Criteria Qualified Seller List Seller Proposals Project Documents
Outputs
Bidder Selected Conferences Sellers Proposal Procurement Evaluation Contract Techniques Award Independent Resource Estimates Calendars Expert Change Judgment Requests Advertising Project Management Internet Plan Updates Search Reference: Figure 12.4. Project PMBOK Guide, 4th Ed
Conduct Procurement
Conduct procurement is the process of obtaining seller responses, selecting a seller and awarding a contract. On major procurement items, the overall process of requesting responses from sellers and evaluating those responses can be repeated.
Conduct Procurement
A short list of qualified sellers can be established based on a preliminary proposal. A more detailed evaluation can then be conducted based on a more specific and comprehensive requirements document requested from the sellers on the short list.
Conduct Procurement: Inputs

1.
2.
3. 4.
Project Management Plan Procurement Documents Source Selection Criteria Qualified Seller List
Conduct Procurement: Inputs

5.
6.
7. 8. 9.
Seller Proposals Project Documents Make-or-Buy Decisions Teaming Agreements Organizational Process Assets
Conduct Procurement: Tools and Techniques

1.
Bidder Conferences
Bidder Conferences (sometimes called contractor conferences, vendor conferences) are meeting with all perspective sellers and buyers prior to submittal of bid or proposal. They are used to ensure that all perspective sellers have a clear and common understanding of the procurement.

2.
Proposal Evaluation Techniques

On complex procurement, when source selection will be made based on seller responses to previously defined weighted criteria, a formal evaluation review process will be defined by the buyers procurement policies. The evaluation committee will make their selection for approval by management prior to the award.

3.
Independent Estimates
For many procurement items, the procuring organization may elect to either prepare its own independent estimates, or have an estimate of costs prepared by an outside professional estimator, to serve as a benchmark on proposed responses.

4.
5.
Expert Judgment Advertising

Existing lists of potential sellers can often be expanded by placing advertisements in general circulation publications such as newspapers or in specially trade publications.
6.
Internet Search

7.
Procurement Negotiations
Negotiations clarify the structure, requirements and other terms of the purchases so that mutual agreement can be reached prior to signing the contract. Final contract language reflects all agreements reached.
Conduct Procurement: Outputs

1.
Selected Sellers
The sellers selected are those sellers who have been judged to be in a competitive range based upon the outcome of the proposal or bid evaluation, and who have negotiated a draft contract that will become the actual contract when award is made.

2.
Procurement Contract Award

A procurement contract is awarded to each selected seller. The contract can be in the form of simple purchase order or complex document. A contract is a mutually binding legal document that obligates the seller to provide the specified product or service and obligates the buyer to compensate the seller.

3.
Resource Calendars
The quantity and availability of contracted resources and those dates on which each specific resource can be active or idle is documented.
4. 5.
6.
Change Requests Project Management Plan Updates Project Document Updates
Procurement
9 3
1
Executing
Process 12.2
Inputs
Project Management Plan Procurement Documents Contracts Performance Report Approved Changes Report Work Performance Information
Outputs
Contract Procurement Change Documentation Control Org: Process System assets Updates Procurement Change Performance Requests Review Project Inspection and Management Auditing Plan Updates Performance ____________ Reporting Payments Reference: Figure 12.4. Systems PMBOK Guide, 4th Ed
Administer Procurement
Administer procurement is the process of managing procurement relationships, monitoring contract performance, and making changes and corrections as needed. Both the buyer and seller will administer the procurement contract for similar purposes. Each must sure that both parties meet their contractual obligations and that their own legal rights are protected.
Administer Procurement: Inputs

1.
Procurement Documents
Procurement documents contain complete supporting records for administration of the procurement processes. This includes procurement awards and the statement of work.
2. 3.
Project Management Plan Contracts
Administer Procurement: Inputs

4.
5.
Performance Report Approved Changes Requests

Approved changes request can include modifications to the terms and conditions of the contract including the procurement statement of work, pricing, and description of the products, services to be provided.
6. Work Performance Information
Administer Procurement: Tools and Techniques

1.
Contract Change Control System

A contract change control system defines the process by which the procurement can be modified. It includes the paperwork, tracking systems, disputes resolution procedures, and approval levels necessary for authorizing changes.

2.
Procurement Performance Review

A procurement performance review is a structured review of the sellers progress to deliver project scope and quality, within cost and on schedule, as compared to the contract.
3.
Inspections and Audits

Inspections and audits required by the buyer and supported by seller as specified in the procurement contract can be conducted during execution of the project to verify compliance in the sellers work process or deliverables.

4.
5.
6. 7.
Performance Reporting Payment Systems Claims Administration Record Management System
Administer Procurement: Outputs

1.
Procurement Documentation
Procurement documentation includes, but not limited to, the procurement contract with all supporting schedule, requested unapproved contract changes and approved changes requests. Procurement documentation also includes any seller-developed technical documentation and other work performance information such as, deliverables, seller performance report etc.
Administer Procurement: Outputs

2.
Organizational Process Assets Updates

Elements of organizational process assets that may be updated include:

Correspondence Payments Schedules and requests Seller performance evaluation documentation
3. 4.
Change Requests Project Management Plan Updates
Procurement
9 3
1
Executing
Process 12.2
Inputs
Project Management Plan Procurement Documents

Procurement Audits Negotiation Settlement Record Management System
Outputs
Close Procurements Org: Process assets Updates ______
Reference: Figure 12.4. PMBOK Guide, 4th Ed
Close Procurement
Close procurement is the process of completing each procurement. It supports the close project or phase process, since it involves verification that all work and deliverables were acceptable. The close procurement also involves administrative activities.
Close Procurement
Close procurements addresses each contract applicable to the project or project phase. Early termination of a contract is a special case of procurement closure that result from a mutual agreement of both parties, from the default of one party, or for convenience of the buyer if provided for in the contract.
Close Procurement: Inputs

1.
2.
Project Management Plan Procurement Documentation

To close the contract, all procurement documentation is collected, indexed and filled. This information can be used for the lesson learned information and as a basis for evaluating contractors for future contracts.
Close Procurement: Tools and Techniques

1.
Procurement Audits
The procurement audit is a structured review of the procurement process originating from the Plan procurement process through Administer Procurements The purpose of a procurement audit is to identify successes and failures that warrant recognition in the preparation or administration of other procurement contracts on the project.
Close Procurement: Tools and Techniques

2.
Negotiated Settlement
In all procurement relationships, the final equitable settlement of all outstanding issues, claims, and disputes by negotiation is primary goal. Whenever settlement can not be achieved through direct negotiation, some form of alternative dispute resolution (ADR) including mediation or arbitration may be explored.
Close Procurement: Outputs

1.
2.

Closed Procurements Organizational Process Assets Updates

Procurement File Deliverable Acceptance Lessons Learned Documentation
Warranty Implied Warranty
Act of sale implies:

General fitness for use Fitness for special uses
Express Warranty

Beyond the mere act of the sale Seller makes specific representations
Request For Proposal (RFP)
The purpose of preparing a request for proposal is to state, comprehensively and in detail, what is required , from customer point of view, to address the identified need.
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A good RFP allows contractors or project team to understand what the customer expects so that they can prepare a thorough proposal that will satisfy customers needs and requirements at a realistic price.
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60
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Following are some guidelines for drafting a formal request for proposal to external contractors: An RFP must provide a statement of work. An SOW deals with the scope of the project, outlining the tasks or work elements the customers wants the contractor or project team to perform.
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The RFP must include the customer requirements, which define specifications and attributes. Requirements cover size, quantity, color, weight, speed, and other physical or operational parameters the contractors proposed solution must satisfy.
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The RFP should state that what deliverables the customer expects the contractors or project team to provide. Deliverables are the tangible items that the contractor is to supply.
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The RFP should list any customer-supplied items. For example, the RFP might state that the customer will supply a copy of its logo for use on the brochure.
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The RFP might stat that the approvals required by the customer. For example, the housing customer may want to review and approve the plans before construction is started.
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Some RFPs mention the type of contract the customer intends to use. It could be fixed price, in which case the customer will pay the contractor a fixed amount regardless of how much the work actually costs the contractor.
See figure on next slide.
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Seller Risk
LOW
HIGH
HIGH
LOW
Buyer Risk
CPPC
CPFF
CPIF
FPI
FFP
100 0
0 100
Firm Fixed Price
Spectrum of risk (For contracts)
The RFP should stat the required schedule for the completion of the project. It might simply stat that the house will complete within six months, or it may include more detailed schedule.
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The RFP should provide instructions for the format and contents of the contractor proposals. The RFP should indicate the due date by which the customer expects potential contractors to submit proposals.
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An RFP may include the evaluation criteria. These are criteria that the customer will use to evaluate proposals from competing contractors in order to select the one to perform the project.
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In rare case an RFP will indicate the funds the customer has available to spend on project.
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BID/NO BID DECISION
Because the development and preparation of a proposal takes time and can be costly, contractors interested in submitting a proposal in the response to an RFP must be realistic about the probability of being selected as the wining contractor.
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BID/NO BID DECISION
Evaluating whether to go forward with the preparation of a proposal is some time referred to as the bid/no-bid decision.
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BID/NO BID DECISION
Some factors that contractor might consider in making a bid/no-bid decision are the following: Competition. Which other contractors might also submit a proposal in response to the RFP?
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BID/NO BID DECISION
Risk. Is there a risk that the project will be unsuccessful-technically and financially? Mission. Is the proposed project consistent with the contractors business mission?
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BID/NO BID DECISION
Extension of capabilities. Would the proposed project provide the contractor with an opportunity to extend and enhance its capabilities? Reputation. Has the contractor successfully completed projects for the same customer in the past?
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BID/NO BID DECISION
Customer funds. Does the customer really have funds available to go forward with the project? Proposal resources. Are appropriate resources available to prepare quality proposal?
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BID/NO BID DECISION
Project resources. Are appropriate resources available to perform the project if the contractor is selected as the winner?
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Developing A Wining Proposal
A proposal is selling document; it is not a technical report. It is important to remember that the proposal process is competitive. A customer uses a request for proposal to solicit competing proposals from contractors.
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In the proposal the contractor must convince the customer that the contractor Understands what the customer is looking for. Can carry out the proposed project. Will provide the greatest value to the customer.
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Is the best contractor to solve the problem. Will capitalize on successful experience with previous related projects. Will do the work professionally. Will achieve the intended results. Will satisfy the cutomer.
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The preparation of proposal can be a straightforward task performed by a single person or it can be a resource intensive effort requiring a team of organization and individuals. Developing a comprehensive proposal for a large project should be treated as a project itself.
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Proposal Contents
o o o
Proposals are often organized into three sections: Technical Management Cost
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Proposal Contents
o o o
Technical section The technical section should contain the following elements: Understanding the problem. Proposed approach or solution. Benefits to the customer.
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Proposal Contents
Management section The objective of management section is to convince the customer that the contractor can do the proposed work.
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Proposal Contents
o o o o
o
o
The management section contains the following elements: Description of work tasks. Deliverables. Project Schedule. Project Organization. Related Experience Equipment and Facilities
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Proposal Contents
Cost Section The objective of the cost section is to convince the customer that contractors price for the proposed project is realistic and reasonable.
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Proposal Contents
o o o o o
The cost section contains the following elements: Labor. Materials. Subcontractors and Consultants. Equipments and Facilities. Travel.
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Proposal Contents
o
o
o o o
Documentation. Overhead. Escalation Contingency or Management Reserve. Fee or Profit.
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Proposal Submission And Follow Up
The customer RFPs will usually provide instructions regarding Due date, by which proposal must be submitted. Name and address of the person to whom the proposal should be submitted.
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Proposal Submission And Follow Up
Contractors must continue to be proactive even after the proposal is submitted. The contractor should call the customer to confirm that the proposal was received.
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Customer Evaluation Of The Proposals

Customers evaluate contractors proposal in many different ways. Some customers initially look at the prices of the various proposals and select , for example, only three lowest-priced proposals for further evaluation.
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Customer Evaluation Of The Proposals
In large projects , customers create a proposal review team that uses a scorecard to determine whether each proposal meets all requirements in the RFP and to rank the proposal against predefined evaluation criteria.
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Procurement Cycle
The procurement process can be effectively presented as a cycle outlining a series of desecrate steps . In practice there may be some iteration between certain steps and indeed the steps may be carried out in a different order.
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Procurement Cycle
Procurement Planning The procurement planning will be viewed from the buyers perspective, as the process of identifying what products and services are best procured out side the project organization.
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Procurement Cycle
Procurement Planning This is the buy or make decision which is a key component of the execution strategy
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Procurement Cycle
Procurement Planning Procurement planning includes: What to procure? How much to procure? When it is required? When to procure? How to procure (Contract)?
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Procurement Cycle
Procurement List The procurement list is developed from projects scope of work. From the procurement list the project manager must decide his execution strategy to buy or make.
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Procurement Cycle
Procurement Schedule The procurement schedule is developed after the CPM network diagram and schedule Bar charts have been produced but before the resource histograms and cash flow statements have been considered.
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Procurement Cycle
Procurement Schedule Order date = ES Lead Time JIT Where: ES (Start Date) JIT (just-in-time)
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Procurement Cycle
Supplier and Vendor List All potential suppliers and vendors need to be identified and pre-qualified according to the project quality plan
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Procurement Cycle
Supplier and Vendor List The buyer need to be satisfied that the supplier has the production and quality management systems to deliver the product to the required specification, quality standards and schedule.
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Procurement Cycle
Invite to Tender Compile a bid package (enquiry document) for the suppliers to quote against.
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Procurement Cycle
Invite to Tender The initial enquiry document is the basis for the contract, it should be progressively adjusted and marked up as more information becomes available.
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Procurement Cycle
Tender Adjudication Scrutinize the quotations (Tenders), and compile a technical and commercial bid tabulation to ensure you are comparing Apples with Apples
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Procurement Cycle
Tender Adjudication Consider suppliers suggestions and negotiate to achieve the best price and conditions, while striving for a win-win arrangement .
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Procurement Cycle
Tender Adjudication This process should take advantage of market conditions, but should also be govern by companys ethics policy.
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Procurement Cycle
Raise the Order Comply with corporate standard terms and conditions of contract. The purchase order should be a stand alone document superseding all previous documentation and correspondence, and must be formally accepted by the supplier.
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Procurement Cycle
Raise the Order Where possible pass on any contractual requirements from client with a back to back agreement with suppliers.
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Procurement Cycle
Expedite Follow-up the order to ensure and encourage the supplier to meet their contractual requirements (Particularly quality and time). Expediting makes the order happen.
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Procurement Cycle

Transport Always consider the different methods of transport. Where possible the products quality should be checked and confirmed before living the factory. This particularly applies to items being exported.
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Procurement Cycle

Insurance Consider placing the order for the transport and insuring yourself so that if there is a problem or claim you can deal with the transport and insurance companies directly.
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Procurement Cycle

Receiving Checking the goods against delivery note, check the delivery note against the order and the check the quality of products against the required condition.
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Procurement Cycle
Receiving (Case)
A project I was working on received to counter rotating gearboxes for an Offshore Supply Vessel, but on inspection the were found to both rotate the same way! Fortunately this was picked up by the receiving inspection which gave the shipyard time to have the correct type shipped over.
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Procurement Cycle
Warehousing
Store the delivered (Received) items for safe keeping and retrieval. Check if warehousing requires any special handling equipment and storage facilities. Issue the stock against the required internal requisition order.
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Procurement Cycle

Accounts (Last step of procurement cycle) The accounts should check the budget , purchase order, invoice and delivery note for variances before making payments.
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Expediting
The progress expeditor (Progress chaser) follows up on all the purchase orders and instructions encouraging them to happen by continually monitoring the suppliers.
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Expediting
On
a large project the expeditor becomes the project managers eyes and ears as he takes on a criminal investigating approach.
Monitoring & Control, Basic Concepts, Lecture by Mumtaz Meer
Expediting
Consider asking the following questions: Have you received the order? Is the order understood? What is your job number? Who is your project manager? Has the job been planned into your production system?(Show me)
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Expediting
Have the instructions been received by project manager? Are their suitably qualified resources available?(Name them and show qualification)
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Expediting

Is the work progressing as planned? Are there any problem? Will you meet the contracted delivery date?
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Expediting
By asking all these questions the expeditor becomes an invaluable source of progress information giving early warning of any supply problems so that the project manager has time to respond.
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B2B Procurement
B2B
(business to business) procurement platforms are a new type of business facility offered by the internet. B2B market places are just on-line catalogues
Monitoring & Control, Basic Concepts, Lecture by Mumtaz Meer
B2B Procurement
Sellers list their products with prices, specifications and delivery terms. Buyers scan the catalogues, place their orders electronically, and can even make payment online
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B2B Procurement
The potential benefit for buyers include dramatically reducing procurement administration costs and time, lower material prices, faster supply chains, and reduced inventory requirements.
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B2B Procurement
The benefit for the sellers include increased sales volume, lower cost of making a sale, and reduced inventory requirements.
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B2B Procurement
The B2B procurement system are being successfully driven by large companies who are collaborating on a market sector basis.
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B2B Procurement
For example, Boeing, Lockheed Martin, BAE Systems, and Raytheon have combined to form <Exostar> a global B2B website for their industry.
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B2B Procurement
B2B procurement offers project manager the opportunity to: Reduce transaction cost. Generate less paper work. Provide an economy of scale through consolidating purchasing. Reduce the level of unapproved Rough purchases.
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B2B Procurement
The project managers also needs to be aware of the associated risks of accessing these global market.
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B2B Procurement
Although web browsing will identify a wider range of products, if these are procured from overseas there will be more links in the supply chain and longer lead times.
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Just in Time
Just in Time is a procurement management system that provides the production line with components as they need them. This will reduce stock levels and stock investment, but will also increase the risk of production disruption.
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Just in Time
Toyota cars developed the Kanban System, Which is known in the West as Just-in-Time (JIT). This was one of the most spectacular features of the Toyota car production system.
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Just in Time
The Toyota system created a greater attention to both the customer who could order their special car with out extra cost, and the worker who was much more involved in maintaining quality much more aware and better educated than their western contemporaries
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Just in Time
The down side of JIT as that it makes companies far more sensitive to interruption
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Project Risk Management includes the processes concerned with conducting risk management planning, identification, analysis, responses, and monitoring and control on a project; most of these processes are updated throughout the project.
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The objectives of Project Risk Management are to increase the probability and impact of positive events, and decrease the probability and impact of events adverse to the project.
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Risk Management
Risk Management is the act or practice of dealing with risk. It includes planning for risk, assessing (identifying and analyzing) risk issues, developing risk handling options, and monitoring risks to determine how risks have changed
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Risk Management
Proper risk management is proactive rather than reactive. Risk management is not a separate project office activity assigned to a risk management department, but rather it is one aspect of sound project management.
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Risk Management Process
Risk Management includes several related actions involving risk:

Risk Planning Risk Assessment Risk Handling Risk Monitoring
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Risk
8 2
1
Planning
Process 11.1
Inputs
Project Scope Statement Cost Management Plan Schedule Management Plan Communicati ons Management Plan Enterprise

Planning Meetings and Analysis ___________
Outputs
Risk Management Plan ___________ _
Reference: Figure 11.2. PMBOK Guide, 4th Ed
Risk
8 2
1
Planning
Process 11.2
Inputs
Risk Management Plan Activity Cost Estimates Activity Duration Estimates Scope Baseline Stakeholder Register Cost Management Plan
Outputs
Documentatio Risk Register n Reviews ___________ Information _ Gathering Techniques Checklist Analysis Assumptions Analysis Diagramming Techniques SWOT Reference: Figure 11.6. Analysis PMBOK Guide, 4th Ed
Risk is a measure of the probability and consequences of not achieving a defined project goal. Risk has two primary components for a given event: A probability of occurrence of that event. Impact of the event occurring (Amount at stake)
Conceptually, risk for each event can be defined as a function of likelihood and impact: that is, Risk= function of(Likelihood, Impact)
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Risk Events or consequences that have the probability of occurring during a project and that are measured by their impacts on the project Components Risk event Risk event probability Risk outcome or consequence (Amount at stake) Risk event status (Probability x amount at stake)
Methodology defines approaches, tools, and data sources that might be used to perform risk management on the project Roles & Responsibilities defines the lead, support, and risk management team membership for each type of action in the plan Budget - $ Timing Describes how often the risk management process will be performed throughout the project life cycle.
Scoring and interpretation methods used for performing qualitative and quantitative risk analysis Thresholds the target against which the project team measures the effectiveness of the risk response plan execution
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Reporting formats - defines how the results of the risk management processes will be documented, analyzed, and communicated to the project team and stakeholders Tracking Documents all facets of risk activities and how the risk process will be audited
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Risk Identification
Risk identification includes determining which risk may adversely affect the project objective and what consequences of each risk might be if they occur
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Risk Identification
The most common approach identifying the source of risk is brainstorming.
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Brainstorming
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Risk Identification
The project manager should involve the key project team members in identifying potential sources of risk. Identifying things that would negatively impact achieving the project objectives. Historical information of past project also helpful in identifying possible risks.
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Types Business (profit or loss) and insurable (loss) Known known Total certainty Known unknown Degree of uncertainty Unknown unknown Total uncertainty
Categories External, unpredictable Regulatory, etc. External, predictable Market risks Internal, non-technical Management Technical Design Legal Contractual
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Risk
8 2
1
Planning
Process 11.3
Inputs
Risk Register Risk Management Plan Project Scope Statement Organization al Process Assets ___________ _
Outputs
Risk Risk Register Probability Updates and Impact ___________ Assessment _ Probability and Impact Matrix Risk Data Quality Assessment Risk Categorizatio Reference: Figure 11.8. n PMBOK Guide, 4th Ed
Risk Assessment
Assessing each risk involves determining the likelihood that the risk event will occur and the degree of impact the event will have on the project objectives.
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Risk Assessment
Both of these factors can be assigned a rating of High, Medium, or Low. Project manager, in consultation with appropriate team member who the most knowledgeable about the potential risk, should determine a rating for each risk.
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Risk Assessment
A tool for assessing risk is a risk assessment matrix.
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Risk Response Planning
Risk response planning involves developing an action plan to reduce the impact or likelihood of each risk, establishing a trigger point for when to implement the actions to address each risk and assigning responsibilities to specific individuals for implementing each response plan.
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Risk Response Planning
A risk response plan can be to Avoid the risk, Mitigate the risk, or Accept the risk. A Contingency plan is a predefined set of actions that would be implemented, if risk event occurs.
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Mitigation (Corrective action) Avoidance (Prevention) Acceptance (Accept consequences)
Transference (Shift Responsibility)
Risk Monitoring
Risk monitoring involves regular reviewing of the risk management matrix throughout the project. It is important to evaluate all the risk to determine if there are any changes to the likelihood of occurrence or the potential impact of any of the risks.
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Risk Monitoring
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Risk
8 2
1
Planning
Process 11.4
Inputs
Risk Register Risk Management Plan Cost Management Plan Schedule Management Plan Organization al Process
Outputs
Data Risk Register Gathering Updates and ___________ Representatio _ n Techniques Quantitative Risk Analysis and Modeling Techniques Expert Judgment ___________ Reference: Figure 11.11. PMBOK Guide, 4th Ed
Strengths Build On
Internal
Weaknesses Eliminate or Reduce
Opportunities Exploit
External
Threats
Mitigate
Probability
Likelihood of occurrence. (Number of occurrences of an event divided by the total number of all possible occurrences)
Statistics
Mean Average of the values of events Mode Value which occurs most often Median Value in middle of the range of ordered values
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Variance
Average of the squared deviations from the mean Standard deviation Square Root of the Variance Range Values between upper & lower limits
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Interviewing project stakeholders and subject-matter experts to quantify the probability and consequences of risks on project objectives The information needed depends upon the type of probability distributions that will be used
Probability distribution (Method of moments) Calculates project range estimates Expected monetary value Probability times cost Three values low (a) , most likely (m), and high (b) with probabilities for each; used to calculate expected value
Sensitivity Analysis determines which risks have the most potential impact on the project Decision Tree Analysis use of a diagram that describes a decision under consideration and the implications of choosing one or another of the available alternatives
Incorporates probabilities of risks and the costs or rewards of each logical path of events and future decisions Solving the decision tree indicates which decision yields the greatest expected value when all the uncertain implications, costs, rewards, and subsequent decisions are quantified
184
Three values with probabilities; used to calculate expected values Optimistic Most likely Pessimistic
e.g.
Optimistic 0.2 x $ 100 K = $ 20 K Most Likely 0.6 x $ 130 K = $ 78 K Pessimistic 0.2 x $ 180 K = $ 36 K Expected Value = $ 134 K
Example
0.5 Project A
0.6 0.4 0.7 0.3
Success Failure
0.5
Project B
Success Failure
What is the probability that Project B will be selected and will be successful?
Answer: 0.35
High Demand Probability =0.3 $ 550,000 Production Successful Probability = 0.7 Decide to pursue Low Demand Probability = 0.7 - $100,000
Production Unsuccessful Probability = 0.3 Terminate = - $ 200,000 Decide not to pursue $0
Expect Value of Pursuing Project A 0.7 x 0.3 x $ 550,000 = $ 115,500 $ 49,000 0.7 x 0.7 x $ 100,000 = $ 60,000 0.3 x $ 200,000 =
$ 6,500
The expected value of Project A is $6,500. The expected value of not preceding is $0. Preceding is the lucrative option.
Simulation Uses a model or copy of a system to analyze the behavior or performance of the system
Monte Carlo
Perform project many times to provide a statistical distribution of calculated results Uses results to quantify the risk of various schedule alternatives, different project strategies, different paths through the network, and individual activities Can be used to assess the range of possible cost options
191
Risk
8 2
1
Planning
Process 11.5
Inputs
Risk Register Risk Management Plan ___________ _
Outputs
Strategies for Risk Register Negative Updates Risks or Risk Related Threats Contract Strategies for Decisions Positive Project Risks or Management Opportunities Plan Updates Contingent Response Project Strategies Document Updates Expert Reference: Figure 11.17. Judgment ___________ PMBOK Guide, 4th Ed
Risk
8 4
1
Monitoring & Control
Process 11.6
Inputs
Risk Register Risk Management Plan Work Performance Information Performance Reports ___________ _
Outputs
Risk Risk Register Reassessme Updates nt Organization Risk Audits al Process Variance and Assets Trend Updates Analysis Change Technical Requests Performance Project Measurement Management Reserve Plan Updates Analysis Reference: Figure 11.19. Project Status PMBOK Guide, 4th Ed
Hazard Prevention Likelihood Reduction Risk Avoidance Risk Transfer Contingency Planning
Risk Exposure Confidence of the risk assessment Compound Risks The number of Risks Cost of Action
Risk Reduction Leverage Cost Benefit
Seller Risk
LOW
HIGH
HIGH
LOW
Buyer Risk
CPPC
CPFF
CPIF
FPI
FFP
100 0
0 100
Firm Fixed Price
Spectrum of risk
Direct property damage Insurance of principal assets, e.g., equipment, materials, property, auto Indirect consequential loss Indirect loss suffered by third party, resulting from actions by the contractor
Legal liability Design errors, public bodily injury, project-performance failure Personnel Bodily injury
Wrap-up insurance All the above integrated into one agreement usually provided by the owner
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Chapter 12

Buyer The customer

Tools and Techniques

Plan Procurements: Inputs

Plan Procurements: Inputs

Plan Procurements: Inputs

Plan Procurements: Inputs

Plan Procurements: Inputs

Organizational Process Assets

Plan Procurements: Tools and Techniques

Plan Procurements: Tools and Techniques

Plan Procurements: Tools and Techniques

Plan Procurements: Tools and Techniques

Variable Sharing Ratio

Cost Plus Percentage of Costs (CPPC)

Cost Plus Fixed Fee (CPFF)

Cost Plus Incentive Fee (CPIF)

Fixed Price Incentive (FPI)

Firm Fixed Price

Spectrum of risk (For contracts)

Plan Procurements: Tools and Techniques

Plan Procurements: Tools and Techniques

Three of more common types of cost reimbursable in use are:

Plan Procurements: Outputs

Procurement Management Plan

Plan Procurements: Outputs

Plan Procurements: Outputs

Procurement Statement of Work

Make-or-Buy Decisions Procurement Documents

Plan Procurements: Outputs

Tools and Techniques

Conduct Procurement: Inputs

Conduct Procurement: Inputs

Conduct Procurement: Tools and Techniques

Conduct Procurement: Tools and Techniques

Proposal Evaluation Techniques

Conduct Procurement: Tools and Techniques

Conduct Procurement: Tools and Techniques

Expert Judgment Advertising

Conduct Procurement: Tools and Techniques

Conduct Procurement: Outputs

Conduct Procurement: Outputs

Procurement Contract Award

Conduct Procurement: Outputs

Change Requests Project Management Plan Updates Project Document Updates

Tools and Techniques

Administer Procurement: Inputs

Project Management Plan Contracts

Administer Procurement: Inputs

Performance Report Approved Changes Requests

6. Work Performance Information

Administer Procurement: Tools and Techniques

Contract Change Control System

Administer Procurement: Tools and Techniques

Procurement Performance Review

Inspections and Audits

Administer Procurement: Tools and Techniques

Performance Reporting Payment Systems Claims Administration Record Management System

Administer Procurement: Outputs

Administer Procurement: Outputs

Organizational Process Assets Updates

Correspondence Payments Schedules and requests Seller performance evaluation documentation

Change Requests Project Management Plan Updates