Identifying Risks that Require an Immediate Risk Response

Bruce, a project manager for Precision Technologies, performed a qualitative and a quantitative risk analysis on his last project. He found these analyses very useful because they helped him identify project risks that had the potential to adversely affect his project's success.

As a project manager, you will find that the outputs from other risk management processes can be extremely useful when performing risk response planning. Two such processes include qualitative risk analysis and quantitative risk analysis. Both of these processes attempt to assess and analyze the probability and impact of potential project risks. As a result, qualitative and quantitative risk analysis outputs can serve as effective inputs to a project's risk response planning process.

A qualitative risk analysis attempts to assess the impact and likelihood of identified project risks. It also prioritizes risks according to their potential effect on project objectives and overall project outcomes. A quantitative risk analysis aims to numerically analyze the probability of each risk and its consequences on project objectives, as well as the extent of overall project risk.

As a result of both a qualitative and a quantitative risk analysis, you will receive a list of risks, together with a measure of their potential impact, that will need to be addressed in the risk response planning process.

The qualitative and quantitative risk analysis outputs that may be useful as inputs to risk response planning include:

• list of prioritized risks
• risk ranking of the project
• prioritized list of quantified risks
• probabilistic analysis of the project
• probability of achieving project objectives
• qualitative and quantitative risk analysis trend results

One qualitative risk analysis output that acts as a valuable input to risk response planning is a list of prioritized risks. During the qualitative risk analysis process, risks are prioritized using a number of criteria. Risks may be assigned a rank of high, medium or low, depending on their potential severity of impact. Risks may also be grouped by those that require an immediate response and those that can be handled at a later date. Prioritized risks usually include risks that affect project cost, schedule, scope, and quality.

As a project manager, you can use this list of prioritized risks during risk response planning to help you decide which risks require your immediate attention. This list will also help you formulate responses for those risks that have the potential to negatively impact critical project objectives.

Another qualitative risk analysis output that you can use as an effective input to risk response planning is a risk ranking of the project. This ranking will indicate the overall risk position of a project relative to other projects by comparing the risk scores.

A risk ranking can also be used to assign resources to projects with different risk rankings, make a benefit-cost analysis decision about the project, or support a recommendation for project initiation, continuation or cancellation.

A risk ranking will help you decide which projects have the greatest needs and which projects will produce the greatest overall benefit. This will allow you to plan effectively for those projects that require immediate risk responses.

As a project manager, you can also use quantitative risk analysis outputs when preparing for risk response planning. These outputs can help you identify sensitive risk areas and formulate potential responses to threatening project risks.

A prioritized list of quantified risks will detail which risks pose the greatest threat or present the greatest opportunity to your project, together with a measure of their impact. This will help you identify risks that require an immediate risk response.

A probabilistic analysis of the project will forecast potential project costs and completion dates. This analysis will help you determine the type of risk response that is required to address threatening cost and scheduling risks.

An estimate of the probability of achieving project objectives under the current plan will indicate whether the project is progressing as planned, or whether it requires immediate risk response action in order to be completed successfully.

The last qualitative and quantitative risk analysis output that is useful as a risk response planning input is qualitative and quantitative risk analysis trend results. Trends can be defined as patterns of results that track in a particular direction. Once you've performed multiple risk analyses on your project, a trend of results may become apparent. This trend of results will indicate the level of urgency and the importance of the risk response.

As a project manager, you can use qualitative and quantitative risk analysis trend results to help you focus on those areas that would benefit from an immediate risk response the most.

Qualitative and quantitative risk analysis outputs will help you identify risks that require an immediate risk response so that you can reduce or eliminate their impact on project objectives and increase your project's chance of success.

Developing a Risk Management Plan

What do you think would happen if someone tried to carry out a complex commercial development project without using blueprints? The project would probably not run very smoothly. If you have a good blueprint, you will increase the chances of success for your project.

To ensure that all the people involved in your project meet their objectives, some type of blueprint for development is essential. A planning meeting is where a good blueprint will be developed to handle any risks that might occur during your project.

During the planning meeting, specific decisions have to be made to ensure you develop an optimum risk management plan for your project. It is the role of the PM to facilitate the meeting to ensure that an effective plan is developed.

The risk management plan that you develop at your meeting will describe how risk identification, qualitative and quantitative analyses, response planning, and monitoring and control will be structured and performed during your project's life cycle.

Methodology defines the approaches, tools, and data sources that might be used to perform risk management on your project.

Roles and responsibilities define the lead, support, and risk management team membership for each type of action in the risk management plan.

Budgeting establishes a budget for risk management for the project.

Timing defines how often the risk management process will be performed throughout the project life cycle.

Scoring and interpretation outlines the scoring systems you are going to use to rate risks. It includes thresholds that refer to the criteria for risks that will be acted upon.

Reporting formats describe the content and the presentation style of the risk response plan. Tracking documents how all facets of risk activities will be recorded for the benefit of the current project, future needs, and lessons learned.

Once you have assembled your risk management planning team, you will have to distribute the appropriate project inputs to each team member. It is your responsibility to guide the team toward making the necessary decisions to create an effective risk management plan. It is your job to ask them the questions that will help them make these decisions. Some questions you should ask are:

• What methods will be used to assess risks?
• What are the risk management roles and responsibilities?
• How much will managing this risk cost?
• How often will risk management processes be performed?
• What thresholds will be set to determine further risk analysis and response?
• What reporting methods and tools will be used to report and document risk status and processes?

You not only need to ask questions, you also need to understand what type of answers you are looking for to create a risk management plan. Identifying the methodology to use to perform risk management depends on the project stage, the amount of information available, and the flexibility of the risk management plan. The method you choose should suit your company's usual approach to risk management.

Risks can be analyzed qualitatively or quantitatively. Qualitative methods classify risks into categories such as high, medium, or low. Quantitative methods assign numeric values based on the probability and consequence of risks. You should use the same method to analyze each risk because you have to be able to compare the results and prioritize the risks.

Based on the structure of your project and how your organization usually handles risk, your team members will assign risk management roles and responsibilities to qualified team members.

The team will decide who is needed to lead and support the risk management processes. For example, someone will be assigned to track changes as a result of risk.

The risk management team will determine the duties for each role. For example, the risk tracker will have to document how risk processes will be audited.

The team must also look at budget information when creating a risk management plan. Based on the decisions that you make, you will have to assess how much the management of the risk will cost for the project. If the cost is too high, you may have to revisit your decisions and reduce expenditures in certain risk management areas. For example, you may opt to reduce the frequency of audits in order to lower costs.

The team will decide how often to perform risk management processes. Timing will be based on the stakeholder risk tolerances and the critical elements in the project's WBS that require more stringent risk management. Stakeholder risk tolerances should be adhered to provided stakeholders understand the cost involved in risk management. If stakeholders want more frequent audits, the team should comply with their requests. Similarly, projects with more critical elements will require more frequent risk analyses.

A schedule describing how often risk management will be performed should be developed early enough to affect decisions and should be revisited throughout the project. For example, during a critical phase, it is likely that there will be more risk analyses.

The fifth question your team needs to answer when creating a risk management plan is what thresholds will be set to determine further risk analysis and response? Thresholds are defined limits for cost, schedule, and scope variance. To determine thresholds, the team should decide the degree of change that the project can sustain in order to address risks and then set limits based on that degree. If the team is unable to do this, this risk will require a response.

The final question involved in creating your risk management plan deals with the reports and tools used to report risk status and track risk management processes for the project. The reporting format outlines how the results of risk management will be documented, analyzed, and communicated. The tracking method documents how the risk processes will be audited. You must determine these methods before you can act on your risk management plan. This documentation serves as a record of the project's risk activities.

It is important to make the right decisions when developing your risk management plan. This will ensure that your plan is effective and will serve as a good blueprint for your project's risk management.

Attributes of Effective Cost Estimates

Cost estimates, which are outputs of the project cost estimating process, are quantitative assessments that you, as a member of a project management team, make. You assess the likely costs of the resources required to complete project activities and then present them in summary or in detail.

Once you've estimated a total project cost, how can you determine if the estimate is good? You'll know its good if it includes the three attributes of an effective cost estimate. Good cost estimates should have the following three attributes.

1. They should include all the resources for a project.
To be accurate, an overall estimate must include all the resources that will be charged to a project. Study the project's work breakdown structure (WBS). The more resources you overlook, the less accurate your estimate will be.

To ensure you include all the resources for a project in your cost estimates, you may want to develop a checklist. This can help you ensure that all costs related to labor, materials, supplies, and special categories, such as inflation, are included in your estimates.

If you are unsure whether your finalized cost estimates truly reflect every resource that can and should be charged to your project, go back to the WBS and verify that the estimate is complete. As long as each work package for your project has been fully decomposed, you should be able to tell from the WBS if any resource has been omitted from the estimates.

2. They are expressed in the appropriate units.
Cost estimates are most typically expressed in a unit of currency, such as dollars, pounds, or yen. Use the currency that most simplifies estimating, measurement, and reporting. For example, use the currency of the country where costs are incurred or the home currency of the parent organization.

Expressing costs in a consistent unit of measure makes it easier to compare costs both within, and across, projects. Multinational corporations will find comparative analysis much easier if they convert costs into one currency.

Some types of estimates are commonly indicated in units of time. Labor costs, for example, are usually expressed in hours, days, or weeks. Your cost estimates may include two columns: one for total "work effort," or duration, and one for total costs in dollars. Reporting labor costs in units of time provides the following benefits.

• You still can produce estimates even if you do not yet know who will be making up the project team. All you need to know is how long tasks should take to perform.
• Using work effort to report cost estimates allows you to tie into the automated scheduling tool that has been used to estimate and report activity durations.

3. They should include an appropriate contingency.
Cost estimates should include contingencies, or allowances, to cover specific risks and expected inefficiencies or problems. They reduce the necessity of revising cost estimates later on when one or more of your figures are causing unacceptable cost variances.
You should make every effort to produce accurate cost estimates, but don't forget that a good project manager will plan for the risk of change occurring during a project. Adding contingencies to cost estimates is one way you can do this.

Most project management software applications contain cost estimating and budgeting functions that select appropriate contingencies for you. They are based on risk factors and statistical analysis of data from previous projects.

In summary, examine your cost estimates closely for accuracy before relying on them. They will form the basis of the budget, the cost baseline, procurement planning, and the entire cost control system for your project.

Project Tools: Quantitatively-based Durations

If you had five lawns to mow and you knew it took you about an hour to mow one lawn, then how long would it take you to mow all five? Pretty simple, right? Well, that's how easy it is to use quantitatively-based durations to estimate project activity durations.

Quantitatively-based durations are often the simplest types of estimates to make, provided you have accurate activity information with which to work. The two types of activity information required to calculate quantitatively-based durations are quantities of work and productivity unit rates.

• Quantities of work to be performed refers to work amounts. Some examples of quantities of work to be performed for each activity are number of graphics, meters of cable, and tons of sand.

• Productivity unit rates refers to the length of time required to complete a fixed amount of work. Examples of productivity unit rates include hours per graphic, meters of cable per hour, and tons of sand per day.

Consider the example of a contractor who is building a new overpass as part of a highway project. Based on the size of the overpass, the project manager knows that she will require about 40 tons of concrete to complete the project. Since she will be working with a crew that she has worked with before, she knows it will take around five days to pour each ton of concrete.
In the example above, 40 tons of concrete represents the quantity of work, while the productivity unit rate for the project is five days per ton of concrete.

Understanding quantities of work to be performed for each activity and productivity unit rates provides useful information to project managers. This information is useful because it provides the data required to perform quantitatively-based duration calculations.

Quantitatively-based durations are calculated by multiplying the quantities of work to be performed for each activity by their productivity unit rates.

Remember, quantitatively-based durations can help you perform activity duration estimates, which can help you avoid surprises that could throw off your project schedule.