Two Risk Monitoring and Control Techniques

Professional consultant Gary Blair says that "Thoughtless risks are destructive, of course, but perhaps even more wasteful is thoughtless caution which prompts inaction and promotes failure to seize opportunity."

The thoughtful caution of risk monitoring and control helps you seize project opportunities and avoid destructive risks. By learning how to monitor and control these opportunities, you can boost their potential for success.

Two risk monitoring and control techniques can help you learn how to handle and control risks, increasing your chances of a successful project. The techniques are:

1. project risk response audits
2. periodic project risk reviews

To determine whether a risk owner has taken appropriate action to prevent a risk from occurring, you can use a project risk response audit. Risk response audits examine and document the effectiveness of the risk response and the risk owner. Risk response audits verify that those responsible conduct the responses as planned. You perform these audits throughout the project's life cycle to help control risk.

Companies must decide when they want to conduct risk response audits and under what circumstances. A company may decide to conduct an audit on risks with a potential cost to the project over a certain amount. This amount will vary from project to project, but will be set out at the beginning of the project.

To avoid biased results, you must have an objective third party conduct your risk response audits. Your company may have a risk specialist or internal audit department, otherwise it will have to hire an external auditor.

The second risk monitoring and control technique that can help you learn how to handle and control risks is periodic project risk reviews. Periodic project risk reviews are regularly scheduled examinations of potential risks. Since project risks are always changing, they should be an agenda item at all team meetings.

Depending on the phase of the project's life cycle, risk ratings and prioritization may change. If team members decide to change the risk rating or prioritization of a risk, they may have to perform additional qualitative or quantitative risk analyses.

Project risk response audits and periodic risk reviews keep track of project risks and how your team responds to them. This helps you handle and control risks properly and increases your chances of managing a successful project.

An Introduction to Trend Analysis

In project management, it is useful to discern trends in the quality data to determine if the project is progressing according to quality expectations. Trend analysis is a technique that tells project managers whether quality goals are being achieved according to the quality management plan.

Trend analysis is a mathematical technique using statistical methods that provide an equation that best fits data in a scatter diagram. Scatter diagrams are simple X and Y axis diagrams with an independent variable, such as time, as the X axis, and the dependent variable as the Y axis. Trend analysis determines the best or most appropriate equation and measures the fit of the equation to the data. Trend analysis is also known as "curve fitting."

Fitting a curve is often done by the least squares method, a mathematical method in which the distance between the data points and a possible line is minimized over its length. This gives the most statistically accurate representation. These lines are often called "regression lines."

Trend analysis is a useful tool for cost and schedule performance, and quality control. The utility of the trend analysis is that it gives a clear and understandable indication of change caused by every incremental change of the independent variable. One of the more useful functions of trend analysis is predicting, or forecasting.

The different lines mean a variety of different things could have occurred in a process. Line and curve shapes indicate whether a process is behaving according to the quality control norms.

• Lines of positive correlation - Lines of positive correlation indicate the desired value y is increasing. This is good if improvement is sought, but bad if the line continues past a specified value.
• Lines of negative correlation - Negative correlation indicates y is decreasing. This is good if the tolerance of a process is coming closer to a desired value, but bad if that same value is exceeded.
• No correlation - A diagram with no correlation means the data is inconsistent. The process is out of control, and immediate steps are necessary to bring the process under control.
• No slope lines - A line with no slope means there is no change. This is indicative of a stable process.
• Curvilinear line - Curvilinear lines indicate a cyclical process or a process decreasing or increasing at a non-uniform rate. Cyclical patterns indicate a possible worn out process. A curvilinear line indicates a complex relationship with the independent variable.

Of all the different lines, curved lines are the most difficult to make conclusions from because of their shape. Other statistical analysis must be used to determine at which point the objective value has been met or exceeded.

Trend analysis allows project managers and teams to predict a pattern and come up with a formula that accurately reflects a data set. As long as the appropriate quantity of data have been selected, accurate predictions can be made of a process. Trend analysis is also useful for determining at which point a quality concern may become an issue based on historic data. Trend analysis is often useful when used in conjunction with other tools and techniques.

Design of Experiments and Quality Assurance

Why would a project quality team design an experiment? Design of experiments is an analytical technique for project quality assurance that helps project managers determine which variables have the most effect on an outcome. It can help you determine the capability of a material, process, or product.

Your project can be improved with experiments that test new ideas and possibilities. Designed experiments are helpful in solving chronic quality problems. Properly designed experiments can:

• reduce rework
• improve productivity
• increase customer satisfaction
• prevent problems
• reduce the need for extra inspections.

Companies strive for efficiency in most areas. After all, companies that have efficient processes while still maintaining a high level of quality are usually the companies that are best-in-their-class.

Design of experiments is a more efficient and less disruptive experimentation process than most trial method experiments. It requires extra thought and planning. However, it is worth the time and effort put into it.

This technique for quality assurance is beneficial for many company types and is most often used for projects that produce a product. Companies and their project managers usually choose to use this technique for the following reasons.

• It requires smaller sample sizes to receive the same accuracy of results.
• It determines interactions between process variables.
• It tests more variables at one time, making this process more efficient.

Design of experiments is a quality assurance technique that verifies how materials, products, or processes affect your project. It is useful for solving chronic quality problems because it tests new ideas and possibilities.

Quality Planning Techniques: Design of Experiments

How do you determine the way a material, product, or process affects your project? You can use a quality planning technique called design of experiments. This analytical technique can help you uncover which variables have the most influence on an outcome, and verify the capability of materials, products, and processes.

Most organizations want to improve their products and services. Designing experiments that verify these improvements is worth the time and effort put into them, since they are helpful in solving chronic quality problems. Properly designed experiments can help you:

• eliminate re-work
• achieve higher productivity
• improve customer satisfaction
• prevent problems
• reduce extra inspections.

Design of experiments is more efficient and less disruptive than a trial method experiment. It also requires extra thought and planning, as a mistake during any part of the experiment can invalidate the entire analysis.

The objective of a designed experiment is to study specific outcomes by analyzing the impact of several variables at one time. Testing more variables at one time makes this process more efficient.

Whether you are searching for the root cause of a quality problem or you want to improve quality results, design of experiments is a beneficial technique for quality planning. In addition to the benefits listed above, it provides the following two important benefits.

• Smaller sample sizes. This technique requires smaller sample sizes to receive the same accuracy of results.
• Interaction between variables. It determines interactions between process variables. Certain combinations of variables can have a greater impact on the outcome than any one variable on its own.

Design of experiments is a technique that is most often applied to the product of a project. For example, pharmaceutical companies often perform designed experiments to test the composition of their drugs. If studying the XYZ drug, a designed experiment would have a matrix of experiments that tests X, Y, and Z in different amounts at the same time. The experiment would examine X1Y1Z1, X2Y1Z2, X1Y2Z3, and other such combinations. This experiment tests multiple variables at the same time.

In summary, design of experiments verifies how a material, product, or process is affecting your project. This quality planning technique is usually applied to projects that produce a product.

Project Cost Performance Measurement Techniques

One of the most important aspects of project cost control is cost performance measurement. You can use a number of performance measurement techniques to measure cost performance, including cost variance, earned value management (EVM), and the cost performance index. Details about these three cost performance measurement techniques are provided below.

1. Cost variance
Cost variance (CV) is the most basic performance measure. Simply stated, cost variance is the difference between the earned value and actual costs. A positive variance indicates that the project is running under budget, while a negative variance means that costs are overrunning. For the purpose of tracking over- or underrun percentages, you may want to use tables, Gantt charts, or bar charts.

Cost variance is typically expressed as a ratio or percent. You can calculate CV by comparing the actual cost of the work (AC) to the earned value (EV). Follow the steps below to calculate cost variance.

• Calculate the difference between the earned value of the project and the actual costs.
• Divide this amount by the earned value.
• Multiply this figure by 100 to obtain a percentage.
• Keep the negative sign for cost overruns.

The project manager's goal in calculating variances is to provide the basis for earned value management. You must understand the problems behind variances and take action that will correct any problems.

2. Earned value management
Earned value management is perhaps the most useful activity in cost control because it combines costs and the schedule into one indicator. It tells you how much the project is physically accomplishing in terms of both cost and time, giving management a more accurate and timely report on project progress.

The concept of earned value management multiplies the project budget (planned value, or PV) and percent-complete figures to arrive at a budgeted dollar value of the work that has actually been completed so far. The main difficulty in using earned value data to measure cost performance is in determining work completion. How does one accurately measure how much of a task is complete, while avoiding subjectivity in measuring performance as much as possible?

There are five methods you can use to assess work completion. They are described below, from the most conservative and least accurate to the most accurate.

• The zero/100 rule. Many companies do not assess percent complete incrementally. This removes any subjectivity. A task is assessed as either not done (zero percent complete) or finished (100 percent complete). This method works well for activities with a short duration—less than a month, for example.
• The 20/80 rule. This method is almost as conservative as the zero/100 rule. When it is started, a task is considered to be 20 percent complete, and 20 percent of the PV is charged against its account. When the task is complete, the remaining 80 percent of the budget is applied to the task.
• The 50/50 rule. This is probably the most popular method. You assume that once a task has begun, 50 percent of its budget is used. When a task is complete, it has used the other half. For a project with a large number of tasks, this method provides a fairly accurate way to calculate earned value.
• The milestone method. This is used for long work packages that are broken down into distinct milestones. A budget is assigned to each milestone instead of to the task as a whole. Value is earned when each milestone is completed.
• The percent complete. This method is usually used for long-duration work packages (for example, ones that last three months or more). Your project may not have identifiable milestones, but you are still able to estimate the percentage of the task that has been completed.

3. The cost performance index
You can use the earned value figure to establish another important performance indicator. Calculate the ratio of earned value to the actual costs to find out how efficiently your team is accomplishing the work. This ratio is called the cost performance index (CPI). The formula for calculating CPI is as follows:

CPI = EV ÷ AC.

When the CPI is measured periodically, you can plot CPI figures in a line graph to see the trend over the life of the project. This is called a trend analysis.

You will usually see the cost performance index reported along with its "companion" indicator—the schedule performance index (SPI). The SPI is the ratio of earned value (EV) to the planned costs (PV).

Project managers use the CPI and SPI to rate the cost and schedule performance of their projects. A poor rating provides a warning signal, allowing for corrective action to be taken before it's too late. These indexes fall into three categories:

• If equal to 1.0, performance is exactly as planned.
• If greater than 1.0, performance is better than planned.
• If less than 1.0, performance is poor.

Evidence shows that without corrective action, most projects will continue to perform at their cumulative CPI rate. Once the project is about one-third complete, you will have difficulty recovering from a CPI of less than 1.0 without aggressively managing the remaining tasks.

Remember, it's important to measure the cost performance of your projects. By using the three techniques described above, you can control project costs and ensure the project comes in on-budget.

Tools and Techniques for Cost Budgeting

Budgeting for your project is not simply a matter of taking the cost estimates for various activities and saying, "This is the budget for this task." Estimates provide merely the base or frame upon which you will build a finalized project budget.

You can use a number of tools and techniques to take your bare-bones estimates and create the budget that will guide all your cost-control efforts. The tools and techniques of budgeting are based on the tools and techniques for cost estimating. Several tools and techniques you can use for cost budgeting are described below.

1. Create contingency funds and a management reserve.
The main difference between an estimate and a budget is the additional cushion a budget has built into it. Budgeting takes your estimates a step further by adding contingencies based on previous experience and risks related to particular activities.

Contingency funds are specific provisions for unforeseen increases in costs at the project activity level. In other words, contingencies are added to work packages and activities at the lower level of the work breakdown structure.

While cost budgeting takes place at the project activity level, it also takes place at the project management level. General project budgeting takes into account overall risk and establishes a management reserve for the project. This account contains a percentage of the project's funds that are set aside for potential problems.

The management reserve is held over and above the budgets for individual work packages. The size of a management reserve depends on the type of project, industry standards, and the guidelines for establishing reserves found in the project's risk management plan.

Although a number of factors must be weighed when developing a management reserve, you can follow this general rule of thumb: find the optimal add-on percentage that will minimize risk and yet not be overly cautious. You want to ensure that actual costs don't exceed your estimates, but you also want to remain competitive and avoid creating a "fat" budget.

2. Identify the ranges of accuracy for each of the cost-estimating techniques.
You developed the cost estimates for your project using one or more of the cost-estimating tools and techniques that are listed below. How accurate do you think your estimates are? It depends on the method you used, since the degree of accuracy varies between estimating techniques. Cost budgeting uses the deemed accuracy of your estimates to come up with appropriate contingencies.

• Parametric modeling. Parametric models provide a rough order of magnitude. These estimates could have a range as great as plus or minus 35 percent. To increase accuracy for budgeting purposes, you may want to run project activities through a more detailed methodology, such as bottom-up estimating.
• Analogous estimating. The accuracy of estimates improves somewhat if you have based cost estimates on a similar project. An analogous, or top-down, estimate may be accurate to plus or minus 15 percent to 20 percent. The range will decrease relative to an increase in similarity between the two projects.
• Bottom-up estimating. Bottom-up estimates are the most reliable (plus or minus five percent to 10 percent) since you have examined each activity in the work breakdown structure. When preparing a budget based on detailed and finalized estimates, you can reduce contingencies and overrun allowances due to the reduction in risk.
• Computerized tools. Project management software greatly simplifies cost budgeting. You can use statistical analysis and simulation to generate a budget based on the probability that actual costs will be over or under the base estimates, giving you an accuracy range as low as plus or minus five percent.

3. Use cost-budgeting techniques based on the cost-estimating techniques you used.
As you work with your base estimates to develop a project budget, remember how your estimates were developed and their level of accuracy, since you will use cost-budgeting techniques based on the cost-estimating techniques you used.

For example, you may have used a parametric model or analogous estimating to develop your cost estimates. If you based estimates on another accurate budget or used an accepted model, why not base the new budget on these, making allowances for any differences? You can use the accuracy range of your estimates to find the "most likely" total cost of your project. Set your budget somewhere between the low and high cost.

If accuracy is not paramount and you are looking for a general contingency, you can use the formula: Most Likely = Estimate + (x percent ÷ 2). Take the maximum cost based on the range of results, divide it in half, and use it as the "most likely" amount. This dollar figure, or percentage amount, is what you add over and above the estimated amount.

Have you used the bottom-up technique to develop the cost estimates for your project? If so, you can use statistical sums to develop the cost budget. The most common approach is to use the Expected Value calculation for each estimate. This formula is: Expected Value = (a + 4m + b) ÷ 6.

In this formula, Expected Value is the mean or average of the base, most likely, and maximum values, a = low or most optimistic forecast, m = the most likely estimate, and b = high or most pessimistic forecast for cost outcomes. Sum up the values for each estimate and base your budget on the total.

You can follow a number of guidelines for setting base budgets when you have used an estimating technique other than bottom-up estimating. Use computerized tools to assess risk and determine appropriate contingencies. You can also use the contingencies from other similar projects as a benchmark. The most likely cost will fall somewhere between the maximum and the base estimate.

In summary, cost budgets are based on the general accuracy of, and statistical information about, cost estimates. Budgeting depends on the assessed risk related to individual activities and the project as a whole. Appropriate contingencies are based on known risks. The higher the impact and probability of the risk, the more contingency you will want to allocate in your budget.

The Analogous Estimating Technique

One of the most common methods of estimating project costs enables you to take advantage of the similarities between a current project and projects that have been performed in the past. This technique is called analogous estimating.

An analogy is a set of comparisons you draw between two things with similar characteristics. Analogous estimating is also known as "top-down" estimating because you apply the total costs from a previous project in order to estimate the total costs of a new one. Just keep breaking the budget down according to the new work breakdown structure (WBS).

The main benefit of using the analogous estimating technique is that it is less costly than other estimating techniques. The down side of using this technique is that it is also generally less accurate.

You may be wondering, "If analogous estimating is not considered to be accurate, why would I use this technique?" However, before you disregard analogous estimating altogether, you should be aware of the circumstances under which it is most reliable. It is particularly beneficial when the following conditions are present.

1. The new and previous projects are similar
There are two situations in which analogous estimating is used. One is when your project is similar to other, previous projects. The more similar the projects are, the more accurate the estimates will be. You also can base estimates on a similar project when you don't have detailed information about a new project. More details are provided below.

• Are they similar? To determine the degree of similarity between the past and current projects, examine the scope and purpose of the former project to ensure the projects are alike in fact, and not just in appearance.
• Not enough detail. Sometimes important costing information becomes available only after a project has begun. A similar project's budget will provide a general baseline to go by.

2. The individuals preparing the estimates have the necessary expertise
Knowledge about, and experience with, the subject matter determines whether the individuals preparing the estimates have the needed expertise. You may want to hire one or more external experts to help with cost estimating.

3. The estimating team has access to adequate information about the previous project
If your current project lends itself to the analogous estimating technique, you'll want to furnish your cost estimating team with everything they will need to produce accurate results. Listed below are some types of information they should have on hand when they are developing cost estimates using analogous estimating.

• Scope statements. The team will not know whether two projects are in fact similar unless it can compare descriptions of the project and product scopes.
• Work breakdown structure. The work breakdown structure from the previous project is also necessary to ensure that similar processes and steps will be followed in the current project. Differences in the two projects could affect the accuracy of cost estimates.
• Performance reports. Actual costs are the most important information from the old project. Your team will use them to determine which of the previous estimates were accurate. It should use the actual costs to revise any inaccurate estimates before copying them into the new project.

Remember the analogous estimating technique as a less costly way of estimating project costs when your team has the needed information and expertise to effectively compare the current project to previous, similar projects.

An Introduction to CPM, PERT and GERT

How do project teams determine a project's duration? Is it an exact science? The answer is no, it is not an exact science. It is more a process of estimating activity durations, which can be made easier by utilizing mathematical analysis.

Mathematical analysis is used in project schedule development to determine early and late start dates, as well as early and late finish dates for all project activities. The outcome indicates the time period in which the activity should be scheduled. Note that this analysis phase does not take into account any resource pool limitations or constraints.

The most widely known mathematical techniques used by project management teams are the: Critical Path Method (CPM), Program Evaluation and Review Technique (PERT), and Graphical Evaluation and Review Technique (GERT).

Critical Path Method (CPM)
The most common mathematical technique is the Critical Path Method (CPM). The CPM is used to predict project duration by analyzing which sequence of activities, or path, has the least amount of scheduling flexibility.

Once you have determined the early and late start and finish dates, you can determine float. Float is equal to the difference between the late finish and early finish dates, or the difference between the late start and early start dates.

The next step in the CPM is to determine the critical path (CP), which is the longest path for the project that has little or no float. To determine the critical path, you begin with the first activity in the network. Look at its successors, compare the successors' float values, and select the one with zero float. This is the second activity on the critical path.

Next, you would continue from the second activity on the critical path and compare float for its successors, selecting the activity that has zero float and including it in the critical path.

You continue this process to the final activity for a complete critical path. The project can finish no sooner than the time it takes to complete the activities on the critical path.

To calculate an activity's duration, you subtract the early start from the early finish or the late start from the late finish. In example that follows, the numbers indicate days.

• activity A - 1 day
• activity B - 2 days
• activity C - 3 days
• activity D - 2 days

Adding the total of the activity durations will give you the duration of the critical path. In this example, the duration of the critical path would be 8 days.
Critical Path activities are, indeed, critical to a project's success. They need management's careful attention. The order and duration of these activities are important because any delays will result in the project going over the anticipated completion date. In addition, project improvements are most effective when made along the critical path.

Program Evaluation and Review Technique (PERT)
Have you ever performed activity duration estimates, then questioned your findings? There is a technique available for checking your findings.

Program Evaluation and Review Technique (PERT) is used when there is a high level of uncertainty about how long it will take to perform a given task.

PERT uses network logic—the collection of activity dependencies that make up a project network diagram—to determine duration. In PERT, network logic is used by applying the critical path method to a weighted average duration estimate.

Although very similar, there is one significant difference between PERT and CPM. CPM uses the most likely estimate instead of the expected value of the estimate that PERT uses.

PERT time estimating requires the following three estimates for each activity.

• TM = most likely time
• TO = optimistic time
• TP = pessimistic time

To determine the expected activity time you must insert the previous estimates into the PERT weighted average formula, which is optimistic (TO) + 4 x most likely (TM) + pessimistic (TP) all divided by 6.
Once you have calculated the estimated times for your project you can plot those values on an s-curve. The s-curve allows you to easily see all three times—optimistic, most likely, and pessimistic.

Graphical Evaluation and Review Technique (GERT)
There is one additional mathematical analysis method that is rarely used today because it has been proven to be less accurate than PERT and CPM. This method is the graphical evaluation and review technique (GERT). GERT allows for probabilistic treatment of both network logic and activity duration estimates. GERT is mainly used on project activities that are only performed in part, as well as those activities that may be performed more than once (loop). The above graphic illustrates a GERT diagram with a simple loop.

For example, on a high-rise development project, the electrical outlets for each floor may be installed as each floor is completed instead of waiting for the completion of the entire building. Since this activity will be performed more than once, using GERT will enable you to calculate the entire duration of this activity.

Regardless of the type of mathematical analysis you apply to your projects, the ultimate objective is to produce a schedule with realistic start and finish dates.