Project Risk Analysis: Creating and Managing Risk Adjusted Project Schedules
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The document outlines the process of creating risk-adjusted project plans using techniques like Monte Carlo simulations to manage both reducible risks and uncertainties that can impact project objectives. It emphasizes the importance of building credible project schedules by identifying, assessing, and mitigating risks, while also accounting for residual risks and uncertainties through contingency and management reserves. Ultimately, effective risk management increases the likelihood of delivering projects on time and within budget.
Project Risk Analysis: Creating and Managing Risk Adjusted Project Schedules
- 1. Risk Adjusted Project Schedules Intaver Institute Inc. 400, 7015 Macleod Trail S.W, Calgary, AB, Canada Tel: +1(403)692-2252 www.intaver.com
- 2. Objectives • Goal to create realistic or “credible” project plans • Identify and manage critical risks • Monte Carlo risk analysis • Calculate model and risk appropriate schedule margin and contingency reserve Risk adjusted project plans allow projects to withstand impact of foreseen and unforeseen circumstances www.intaver.com Intaver Institute Inc.
- 3. Sources of Risk www.intaver.com Intaver Institute Inc. Discrete Risks •Risk events that can directly impact project objectives Technical, Schedule, Cost. •Characterized by probability of occurrence and impacts and period of exposure (sunrise and sunset) •Are “reducible” – they can be managed or eliminated give sufficient effort Uncertainties •Natural variance caused by randomness in all processes •Characterized using statistical distributions that capture most likely and boundary estimates (Low and High) •Are “irreducible” – they cannot be reduced
- 4. Building Risk Adjusted Plans www.intaver.com Intaver Institute Inc. 1 Create WBS. WBS is primarily developed using Scope of Work. 2 Create Integrated Management Plan. IMP provides high level structure for program deliverables, technical measures of success as well as cost and schedule estimates 3 Analyze and manage risks. Identify, assess, and manage reducible risks for every WBS item in the plan.
- 5. Manage Discrete Risks www.intaver.com Intaver Institute Inc. 1. Identify Risks o What events could impact key objectives 1. What are the impacts? o Assess the impact of a risk event occurring on technical, cost and schedule measures. 1. What can you do about it? o What is your risk strategy: Avoid, Transfer, Mitigate, or Accept o If mitigate, create mitigation plan with activities that will reduce probability and impact. o Residual risk (cost, schedule) added to contingency reserve
- 6. Assign Risks to WBS www.intaver.com Intaver Institute Inc. Drag selected risk and drop it on the task; define risk probabilities and impacts
- 7. Assess Risks www.intaver.com Intaver Institute Inc. Risks are initially assessed using Risk Matrix or Risk Register Prioritization
- 8. Risk Planning www.intaver.com Intaver Institute Inc. • Mitigation activities for each risk are modeled to waterfall chart • Mitigation activities are added to the schedule with associated dates, costs and durations • Successful completion of mitigation activities in schedule are tracked and updated in risk register.
- 9. Contingency and Management Reserves www.intaver.com Intaver Institute Inc. • Contingency and Margin cover “known unknowns” o Residual risk from known risks (manageable) o Natural variance in project performance (unmanageable) o Does not cover scope changes • Management Reserves cover unknown unknowns o Risks not previously identified, etc.
- 10. Managing Irreducible Risk www.intaver.com Intaver Institute Inc. • Modeling irreducible risk is used to develop Schedule margins for the Program • Uncertainties are modeled using 3 pt. estimates (L, ML, H) • Use all available information including SME opinion, previous analogous projects • Uncertainty should be added to all tasks in relation to their known and forecasted level of uncertainty.
- 11. Monte Carlo is Essential www.intaver.com Intaver Institute Inc. Monte Carlo Simulations
- 12. Contingency and Management Reserves www.intaver.com Intaver Institute Inc. $Cost Time Contingency Margin MR P80 P80 x x
- 13. Unmanaged Risks and Contingency www.intaver.com Intaver Institute Inc. • Impact of unmanaged and residual risks added to contingency • Contingency is difference between baseline and level of confidence P-? • Calculated with Monte Carlo simulation
- 14. Residual risk www.intaver.com Intaver Institute Inc. $ Pre-Mitigation Original Estimates With Risk CR $ Post-Mitigation Margin Pre-Mitigation Post-Mitigation Residual risk is accounted for in contingency and margin
- 15. Schedule Margin www.intaver.com Intaver Institute Inc. • Deterministic Plan = 330 days • With uncertainties and residual risk P80 = 353 days • Schedule Margin = P80 – DP = 33 days
- 16. Schedule Margin www.intaver.com Intaver Institute Inc. Margin is added directly to the schedule to provide buffers for key deliverables.
- 17. Cost Contingency www.intaver.com Intaver Institute Inc. Forecasts for cost and schedule now account for risks and uncertainties and are integrated into plan Max P50 Low
- 18. When is this appropriate? www.intaver.com Intaver Institute Inc. • Always perform risk management as appropriate for the size and importance of your project. • Scale with Project – Small, Routine: Qualitative – Large, Complex: Quantitative (Monte Carlo) • Set thresholds – US Federal – $20M Perform EV and RM evidenced by reports – $50 Certified EV and RM systems
- 19. Summary www.intaver.com Intaver Institute Inc. Program managers can increase confidence of successfully delivering programs on time and budget by: •Managing and controlling risks (reducible) •Accounting for uncertainties and residual risk integrating sufficient schedule margin and management reserves •This creates a project plan that is…. Risk adjusted plans and protects key program objectivesRisk adjusted plans and protects key program objectives