BMFG 4623 Engineering Economy and

Management

Project Risk Management

Lecture by: Al Amin bin Mohamed Sultan
 Introduction to Project Risk
Management
• The art and science of identifying, analyzing, &
responding to risk throughout the life of a project
and in the best interests of meeting project
objectives

• Risk management is often overlooked in projects

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 Importance of Risk Management

At the very least, risk management can:

Allow project owners to set up procedures to

avoid the risk, minimize its impact, or at the very
least help cope with its impact.
 What is Risk?
• A dictionary definition of risk is “the possibility
of loss or injury”
• Project risk involves understanding potential
problems that might occur on the project and
how they might impede project success
• Risk management is like a form of insurance; it
is an investment

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What are some examples of risks when
trying to open up a small business?
 Uncertainty and Risk
• Uncertainty implies that future events are
unknown

• Risks can be positive or negative

– Positive Risk?
– Negative Risk?
Risk Management Process
 Risk Identification
• Brainstorming
Whether alone or in a group, brainstorming involves focusing on quantity over quality. Just
write everything you can think of on paper, and then come back and narrow down the list
later.

• Subject matter experts

There is no substitute to having experts in subject matter advising you of the risks involved
with the work. Often they are in other departments but their advice is second-to-none.

• Checklists
Although we have a generic checklist, it is best to eventually develop a specific one for you
organization or type of project.

• Lessons learned
Few organizations maintain a lessons learned database, but it is an invaluable tool. It’s a
collection of project summaries, a record of problems encountered, mistakes made, and
what the project manager would do differently in future projects. When you’re starting a
new project and you spend a few minutes reading that, how can you go wrong?

• Documentation review
This involves learning about the project, its technical details, and its people. The higher risks
will be present in the non-standard tasks that haven’t been performed by the organization
before.
Results from this stage will be listed in a
 Risk Register
• Risks are recorded in a Risk Register which
should be frequently reviewed to ensure that
the risks are being appropriately managed.
• Excellent Examples of Risk Statement:
– A thunderstorm may occur during lunch, causing a
cancellation of our outdoor luncheon.
– If a low pressure systems moves across our area, a
thunderstorm may occur during lunch leading to, a
cancellation of our outdoor luncheon.

• Poor Examples of Risk Statements:

– Bad weather (not specific enough)
– Vehicle breakdown (not specific enough)
Risk Register Example
 Assignment 1
Food trucks are increasingly becoming very
common in Malaysia, especially in Klang Valley.
If you decide to open up a food truck business,
you need to identify all the possible risks and
plan for their countermeasures.
• Develop the Risk Register for opening up food
truck business
• Please work in groups of 2-3 persons only.
BMFG 4623 Engineering Economy
and Management

Qualitative and Quantitative Risk

Analysis
 Introduction
• Risk analysis is carried out as part of the risk
management plan.

• Risk analysis is about understanding and

evaluating the identified risks associated with
a project and determining which risk events
warrant a response.
PMBOK® Guide Fifth Edition defines Perform Qualitative Risk Analysis “The
process of prioritizing risks for further analysis or action by assessing and
combining their probability of occurrence and impact.”
PMBOK® Guide Fifth Edition defines Perform Quantitative risk Analysis as “—the
process of numerically analyzing the effect of identified risks on overall project
objectives”

Note that both quantitative and qualitative use numbers for risk rating and
prioritization of risks. But qualitative is a subjective evaluation, whereas
quantitative is more objective in terms of value or cost terms.

In qualitative analysis, for example, the risk rating could be “5” or “10” after
multiplying the P and I values of the individual risks. For quantitative analysis you
establish the overall cost or time impact on the project, such as: USD 4000 and the
probability of it happening at 10%.

An example is given below:

 Qualitative vs Quantitative
Qualitative Risk Analysis (QLRA) Quantitative Risk Analysis (QTRA)
Performed first. Performed after qualitative analysis is
done.
Should be always done. Can be optional.
Examines individual project risks. Examines the combined effects of risks
on the project as a whole to determine
an overall project risk.
Day-to-day risk management is focused Overall project risk is important for
on individual project risks. strategic decision making and project
governance.
For smaller projects QLRA will suffice. For large projects, QTRA is needed to
QTRA is time-consuming and hence may know the overall risk of the project.
not be desired.
Risk scale is qualitative and can be Risk scale and scores are quantitative,
textual (low, medium, high), color coded, typically specified in monetary and
numeric (from 1 to 5) or some schedule terms.
combination.
Qualitative Risk Analysis
 Qualitative Analysis : Probability and Impact Analysis

• The Risk Impact/Probability Chart is based on the principle that a

risk has two primary dimensions:
• Probability – A risk is an event that "may" occur. The probability of
it occurring can range anywhere from just above 0 percent to just
below 100 percent. (Note: It can't be exactly 100 percent, because
then it would be a certainty, not a risk. And it can't be exactly 0
percent, or it wouldn't be a risk.)
• Impact – A risk, by its very nature, always has a negative impact.
However, the size of the impact varies in terms of cost and impact
on health, human life, or some other critical factor.
• The chart allows you to rate potential risks on these two
dimensions. The probability that a risk will occur is represented on
one axis of the chart – and the impact of the risk, if it occurs, on the
other.
Qualitative Analysis : Probability and Impact Analysis

What can you conclude from this example?

 Qualitative Analysis : Probability and Impact Analysis

• Probability and Impact Analysis tool will help in

prioritizing risks
• E.g. those risks that you need to attend
urgently…….
• In the above example “fire in data center” and
“loss of power” are high risk events.
 Qualitative Analysis : Probability and Impact Analysis

• For each risk you need to be able to

defend/justify the reasons for each rating (very
low to very high)

• It is a good idea to establish definitions for your

rating of each risk

• Define what you mean by low, high etc……..

• An example is given in the next slide

Qualitative Analysis : Probability and Impact Analysis
Quantitative Risk Analysis
 Quantitative Risk Analysis
• The aim of quantitative risk analysis is to
analyze numerically the probability of each
risk occurring and assess the consequence on
project objectives.

• Two types :
– Decision Trees
– Sensitivity Analysis
 Decision Trees
Decision Trees represents a general approach to
decision making which is suitable for a wide range of
operations management decisions, including:

Capacity Product and

planning service design

Location Equipment
planning selection

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 Decision Tree Elements
• A set of possible future conditions exists
that will have a bearing on the results of the
decision
• A list of alternatives for the manager to
choose from
• A known payoff for each alternative under
each possible future condition

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 Decision Tree Process
• Identify possible future conditions called
states of nature
• Develop a list of possible alternatives, one
of which may be to do nothing
• Determine the payoff associated with each
alternative for every future condition

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 Decision Tree Proces
• If possible, determine the likelihood of each
possible future condition
• Evaluate alternatives according to some
decision criterion and select the best
alternative

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• In this case the candy shop would be chosen
since you can earn more
• But what if you are also presented with
probabilities for each options?
• In this case you to calculate the expected value
for each option as shown above
• So in this example the lemonade stand gives you
the highest expected value.
 Decision Trees
• Expected Value : a predicted value of a
variable, calculated as the sum of all possible
values each multiplied by the probability of its
occurrence.
Note that the
Decision Tree Example
probability
values must
add up to
1.00
 Sensitivity Analysis

5S-40