TOPIC 1 (Risk

Management Overview)
EBPM 3303 (PROJECT RISK MANAGEMENT)
Reference (Text Book)
Chris Chapman & Stephen Ward, Project Risk Management: Process, Tech & Insights2nd Edition,
Wiley 2003.
INTRODUCTION
An overview of risk management or uncertainty management.
Importance of being able to spot and take advantage of risk
Sometimes produces opportunities or threats translating into how much costs could be saved or the
amount of revenue that could be generated.

Addresses the Project Definition Process, the six Ws framework for the roots of uncertainty,
the scope of Project Risk Management, the Project Life Cycle (PLC), the motives for formal risk
management process, the key process output, documentation, use of qualitative vs. quantitative
analysis and Risk Efficiency Concept.
Highlights the tools used in defining risk and uncertainty
Extension of conventional project planning and influencing project design, and developing the
ability to distinguish between base plans and contingency plans.
1.1 Risk, Uncertainty and Management
Risk is defined as the cumulative effect of the probability of uncertain occurrences that may
positively or negatively affect project objectives. (Ward, 2000; Pritchard, 2005).
Risk is known as an uncertain event or condition occurring, can certainly affect project
objectives either positively or negatively (Larson & Gray, 2011).
Risk management attempts to perceive and oversee potential and unforeseen inconvenience
spots that may happen when the project is implemented.
Project Risk Management includes the processes concerned with conducting risk management
planning, identification, analysis, responses, and monitoring and control of a project.
The purpose of Project Risk Management is to increase the probability and impact of positive
events, and decrease the probability and impact of events adverse to project objectives.(PMI,
2000).
Risk, Uncertainty and Management
Project Risk Management can identify and prioritise risks before their occurrences, and help
project managers by providing action-oriented information that requires consideration of
occasions that might happen. Therefore, any matters are reported in terms of probability or
likelihood of occurrence, and other dimensions, such as, their impact on objectives (PMI, 2009).

The five areas of uncertainty through the project life cycle (PLC)
Variability Associated with Estimates
An obvious area of uncertainty includes the time, cost and quality of particular activities. For
example, to complete a particular activity, we may not know the amount of effort and time
needed.
One or more of the following might be the causes of this uncertainty:
Lack of a clear specification of what is required;
Novelty of or lack of experience of this particular activity;
Complexity in terms of the number of influencing factors and the number of interdependencies;
Limited analysis of the processes involved in the activity; and
Possible occurrence of particular events or conditions that might affect the activity.
Uncertainty about the Basis of Estimates
The quality of estimates depends on:
Who produced them;
What form they are in;
Why, how and when they are produced;
From what resources and experience base;
What assumptions underpin them.
The existence of uncertainty relates to three basic sources:
Known unknowns;
Unknown unknowns;
Bias
These sources of uncertainty need to be recognised and managed because they have a
significant impact on estimates.
Known unknowns
Known unknown you know you dont know something.
At the initial stages of the project, we will come to know that there is a report module, but dont
yet know what is there in the module.
Most risks are found in the Known-Unknown quadrant (lower right).
Known unknowns can be anticipated and planned.
The Known unknowns are managed using Contingency Reserves. This is a separately planned
quantity used to allow for future situations which may be planned for only in part ("known
unknowns").
Contingency reserves are intended to reduce the impact of missing cost or schedule objectives.
Contingency reserves are normally included in the project's cost and schedule baselines.
Unknown unknowns
Unknown unknown - you dont know you dont know.
Before the requirements are shared, our knowledge of the project or a report the system (to be built
by the project) has to generate is not known.
Unknown Unknown is the worst of all. We are not aware of its existence and hence cant action on it
in the usual. This is also known as force majeure or act of god.
The so called unknown unknown is handled by using a Management reserve. It is a separately
planned quantity of money used to allow for future situations which are impossible to predict.
("Unknown unknowns") Management reserves are intended to reduce the risk of missing cost or
schedule objectives.
Unknown-Unknown is said to have happened, when a totally unexpected event that has an extreme
positive or negative impact on the project occurs. Unknown-Unknown is still an upcoming area as far
as project management and project risk management are concerned. And generally for projects of
the financial magnitude and timelines that we execute, there is no need to be too worried about
unknown-unknown. Managing Unk Unks can also be very expensive.
Bias
Susceptible to individual biases. If not acknowledged and managed, these biases can significantly
impact the value realized by taking a consistent approach to risk management.
Confirmation bias prompts people to agree with evidence that confirms their prior decisions. For
example, a smoker may trust statistically irrelevant studies that conclude that cigarettes are not
harmful.
A project manager with a confirmation bias could use a questionable report to justify polluting the
environment, since he/she actually only wants confirmation that the containment cost she missed in
her budget is unnecessary.
Common instance of such biases relates to risk impact. In the project context, we are usually not
having to manage impacts of life and death, but the same behaviors persist.
You may question why such biases should be of concern as long as there is sufficient air time given to
identifying and assessing risks. Unfortunately, these biases usually impact the most important step in
risk management which is the development and execution of risk responses. Identifying and
communicating risks is valuable, but if that is where activity ends, all we have done is to change
unknown unknowns into known unknowns.
Uncertainty about Design and Logistics
Project can be delivered and the process for producing it are fundamental uncertainties in the
PLCs conception stage.
Pre-execution stages of PLC, the attempt to specify what is to be done, when, how, by whom,
and at what cost, can lead to the removal of much of this uncertainties.
Significant amount of these uncertainties may remain unresolved.
Derived from the nature of design and logistics assumptions, and associated uncertainty.
Uncertainty about Objectives and
Priorities
Can cause major difficulties in projects.
Can be intensified if this uncertainty extends and involves other project parties.
Understand clearly their responsibilities and expectations of other parties.
Uncertainty about Fundamental
Relationships between Project Parties
The relationships between the various parties may be complex.
An uncertainty that arises from the ambiguity in respect of the following is introduced, because
of the involvement of multiple parties in a project (Ward, 1999; Chapman & Ward, 2003):
Specifications of responsibilities;
Perceptions of roles and responsibilities;
Communication across interfaces;
The capabilities of parties;
Formal contractual conditions and their effects;
Informal understandings on top of, or instead of, formal contracts;
Mechanisms for co-ordination and control.
1.2 Project Definition Process
In major projects, the concerns about issues of design and logistics that involve the large-scale
use of new and untried technology are the initial motivation for applying formal risk
management.
Usually, issues related to objectives and relationships between project parties are the most
important issues that risk management helps to resolve.
In the project definition process, there are six basic questions that need to be addressed, known
as six Ws framework.
Six Ws Framework
1.3 Scope of Project Risk Management
Defines risk as an uncertain effect on project performance rather than as a cause of an
(uncertain) effect on project performance (Chapman & Ward, 2003).
Implications of uncertainty about the level of project performance achievable.
Need to identify base plans and contingency plans.
Base plans and contingency plan
Base plans and contingency plan
Proactive planning that help risk management modify the future incidence and quality of
opportunities and threats
Possible impact on project performance.
Supporting activity-based plans is usually associated with Project Risk Management.
Depends on the effective Project Risk Management.
1.4 Project Life Cycle (PLC)
Framework that examines the scope of decision-making in project management.
1.5 Elaboration on the Eight Stages of
PLC
1.6 Motives for Formal RMP
1.7 Qualitative versus Quantitative
Analysis
1.8 Risk Efficiency
Managing portfolios of investment opportunities afforded by the financial securities markets.
Important to understand the operation of financial markets.
Involves one attribute (profit or return) and a two-criterion view of a portfolio of risky
investment opportunities.
Expected value, an unbiased estimate of the performance outcome that can be expected
Measure of what should happen on average.
Risk, defined as downside variability of the level of performance.

In a project context, risk efficiency has to be addressed in terms of cost, time, and all other
relevant measures of performance.