Project Risk Management is the process of identifying, analyzing and responding to risks during the planning and execution of a project. Its goals are to minimize the probability of events adverse to project objectives, and to enable the project manager to report project cost and completion date with a specified probability of success. Project Risk Management can be defined as the process used to manage the risks of cost and schedule overruns during the execution of a project. The risk assessment component of risk management provides a means by which the project management team or owner can: realistically set reasonable cost and schedule contingencies; estimate the probability of cost overruns and schedule delays; estimate the probability that the sanctioned cost and schedule will be achieved; understand the accuracy of a cost estimate or schedule; and ensure that the project team identifies risks and implements a plan to mitigate them.
PROJECT RISK MANAGEMENT
The purpose of this document is to describe procedures and software tools for undertaking formal project cost and schedule risk assessments. Such an assessment would:
â€¢ Permit the project team to identify risk at the planning stage of a project;
â€¢ Enable realistic and reasonable cost and schedule contingencies to be set;
â€¢ Provide a better understanding of the accuracy of project cost and schedule estimates;
â€¢ Enable a Risk Mitigation Plan to be implemented; and,
â€¢ Enable probability estimates of achieving sanctioned cost and schedule to be reported.
By conducting a risk assessment the project managementâ€™s awareness is increased
regarding cost and schedule challenges in the execution of the total project scope and the
achievement of the completion date.
This paper includes:
1. A process for evaluating, mitigating and reporting risk during all stages of a project;
2. Application of qualitative risk assessment tools, including Boston Square and
influence diagrams ; and
3. Application of quantitative risk assessment tools, including decision and event trees
and Monte Carlo risk assessment for project schedules.
Accident : the actual realization of a hazard that may, depending on the circumstances, cause personal injury, monetary loss and/or delay in schedule
Base Estimate : represents the most likely outcome (time or cost) if everything on the project happens exactly in accordance with the given information and assumptions on which the estimate was based. The base estimate should be devoid of all forms of contingency.
Consequence Modeling : an evaluation of the effects resulting from potential accidents, and what their impacts may be
Contingency : the provision made for variations to the basis of an estimate of time or cost that are likely to occur, and that cannot be specifically identified at the time the estimate is prepared. Contingency is not meant to cover scope changes or extraordinary random events
Decision tree : a graphical representation of a problem describing chance events and decision in sequential order and showing all possible outcomes. Events â€œbranchâ€ from their predecessors, making the final model look like a tree. Traditionally, decision trees begin with a decision node.