Project management goal: Manage risks

All projects have risks. The key to managing a project is not to avoid risks, but to understand them.

A risk is the possibility of an event or condition that would have a negative impact on a project. Risk management is the process of identifying, mitigating, and controlling the known risks in order to increase the probability of meeting your project objectives.

This article is one of many project management goals on the Project Road Map.

In this article


ShowEXAMPLES FROM PROJECT MANAGEMENT . . .

Example One: The accidental project manager   : You finished designing the project schedule for a marketing campaign, and after your team reviews it, someone point outs all the red bars on the Gantt chart. You point out cleverly that this is the critical path and that there are three of them in the project. You explain that the critical path contains those tasks which, if they changed in duration, would slip the end date of the schedule. Yet another team member points out that the end date can’t slip because that’s the launch date for the new internet web site used in their new customer-support program.

With these warnings in mind, you go back to your schedule and look more closely at the tasks along the critical path. You see a number of them that are long because only one person is working on them at the same time, and you suddenly realize that not only is this person a new hire with little experience, he is also assigned to these tasks at the very end of the schedule when the training budget will be depleted. There is too much risk on these tasks, you decide. You start using the new Team Planner feature in Project 2010 to reassign two experienced user on the later tasks that are critical, and you decrease the duration of the tasks because you know how much faster these experienced works can get a job done. As if by magic, fewer of the Gantt bars are now red, and you feel more confident in your schedule’s outcome.

The most important thing to remember about risks is that all projects contain them. Risks don’t happen in only large projects. The mistake beginning project managers make in small projects is not identifying risky events in their short scheduled. Here is a list of typical activities and events that can lead to risk in a project.

Activity Problem

Critical tasks

   
Pay close attention to tasks that are on the critical path. They have the greatest impact on the end date of the project

Multiple critical paths

   
If you have multiple critical paths, pay even more attention. Multiple critical paths increase the number of unknowns in your project. A tasks that wasn’t on the critical path, can suddenly appear on the critical path, or it can create an additional critical path with only a slight duration change.

Vendor tasks

   
Tasks that have been contracted by a vendor have more risk than tasks that are perform by internal resources. When contracting work with a vendor, you may need to request more frequent or detailed of progress than you would with your own team members. Vendor tasks that occur at the end of a project have more risk than vendor tasks at other times in the project. Remember, that a vendor includes both contracted people outside your company as well as employees from other areas of your company. Both constitute external dependencies, and both should be treated the same in terms of status reporting and schedule timing.

Inexperienced team members

   
Be sure to plan for any ramp-up time with people who are new to the work. Inexperienced workers assigned to work at the end of the project endanger the end date of the project because of ramp-up time more than at other times in the project lifecycle.

Projects that are longer than a year’s duration

   
Most project’s take less than a year to complete. Projects that take longer than a year have more unknowns and thus contain more risk resulting from resource availability (especially for experienced workers), technology changes, market forces stemming from capital forecasting indicators, and so on.

Too many tasks occurring at the same time

   
Check for an excessive number of tasks scheduled concurrently. Even if these tasks are being performed by different people, too many of them occurring at the same time while others aren’t incurs risk. This is especially true if concurrent tasks happen toward the end of the project.

Designing a schedule backwards

   
Beginning project managers make the mistake of creating task dependencies through linking before outlining tasks. In a nutshell, here are the steps you should take in designing a new project: List tasks, group related tasks under their summary tasks, determine durations of lowest level tasks, link the tasks. Remember: it is not necessary to link all the tasks.

Ignoring the past

   
A company becomes mature by recording its successes and problems from past projects. Documenting how risks were handled in a project is often part of the closing phase of a project. Some organizations have departments (call project management offices) that are responsible for capturing the history of a project’s successes and failures. In this way, a company begins to grow its successes while decreases its failures.

Here are three steps to start using risk management in a meaningful way to help your project succeed.

  1. Explain to your team how risks are defined in project management. People respond to a mathematical depictions or graphical depictions of difficult concepts. Explain that risk is define by this equation:
    Risk = Probabiliy x Impact
    This means the relevancy of a risk can be determined by looking at both its likeliness of it occurring and the consequences it will have on the outcome of your project. This is how industry defines risk. More dramatically, if the probability of hurting yourself by lighting a match is the same in two rooms in a building, there is only relevant risk if one of the rooms contains boxes of fireworks.
  2. Review your schedule for risk. Pay particular attention to tasks on the critical path and tasks with over allocated resources. Read the next section to learn how the experts deal with costs (Hint: this isn’t beyond your reach either).
  3. Document the risk. Putting this mathematical definition on a team board while discussing risk helps the team prioritize risks and not get side tracked by long discussions about impactful risks that are highly unlikely to happen. Here’s an example of an impact quadrant using Excel that displays graphically how impact is related to probability in risk.
    Image of risk grid in Excel
    Learn how to create a scatter chart with your company's own labels in Excel 2010.

Example Two: The seasoned project manager   : You’re completed scheduling your road maintenance project and it is currently being reviewed by municipal stakeholders. Your sponsor (one of the critical stakeholders) asks how confident you are in the end date for the project given that some of the critical work you’ve vended out (such as street lighting and guard-rail enhancements) occur toward the end of the project.

You hadn’t thought about the timing of the externally contract work. You review the Team Planner in Project to see what else is occurring toward the end of the project that look risky, and you see other tasks that are being vended out that aren’t due until just before completion date. You re-negotiate the contract with a vendor to change the scheduling of these late tasks, and now you feel more confident in the outcome of your project.

Here are a few things to keep in mind as you explore risks.

 Tip    A little known concept in risk management is opportunity. Not all risks are bad. If after exploring the risks in your project you realize that a software sub-system being developed as part of a larger manufacturing process is itself marketable, you may decide to reassign you’re best engineers onto further developing a new software package for the consumer market. Taking experienced engineers off a project creates additional risk in your project, but in this case it may be warranted by the opportunity gained. Remember, however, to check with your PMO office, functional managers, or other stakeholders before reassigning people in the middle of a project just because you think it is good for the company.

  • Review historical data     Examining the cost histories of similar projects helps you to better estimate the costs in a current project. If your organization has PMO (Project Management Office), consult with them about your cost and budget needs. One aspect of an organization with mature project management practices is a constantly evolving history of past projects so that mistakes aren’t repeated and successes are continued.
  • Use an expert to review your cost requirements     Use an experienced and knowledgeable team member to review the cost estimates for tasks and resources. Larger organizations use a PMO (Project Management Office), or they’ll contract with a professional estimator.
  • Review cost variances using earned value   . Earned value is an industry standard for analyzing work and cost variances throughout the length of your project. You don’t want to discover toward the end of your project that you are over budget and behind schedule.
  • Export cost information to other programs    You may want to export cost information to another program for further risk analysis. A quick tool you can use are Sparklines in Excel 2010. The following example displays Sparklines for earned value information copied from Project to Excel. Note that in this example there may be a risk associated with project’s CPI (Cost Performance Index)
    EVM in Excel using sparklines
    Learn how to create impressive Sparklines using Excel 2010.
  • You can also use Visual Reports in Project 2010 to create a more sophisticated PivotChart of earned value (commonly known as an S-curve by experienced project managers).
  • Don’t be afraid of using advanced analysis tools    You can take your project data further and create an advanced analysis using ANOVA (analysis of variation) or Monte Carlo simulations in Excel 2010. The sky’s the limit to analyzing Project information.

Keep in mind three methods risk management professionals use to handle the risks in a project.

Avoid the risk    If the risk results in serious consequences for your project, avoidance is a good policy. For example, a company may decide that using the same manufacturing processes concurrently for two new deliverables creates a risk in project timing, and can be avoided by using the manufacturing process sequentially for the deliverables.
Mitigate the risk    Reducing the probability of serious risk is a useful strategy if you are comfortable with your options. For example, you can decide to deploy a simplified and well-understood manufacturing process if a more innovative and costly one will take too long to install.
Transfer the risk    A common way to control risk is to transfer it to an external vendor. For example, if the documentation of a computer sub-system is too large in scope for internal resources to complete, portions of it can be contracted to an external vendor to develop. Insurance companies are also used as a means to transfer risk, especially monetary risks that are transferred via warranties and payment bonds.
  •  Warning    Before deciding to transfer risk to a vendor or bonding companies, check with your PMO (project management office) or legal department about the type of contract that minimizes your company’s own risk, keeping in mind that you don’t want to transfer so much risk to an outside vendor that the end date of the project becomes in jeopardy.

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Step 1: Identify risks in your project

Project risk management plan (template) This template is a controlling document that incorporates the goals, strategies, and methods for performing risk management on a project.
Review the progress of your schedule Reviewing how the tasks are doing in your schedule tells you about where the costs are going.

See what’s driving the project finish date (critical path)

Text | Video

Task on the critical path can have the most impact on the costs of the project overall. Learn how to spot them. A project can also have multiple critical paths, which increases further the risk of the end date of your project being pushed out unexpectedly.
Review Project costs After you enter costs for resources, tasks, or both, you can examine them to spot negative trends to present a risk to going over budget on your project.
Spot risks using visual report You can export project cost information to Visio or Excel for further analysis to discover, for example, if your project’s earned value numbers indicate a risk with some of your tasks not completing on time.
Create or update a baseline or an interim plan If you want to track the progress of your schedule for the purpose of uncovering tasks that are a risk, you need to learn about setting baselines for your project.

Hide a column in a view

Text | Video

Hiding columns is an effective way to temporarily prevent information from being seen by others. Don’t worry—when you hide columns, data isn’t going to be deleted.

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Step 2: Manage risks

View project costs After you enter costs for resources, tasks, or both, you can examine them to see if they need to be adjusted to meet your goal for costs.
Define how costs accrue Specifying when the actual costs are charged to your project (at the start, finish, or throughout the project) can help you establish a cash flow plan
Create or update a baseline or an interim plan When your cost estimates are in line with your goal for costs, you can establish them as your baseline plan. In this way, you can compare actual cost (actual cost: The cost that has actually been incurred to date for a task, resource, or assignment. For example, if the only resource assigned to a task gets paid $20 per hour and has worked for two hours, the actual cost to date for the task is $40.) with your original plan as the project progresses.
Review the progress of your schedule Reviewing how the tasks are doing in your schedule tells you whether you are going over budget or behind schedule.
Analyze project performance with earned value analysis An earned value analysis indicates how much of the budget should have been spent, in view of the amount of work done so far and the baseline cost for the task, assignment, or resources.
Learn advanced principals of earned-value analysis (blog) Learn a few more advanced tricks for using earned value that are CEFCT compliant.

See what’s driving the project finish date (critical path)

Text | Video

Task on the critical path can have the most impact on the costs of the project overall. Learn how to spot them.

Hide a column in a view

Text | Video

Hiding columns is an effective way to temporarily prevent information from being seen by others. Don’t worry—when you hide columns, data isn’t going to be deleted.
Create a visual report of Project data in Excel You can export project data to excel. For example, if you are analyzing an earned value analysis, you can export this information to view a standard S-curve of earned value information for further analysis.

Use sparklines to manage risks

Text | Training Video

Use sparklines in Excel 2010 to feature dynamics statistics in your project.

Advanced modeling tools:

ANOVA | Monte Carlo

Perform advanced risk analysis of project data using ANOVA (analysis of variation) or the Monte Carlo simulations in Excel 2010.
Add risk contingency (blog) Learn how to develop a plan for dealing with risks, should they occur.

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Applies to:
Project 2010