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  2. 2. Risk Management ØRisk • Uncertain or chance events that planning could not overcome or control. ØRisk Management • A proactive attempt to recognize and manage internal events and external threats that affect the likelihood of a project’s success. • What can go wrong (risk event). • How to minimize the risk event’s impact (consequences). • What can be done before an event occurs (anticipation). • What to do when an event occurs (contingency plans).
  3. 3. 7–3 Risk Management’s Benefits Ø Minimize management by crisis Ø Encourage proactive management Ø Minimize surprises and problems/negative consequences Ø Gain competitive advantage Ø Decrease overall probability of project variances Ø Increase probability of project success Ø Improves chances of reaching project performance objectives within budget and on time. Ø Focus on building the right product the first time Ø Prevent problems from occurring, or if they occur, from escalating/better control in future
  4. 4. DEFINITIONS OF RISK, RISK TOLERANCE AND UNCERTAINTY Ø Risk is a very crucial integral part of project management. Ø Unforeseen that never be static Ø Projects are prone to risks and often incorporate new techniques and procedures, and risks have to be identified from the start. Ø Effect of the uncertainty on objectives. Ø As the cumulative effect of the probability of uncertain occurrences that may affect the project objectives. Ø Uncertain event or condition occurring which can certainly affect project objectives ( positively or negatively) Ø Unmanaged risks are mostly the primary cause of project failure.
  5. 5. RISK AND UNCERTAINTY RISK • is concerned with objective probabilities • can be assigned a probability value UNCERTAINTY • requires consideration of subjective probabilities • uncertainty is completely immeasurable • defined as the sum of the unknown and unknowable aspects of the project, the consequences could threaten the achievement of one or more project goals. • It is the intangible measure of what is not known about the project
  6. 6. Uncertainty and risk should not be defined only in terms of threats to success but also in a broader sense to include having potential positive outcomes. Risks = Unfavourable events/outcomes , lack of knowledge of future events /conditions – negative risks Opportunities = future events/outcomes that are favourable to a project - positive risks 2 types of risk
  7. 7. MANAGING UNCERTAINTY Diagram shows 9 steps of uncertainty management framework STEP 1&2- PREPARING THE PROCESS STEP 3-7 : Process for identifying, analysing and developing measures for exploiting or controlling the uncertainty STEP 8 & 9 : RISK RESPONSE -Following up the uncertainty over the project life cycle
  8. 8. RISK TOLERANCE • Risk tolerance: the specific maximum risk that an organization is willing to take regarding each relevant risk. Risk target: the optimal level of risk that an organization wants to take in pursuit of a specific business goal. • Risk tolerance can be defined accurately if we really understand the manager’s inclination towards risk-taking of good and bad outcomes. • It is a subjective notion that is influenced by many circumstantial attitudes towards risk. • Risk tolerance concerns both the probabilities of inherent risk occurrences taking place and the resulting impact of those occurrences. • Risk tolerance is very important in a sense that it leads to more efficient use of resources because the project team has a better understanding of how much of the project’s risks should be remedied.
  9. 9. DEVELOPING RISK MANAGEMENT PLAN ØRisk management plan provides documented guidance for contract risk management process which includes conducting risk assessment from all perspectives and other contract activities inclusive of contract risk as well. ØRisk assessment should be performed at the initial stage during planning as well as at relevant intervals throughout the project to ascertain potential project risk impacts with the intent to either remove the risk threat or to plan actions that reduce the impact in the event of risk occurrences.
  10. 10. RISK ASSESSMENT TECHNIQUES RISK ASSESSMENT TECHNIQUES CHECKLIST DELPHI TECHNIQUE BRAINSTORM ING NOMINAL GROUP TECHNIQUE MONTE CARLO SIMULATION OTHER During risk assessment, project team members must also be careful to differentiate between describing a risk event and describing the cause of a risk event. This Table describes a few risk assessment techniques which are commonly practiced.
  12. 12. RISK ASSESSMENT Risk assessment component can be divided into risk identification and risk analysis. Generally, the risk management plan documents the risk management process. The purpose of this practice is to provide the project manager, project team and other relevant stakeholders with an approach to develop the planning documentation that is needed to conduct risk management activities across all contract stages.
  13. 13. RISK ASSESSMENT It should address the following: (a) The personnel responsible for managing the various aspects of the project and contract risks; (b) Specify how the initial risk identification, analysis and prioritisation of output will be maintained; (c) State what the specific response strategies are, including any contingency plans to be implemented; and (d) Whether a management reserve for such plans will be allocated.
  14. 14. RISK MANAGEMENT PLAN The risk management plan is usually developed during project planning (planning phase). The plan and its content can be reviewed and updated throughout the stages or phases of the contract formation until the project is completed. However, in the risk management plan, a brief summary of the process that leads to the contract and references to source the documents will be the main content apart from risk management process and activities embedded within. In short, the plan should include a resume of the risk management plan which will define all the scope and areas in which risk management applies, particularly the risk types to be investigated.
  16. 16. CONTRACT RISK MANAGEMENT FRAMEWORK Successful contract outcomes are more likely to be the result of defining and managing activities according to a logical and structured contracting process framework suitable for the proposed activities. Figure : Risk management framework in contract management
  17. 17. (i) Identify the need of the contract and the extent of risk assessment required. (ii) Plan the contract process and set criteria. (iii) Develop the type of contract, conditions and specifications so that there is clarity in risk identification. (i) Invite and receive offers: (ii) Evaluate offers: (iii) Negotiate and apply due diligence: (iv) Finalise and award the contract. (i) Manage the transition: (ii) Manage the operation and evaluate performance: (iii) Review contract options (Complete, extend, renew):
  18. 18. RISK MANAGEMENT PROCESS Risk management requires a proactive rather than a reactive approach. It is a preventive process designed to ensure that unpredictability is reduced and any negative consequences associated with unwanted events are minimised. The risk management process supports decision-making in all steps of the contracting process and aims to enhance assurance that the contract has adequate specifications and terms, the right contractor is chosen and key risks are managed at all stages. Managing risks in contract management requires an understanding of two factors: (a) The risk management process itself; and (b) How risk management is applied to the contracting process. The management of risks is required throughout the contracting process because the nature of risks being managed will differ along the process
  19. 19. Figure: Risk management process Figure shows the steps that need to be embedded and practised in the risk management process. The clear boxes indicate that the process is likely to occur regularly, while the dotted lines indicate the possibility that the contingency planning might occur.
  20. 20. RISK MANAGEMENT PROCESS (a) Step 1 Establish the Risk Context The clarity on internal and external risk context is very crucial in this step as organisations operate in an environment of risk. The same understanding and clarity should be applied across all internal processes in the organisation whilst including contract management. Internal risk context is defined as the internal environment within which the organisation seeks its objectives whilst external risk context refers to understanding the external environment in which the organisation operates to enable the recognition of what potential risks may exist.
  21. 21. RISK MANAGEMENT PROCESS (b) Step 2 Risk Identification The risk management process begins by generating a list of all the possible risks that have the potential to affect the project. The brainstorming session and other problem-identifying techniques to identify potential risks have to be pulled together to ensure this step can be done efficiently.
  22. 22. 7–27 The Risk Breakdown Structure (RBS) FIGURE 7.3
  23. 23. Risk analysis (c) Step 3 Risk Analysis Risk analysis, on the other hand, involves developing a clear understanding about an identified potential risk. In carrying out the analysis, the probability and impact of the risk will be determined via various techniques. Documentation of risk analysis can be done in various templates but must be documented together in a risk management plan.
  24. 24. (d) Step 4 Risk Evaluation Risk evaluation is actually part of risk analysis as it is a further in-depth analysis to evaluate the overall risk rating of each risk and to decide which risk poses a higher threat to the project. (e) Step 5 Risk Treatment In this step, the project team explores the options available for the project manager to reduce the risk profile of each risks identified which will be subsequently monitored. This step also contains the rating of risks in the risk register which include details of: (i) The rating of risk probability; (ii) The impact of the risk; (iii) The overall risk rating; and (iv) The scale and weightage that will be applied to all project risks.
  25. 25. Step 6 Contingency Planning This step involves the use of alternative plans if a possible foreseen risk event becomes a reality. It represents actions that will reduce or mitigate the negative impact of the risk event. The contingency plan only materialises after the risk is recognised and becomes an issue. Contingency planning evaluates alternative remedies for possible foreseen events before the risk event occurs and selects the best plan among alternatives.
  26. 26. The Risk Management Process Step 1: Risk Identification Generate a list of possible risks through brainstorming, problem identification and risk profiling. Macro risks first, then specific events Step 2: Risk Assessment Scenario analysis for event probability and impact Risk assessment matrix Failure Mode and Effects Analysis (FMEA) Probability analysis Decision trees, NPV, and PERT Semiquantitative scenario analysis Step 3: Risk Response Development 1.Mitigating Risk 2.Avoiding Risk 3.Transferring Risk 4. Retaining Risk Contingency Plan :An alternative plan that will be used if a possible foreseen risk event actually occurs. Step 4: Risk Response Control Risk control : • Execution of the risk response strategy • Monitoring of triggering events • Initiating contingency plans • Watching for new risks Establishing a Change Management System • Monitoring, tracking, and reporting risk • Fostering an open organization environment • Repeating risk identification/assessment exercises • Assigning and documenting responsibility for managing risk
  27. 27. Risk Response Development • Mitigating Risk Reducing the likelihood an adverse event will occur. impact of adverse event. • Avoiding Risk Changing the project plan to eliminate the risk or condition. • Transferring Risk Paying a premium to pass the risk to another party. Build-Own-Operate-Transfer (BOOT) provisions. • Retaining Risk Making a conscious decision to accept the risk. RISK RESPONSE
  28. 28. • Risk response planning phase is to develop suitable responses to the identified risks which are appropriate, achievable and affordable. • Risk owners are also allocated accordingly to each risk response. • This is to be responsible for strategy implementation and for monitoring its effectiveness. • This significant phase of the risk response planning is very important since a majority of decisions are taken at this point that will directly affect the risk exposure of the project. • And critical for this phase to also deal effectively with opportunities in addition to the threats, if the associated profits, values or benefits are to be realised by the project and the organisation respectively. RISK RESPONSE
  29. 29. THANK YOU