risks in project management

1. RISKS IN PROJECT
Prepared by
Ananya P. P (2015-31-030)
Deepa C.S. (2015-31-031)

2. Different types of risks in project
management

3. CONTENTS
 WHAT IS RISK
 DIFFERENT TYPES OF RISKS IN PROJECT
MANAGEMENT
 ROLE OF RISK MANAGEMENT

4. INTRODUCTION
 Complex projects are always fraught with a
variety of risks ranging from scope risk to cost
overruns.
 One of the main duties of a project manager is
to manage these risks and prevent them from
ruining the project.

5. RISK
A dictionary definition of risk is “the possibility of loss or injury”
PROJECT RISK:
Project risk involves understanding potential problems that might
occur on the project and how they might impede project success.
Project risk is an uncertain event or condition that, if it occurs, has
an effect on at least one project objective.
Project risks are factors that could cause the project to fail.
Project risk management is the art and science of identifying,
assigning, and responding to risk throughout the life of a project and
in the best interests of meeting project objectives.
Risk management is often overlooked on projects, but it can help
improve project success by helping select good projects, determining
project scope, and developing realistic estimates

6. To better understand risks, it is essential that we understand that
risks fall into categories. The major categories of risk are as
follows:
Stakeholder Risk: Stakeholders are people who have any kind
of vested interest in the performance of the project. Common
examples of stakeholders are as regulators, customers, suppliers,
managers, customers etc. Stakeholder risk arises from the fact that
stakeholders may not have the inclination or the capabilities
required to execute the project.
Regulatory Risk: An organization faces several kinds of
regulations. It faces rules from the local and state government
where they operate. It faces rules of the national government
where it operates. It also faces rules of international trade bodies.
To add to all this there are internal regulations which have been
put into place for better internal governance and avoiding fraud.

7. External Risk: The execution of a project requires help and
support from several outside vendors as well. The dependence on
these vendors poses obvious risk to the execution of the project.
These vendors lie outside the direct control of any organization.
The organization may have very little ways to predict issues arising
from external sources.
Execution Risk: The project also faces risk of not receiving
continued support from the organization. This is because the
organization may discover better use of their resources in the
additional time. It is also likely that the project may be poorly
scoped causing it to spill over leading to wastage of resources
prompting the management to abandon the project.

8. Scope Risk
This risk includes changes in scope caused by the following factors:
• Scope creep – the project grows in complexity as clients add to
the requirements and developers start gold plating.
• Integration issues
• Hardware & Software defects
• Change in dependencies
Scope risks can be minimized and managed with savvy planning.
Defining the project clearly, managing the changes in scope
throughout the duration of the project, making use of risk registers
to better manage risks, identifying the causative factors, and the
appropriate responses to risky situations and developing greater risk
tolerance in collaboration with the customer, would pay great
dividends in the long run.

9. Scheduling Risk
• There are a number of reasons why the project might not proceed
in the way you scheduled. These include unexpected delays at an
external vendor, natural factors, errors in estimation and delays in
acquisition of parts.
• To reduce scheduling risks use tools such as a Work Breakdown
Structure (WBS) and RACI matrix (Responsibilities, Accountabilities,
Consulting and Information) and Gantt charts to help you in
scheduling.

10. Bringing in a new worker at a later stage in the project can significantly slow
down the project.
Apart from attrition, there is a skill related risk too.
Another source of the risk includes lack of availability of funds. This could
happen if you are relying on an external source of funding (such as a client
who pays per milestone) and the client suddenly faces a cash crunch.
Resource Risk
This risk mainly arises from outsourcing
and personnel related issues. A big
project might involve dozens or even
hundreds of employees and it is
essential to manage the attrition issues
and leaving of key personnel.

11. Technology Risk
This risk includes delays arising out of software & hardware defects
or the failure of an underlying service or a platform.
The risk that components of your technology stack will be low
quality. There are dozens of quality factors for technical components
(e.g. stability, availability, scalability, usability, security, extensibility).
Many times the solution proposed by the project requires
implementation of a new technology. However the organization may
not be in a position to acquire these technologies due to financial or
operational constraints. This poses obvious risks to the project as it
can adversely affect the implementation of the proposed solution.

12. PROJECT RISK MANAGEMENT
Project risk management is a project management
activity that involves identifying, assessing,
measuring, documenting, communicating, avoiding,
mitigating, transferring, accepting, controlling and
managing risk.
Project risk management is the art and science of
identifying, assigning, and responding to risk
throughout the life of a project and in the best
interests of meeting project objectives.

13. Risk management is often overlooked on projects, but it can help
improve project success by helping select good projects,
determining project scope, and developing realistic estimates.

14. The goal of project risk management is to minimize
potential risks while maximizing potential opportunities.
Major processes include:-
 Risk management planning: deciding how to
approach and plan the risk management activities for
the project
 Risk identification: determining which risks are likely
to affect a project and documenting their
characteristics

15. Qualitative risk analysis: characterizing and analyzing risks and
prioritizing their effects on project objectives
Quantitative risk analysis: measuring the probability and
consequences of risks
Risk response planning: taking steps to enhance opportunities and
reduce threats to meeting project objectives
Risk monitoring and control: monitoring known risks, identifying new
risks, reducing risks, and evaluating the effectiveness of risk reduction

16. INCORPOARTING RISK
FACTORS
SENSITIVITY ANALYSIS
Prepared by
Ananya P. P.
2015-31-030
MBA-ABM

17. INCORPORATING RISK
FACTORS
General techniques applied for incorporating
risk factors in projects are:
1) General techniques
2) Quantitative techniques

18. General techniques
 1)Risk Adjusted Discount Rate
 2) Certainty Equivalent Coefficient

19. Risk Adjusted Discount Rate
 Based on the presumption that investors
expects a higher rate of return on risky
projects as compared to less risky projects.
 The rate requires determination of
 Risk free rate
 Risk premium rate

20.  Risk free rate- rate at which the future cash inflows
should be discounted assuming there to be no risk.
 Risk premium rate- is the extra return expected by the
investors over the normal rate (the risk free-rate) on
account of the project being risky.
 Risk adjusted discount rate is a composite discount rate
that takes into account both the time and risk factors.
 A higher discount rate will be used for more risky
projects and lower rate for less risky projects

21. Certainty Equivalent Coefficient
 Estimated cash flow are reduced to
conservative level by applying a correction
factor termed as certainty equivalent coefficient.
 The correction factor is the ratio of riskless or
certain cash flow to risky cash flow
 Certainty equivalent coefficient(CEC)=
Riskless cash flow
Risky cash flow
X 100

22.  Riskless cash flow- cash flow which the management is
prepared to accept in case there is no risk involved. This
will be lower than the cash flow which will be there in
case the project is risky.
 CEC focuses on the minimum returns out of the total
expected returns
 CEC are computed for estimating cash flows of each
year
 CEC are then multiplied with the cash flows to ascertain
cash flows which may be used for the purpose of
determining the IRR or NPV for capital investment
decisions.

23. Quantitative techniques
 Sensitivity analysis
 Probability assignment
 Standard deviation
 Coefficient of variation
 Decision tree analysis

24. Sensitivity analysis
 Analysis of the effects of changes in sales,
costs, etc. on a project.
 The technique of sensitivity analysis helps in
studying the impact of crucial variables like raw
material, sales volume, sales price, degree of
capacity utilization etc. over the economic
viability of an enterprise.

25.  Under this approach the value of different key
variables is changed in a systematic manner.
 In other words, change is effected in one
variable and the other variables are assumed
constant and the results are analysed to find
out sensitivity of various variables with respect
to their impact on profit margin

26.  When the analyst has discovered the variables to
which the outcomes is most sensitive , he
should:
 Scrutinise estimates of these with the greatest
care.
 Discuss the estimated values in the report, and
suggest possible range of error;
 Present the sensitivity analysis for the use in
decision making

27.  Sensitivity analysis is used at the earlier stages
of the project investigation, to pick out those
variables, to the estimation of which the most
resources and thought should be devoted
 It helps in deciding the viability of the project
 It gives an idea of change in the present value
which results from wrong and inappropriate
estimates.

28. Probability assignment
 The project analyst might present by applying a
probability distribution method a range of
present values of each project with a probability
estimate attached to each value.
 By multiplying the outcomes by the probabilities
and summing, one can then produce the
actuarial present values.

29. Standard deviation
 Standard deviation is the measure of dispersion
 It is the square root of squared deviations calculated from
the mean
 In case of capital budgeting, S.D is used to compare the
variability of possible cash flows of different projects from
their respective mean or expected values
 A project having a larger SD will be more risky than a
project having a smaller one

30. Coefficient of variation
 SD is unfit for comparison particularly where
projects involve different cash outlays or
different expected values ( mean value)
 In such cases relative measure of dispersion
should be calculated
 Coefficient of variation is one such measure
 Coefficient of Variation=
• Standard Deviation
Expected Cash flow

31. Decision Tree analysis
 This is the graphical relationship between a
present decision and possible future
events, future decisions and their
consequences.
 The sequence of events is mapped out
over time in a format resembling branches
of a tree
 It links events chronologically with
forecasted probabilities