1. Risk Adjusted Project Schedules
Slide 1 In this video, we will show how to create a risk adjusted project plan.
Risk Adjusted Project Schedules
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2. Objectives Goal to create realistic or “credible” project plans
Identify and manage critical risks
Monte Carlo risk analysis
Calculate model and risk appropriate schedule margin and contingency reserve
Risk adjusted project plans allow projects to withstand impact of foreseen and unforeseen circumstances
Risk adjusted plans are credible in the sense that they should be achievable as they account for the level of risk that the project faces.
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3. Sources of Risk Discrete Risks Uncertainties
Risk events that can directly impact project objectives Technical, Schedule, Cost.
Characterized by probability of occurrence and impacts and period of exposure (sunrise and sunset)
Are “reducible” – they can be managed or eliminated give sufficient effort
Uncertainties
Natural variance caused by randomness in all processes
Characterized using statistical distributions that capture most likely and boundary estimates (Low and High)
Are “irreducible” – they cannot be reduced
Risk comes from 2 sources:
Discrete risks or risk events that have a probability and impacts. They are also reducible or manageable. With appropriate risk plans, we can minimize the impact of risk events on the project.
Uncertainties are natural variances caused by inherent randomness in all physical processes. Uncertainties can not be managed, but we need to account for them to ensure we have
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4. Building Risk Adjusted Plans1
Create WBS. WBS is primarily developed using Scope of Work. 2
Create Integrated Management Plan. IMP provides high level structure for program deliverables, technical measures of success as well as cost and schedule estimates 3
Analyze and manage risks. Identify, assess, and manage reducible risks for every WBS item in the plan. 4
Develop IMS to include all program activities required to successful complete program deliverables. 5
Monte Carlo simulations to assess irreducible risks and develop model appropriate margins and contingencies.
In order to identify, assess, and manage risks requires that you have a project plan.
Based on the project plan, you can manage your risks and put in plans to reduce them as cost effectively as possible.
Monte Carlo simulations are run with the residual risks and uncertainties assigned to the project plan.
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5. Manage Discrete Risks Identify Risks What are the impacts?
What events could impact key objectives
What are the impacts?
Assess the impact of a risk event occurring on technical, cost and schedule measures.
What can you do about it?
What is your risk strategy: Avoid, Transfer, Mitigate, or Accept
If mitigate, create mitigation plan with activities that will reduce probability and impact.
Residual risk (cost, schedule) added to contingency reserve
Managing risks is a 3 step process.
It can be basic by asking 3 questions
The effort to manage risks depends both on the scale of the project and the potential impacts of the ris.l
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6. Assign Risks to WBS
Drag selected risk and drop it on the task; define risk probabilities and impacts
Risks are assigned to the project plan. In this example, you can drag risks onto activities and assign risk probabilities and impacts.
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7. Assess Risks
Risks are initially assessed using Risk Matrix or Risk Register Prioritization
Risks priority is determined using risk scores.
They can be plotted on risk matrixes or prioritized using a Risk Register
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8. Risk Planning
Mitigation activities for each risk are modeled to waterfall chart
Mitigation activities are added to the schedule with associated dates, costs and durations
Successful completion of mitigation activities in schedule are tracked and updated in risk register.
For risks that require mitigation, plans can be plotted on a waterfall chart.
Each mitigation activity includes planned reductions in risk probability and impacts, planned completion date, and cost.
The cost of risk mitigation and planned reduction to risk score are shown on the pre and post mitigation risk cubes.
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9. Contingency and Management Reserves
Contingency and Margin cover “known unknowns”
Residual risk from known risks (manageable)
Natural variance in project performance (unmanageable)
Does not cover scope changes
Management Reserves cover unknown unknowns
Risks not previously identified, etc.
You protect project objectives by using cost contingency and schedule margin.
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10. Managing Irreducible Risk
Modeling irreducible risk is used to develop Schedule margins for the Program
Uncertainties are modeled using 3 pt. estimates (L, ML, H)
Use all available information including SME opinion, previous analogous projects
Uncertainty should be added to all tasks in relation to their known and forecasted level of uncertainty.
Irreducible risk is combination of impacts of residual or unmanaged risk and uncertainties caused by natural variance.
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11. Monte Carlo is Essential
Monte Carlo Simulations
Monte Carlo simulations use a risk model which is a combination of a project plan and residual risk and uncertainties that are assigned to the plan.
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12. Contingency and Management Reserves
$ Cost
Time
Contingency
Margin MR x
P80
P80
Contingency and margins are calculated based on the results of the simulation.
These results are referred to as confidence levels.
For example a P5 or 50% confidence level indicates that you have a 50% chance of completing a project at a specific cost or date or less/earlier.
P80 is a very common value for setting schedule margin and cost contingency.
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13. Unmanaged Risks and Contingency
Impact of unmanaged and residual risks added to contingency
Contingency is difference between baseline and level of confidence P-?
Calculated with Monte Carlo simulation
Margin or contingency is the difference between the orginal project plan and the simulated percentile level
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14. Residual risk
With Risk $ CR $
Original Estimates
Margin
Pre-Mitigation
Post-Mitigation
Pre-Mitigation
Post-Mitigation
Residual risk is accounted for in contingency and margin
Here we can see how pre and post mitigated project estimates would work. The schedule margin and cost contingency would be added to the original plan to create a post-mitigated estimates.
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15. Schedule Margin Deterministic Plan = 330 days
With uncertainties and residual risk P80 = 353 days
Schedule Margin = P80 – DP = 23 days
Here is a very simple example of how schedule margin is calculated.
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16. Schedule Margin
Margin is added directly to the schedule to provide buffers for key deliverables.
Margin is added as activities to project schedules.
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17. Cost Contingency
Forecasts for cost and schedule now account for risks and uncertainties and are integrated into plan
P80
P50
Low
Like margins, cost contingency can be calculated using Monte Carlo simulations.
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18. Risk adjusted plans and protects key program objectives
Summary
Program managers can increase confidence of successfully delivering programs on time and budget by:
Managing and controlling risks (reducible)
Accounting for uncertainties and residual risk integrating sufficient schedule margin and management reserves
This creates a project plan that is….
Risk adjusted plans and protects key program objectives
Using Risk Management and Monte Carlo simulations, project teams can improve their ability to deliver their projects on time and budget.
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