Wednesday, March 23, 2016

Project Risk Management

Introduction


Project Risk is an uncertain event or condition that, if it occurs, has positive or negative impact on one or more project objectives such as scope, Schedule, Cost and quality.

Project Risk has its origins in the uncertainty present in all projects. Known risks are those that have been identified and analyzed, making it possible to plan responses for those risks. Known risks that cannot be managed proactively should be assigned a contingency reserve. Unknown risks cannot be managed proactively and therefore may be assigned management reserve.

A negative project risk that has occurred is considered an issue.


Organizations perceive risks as the effect of uncertainty on projects and organizational objectives. Organizations and Stakeholders are willing to accept varying degrees of risk depending on their risk attitude.

Benefits of risk management in projects are very huge in terms of effort or money while dealing with uncertain project events in a proactive manner. 

Here I am giving 7 rules to apply risk management successfully in your project. They are based on personal experiences of the author who has been involved in projects for over 15 years. Also the huge amount of literature available on the subject (Internet/books) has been condensed in this white paper.

1. 7 Basic Rules

1.1      Identify Risks

The first step in project risk management is to identify the risks that are present in your project. This requires an open mind set that focuses on future scenarios that may occur. Risk identification is an iterative process, because new risks may evolve or become known as the project progresses though its life cycle. Two main sources exist to identify risks. 
Are you able to identify all project risks before they occur?  Probably not, However if you combine a number of different identification methods, you are likely to find the large majority. If you deal with them properly, you have enough time left for the unexpected risks that take place.

1.2      Analyze Risks

Understanding the nature of a risk is a precondition for a good response. Therefore take some time to have a closer look at individual risks and don't jump to conclusions without knowing what a risk is about.
Risk analysis occurs at different levels. If you want to understand a risk at an individual level it is most fruitful to think about the effects that it has and the causes that can make it happen. Looking at the effects, you can describe what effects take place immediately after a risk occurs and what effects happen as a result of the primary effects or because time elapses. A more detailed analysis may show the order of magnitude effect in a certain effect category like costs, lead time or product quality. Another angle to look at risks, is to focus on the events that precede a risk occurrence, the risk causes. List the different causes and the circumstances that decrease or increase the likelihood.
Another level of risk analysis is investigating the entire project. Each project manager needs to answer the usual questions about the total budget needed or the date the project will finish. If you take risks into account, you can do a simulation to show your project sponsor how likely it is that you finish on a given date or within a certain time frame. A similar exercise can be done for project costs.
The information you gather in a risk analysis will provide valuable insights in your project and the necessary input to find effective responses to optimize the risks.

1.3      Prioritize Risks

Although you may think it best to treat all risks equally, some will inevitably have a more significant impact on your project than others. So, it stands to reason that time and resources should be allocated to those that can cause the biggest losses and gains.  

1.4      Risk Ownership

Some project managers think they are done once they have created a list with risks. However this is only a starting point. The next step is to make clear who is responsible for what risk! Someone has to feel the heat if a risk is not taken care of properly. The trick is simple: assign a risk owner for each risk that you have found. The risk owner is the person in your team that has the responsibility to optimize this risk for the project. The effects are really positive. At first people usually feel uncomfortable that they are actually responsible for certain risks, but as time passes they will act and carry out tasks to decrease threats and enhance opportunities.

1.5      Communicate Risks

A good approach is to consistently include risk communication in the tasks you carry out. In every team meeting, make project risks part of the default agenda (and not the final item on the list!). This shows risks are important to the project manager and gives team members a "natural moment" to discuss them and report new ones.
Another important line of communication is that of the project manager and project sponsor or principal. Focus your communication efforts on the big risks here and make sure you don't surprise the boss or the customer! Also take care that the sponsor makes decisions on the top risks, because usually some of them exceed the mandate of the project manager.

1.6      Make Risk Management Part of Your Project

The first rule is essential to the success of project risk management. If you don't truly embed risk management in your project, you cannot reap the full benefits of this approach. You can encounter a number of faulty approaches in companies. Some projects use no approach whatsoever to risk management. They are either ignorant, running their first project or they are somehow confident that no risks will occur in their project (which of course will happen). Some people blindly trust the project manager, especially if he or she looks like a battered army veteran who has been in the trenches for the last two decades. Professional companies make risk management part of their day to day operations and include it in project meetings and the training of staff.

1.7      Risk Responses

Implementing a risk response is the activity that actually adds value to your project. You prevent a threat occurring or minimize negative effects. Execution is key here. The other rules have helped you to map, prioritize and understand risks. This will help you to make a sound risk response plan that focuses on the big wins.
If you deal with threats you basically have three options, risk avoidance, risk minimization and risk acceptance. Avoiding risks means you organize your project in such a way that you don't encounter a risk anymore. This could mean changing supplier or adopting a different technology or, if you deal with a fatal risk, terminating a project. Spending more money on a doomed project is a bad investment.
The biggest category of responses is the ones to minimize risks. You can try to prevent a risk occurring by influencing the causes or decreasing the negative effects that could result. A final response is to accept a risk. This is a good choice if the effects on the project are minimal or the possibilities to influence it prove to be very difficult, time consuming or relatively expensive. Just make sure that it is a conscious choice to accept a certain risk.

Earned Value Management (EVM)



Summary:  In PMP® Exam questions, the Earned Value Management (EVM) questions are usually considered the most important ones as candidates will need to solve quite a few of them in the real PMP® Exam — I got around 7 EVM questions on my PMP® Exam paper and I am quite confident that I could get them all correct.

EVM is not a PMI Method; it was introduced by the military to manage large scale military projects.  It is applicable to many other industries and projects.

When should it be used?  Never for Firm Fixed price contracts, costs are known by the buyer and they are fixed, it will only give schedule information. EVM is expensive, so there is no need to add the additional cost. Cost Plus and Time and Materials type contracts that meet cost thresholds are where EVM become useful.

However, many project managers may not have done any EVM in their projects and many of them consider the EVM questions a bit scary. 

This post aims to help PMP® aspirants to understand easily the EVM concepts and how to tackle the EVM questions.
Introduction
As project managers come from different backgrounds, there is no consensus for the level of difficulty of EVM questions. But if you can understand the concepts of EVM firmly, you too will find that EVM questions for the PMP® Exam is indeed NOT difficult at all. After all, the PMP® Exam is not an exam decided for Maths students, the PMP® Exam tests your understanding of project management as a whole.
To arrive at the correct answers for EVM questions, all you need to do in the PMP® Exam is to:
1.     Read the question carefully and understand correctly
2.     Choose the correct formula to apply
3.     Calculate the answer  

EVM Concepts Explained With Examples
Earned value management (EVM) is used to assess the schedule and cost performance of a project — with EVM, the project manager will know exactly whether the project is with respect to schedule and budget
Schedule -
§  ahead of schedule
§  on Schedule  
§  behind the schedule
Budget
§  under budget
§  on Budget  
§  over budget
Earned value management (EVM) bases on the concept that i) work completed will deliver value and ii) the value delivered equals the budget put into the work. The value gained can be assessed along the progression of the project. In reality, earned value management is very complicated as value usually cannot simply be assessed based on the percentage of completion.
 PMI has simplified PMP® EVM calculation to very “ideal” situations! You will just need to know the following to get your PMP® EVM questions correct.
Basic EVM Formulas
To speak more clearly how the value is to be managed, a number of terms are defined in EVM (explained with the example of building 10 houses each has a value of US$500 expected to be completed in 10 weeks in proportion):
§  Planned Value (PV) — The budgeted value of the work completed so far at a specific date
example: at end of week 4, altogether 4 houses should be completed, the PV is US$2000
§  Earned Value (EV) — The actual value of the work completed so far at a specific date (refer to the “Notes on Earned Value Measurement” section below)
example: by end of week 4, only 3 houses are completed, the EV is US$1500
§  Actual Cost (AC) — The total expenditure for the work so far at a specific date
example: by end of week 4, US$2000 was spend, the AC is US$2000
EVM is based on monitoring these three aspects along the project in order to reveal the health of the project with the following indices:
§  Schedule Variance (SV) — difference between PV and EV, to tell whether the project work is ahead of / on / behind schedule
§  SV = EV – PV
If the project is behind schedule the SV will be negative (i.e. achieved less than what planned)
If the project is on schedule the SV = 0
If the project is ahead of schedule the SV will be positive (i.e. achieved more than what planned)
example: by end of week 4, the SV = EV – PV = US$1500 – US$2000 = -US$500 (behind schedule)
§  Schedule Performance Index (SPI) — ratio between EV and PV, to reflect whether the project work is ahead of / on / behind schedule in relative terms
§  SPI = EV/PV
If the project is behind schedule the SPI < 1 (i.e. achieved less than what planned)
If the project is on schedule the SPI = 1
If the project is ahead of schedule the SPI > 1 (i.e. achieved more than what planned)
§  example: by end of week 4, the SPI = EV/PV = US$1500/US$2000 = 0.75 (behind schedule)
§  Cost Variance (CV) — difference between PV and AC, to tell whether the project work is under / on / over budget
§  CV = EV – AC
If the project is over budget the CV will be negative (i.e. achieved less than spent)
If the project is on budget the CV = 0
If the project is under budget the CV will be positive (i.e. achieved more than spent)
§  example: by end of week 4, the CV = EV – AC = US$1500 – US$2000 = -US$500 (over budget)
§  Cost Performance Index (CPI) — ratio between EV and AC, to reflect whether the project work is under / on / over budget in relative terms
§  CPI = EV/AC
If the project is over budget the CPI < 1 (i.e. achieved less than spent)
If the project is on budget the CPI = 1
If the project is under budget the CPI > 1 (i.e. achieved more than spent)
§  example: by end of week 4, the CPI = EV/AC = US$1500/US$2000 = 0.75 (over budget)
Note both SV and SPI / CV and CPI give similar information on schedule / budget but the indices will give more insights into the actual performance with a meaning comparison.
From my experience, the most difficult process of solving EVM problems for PMP® Exams is to identify the PV, EV and AC from the wordy calculation questions. Then you will just have to recall the correct formula to substitute the values into to get the answer — the question will usually ask you directly about the actual indices to get.
Advanced EVM Formulas
§  Budget at Completion (BAC) — also known as the project/work budget, that is the total amount of money originally planned to spend on the project/work
§  example: the BAC for the housing project = US$500 x 10 = US$5000
§  Estimate at completion (EAC) — as the project goes on, there may be variations into the actual final cost from the planned final cost, EAC is a way to project/estimate the planned cost at project finish based on the currently available data
§  The following formulas can be used to calculate EAC based on which information and conditions given in the question:
§  EAC = BAC/CPI
If we believe the project will continue to spend at the same rate up to now
§  The delay is caused by reasons which is likely to continue (e.g. labor with less skilled than expected)
§  example: the EAC for the housing project = US$5000 / 0.75 = US$6666.66
§  EAC = AC + (BAC-EV)
If we believe that future expenditures will occur at the original forecasted amount (no more delays of the same kind in future)

§  The delay might be caused by some unforeseen reasons (e.g. typhoon) which is not likely to happen again
§  example: the EAC for the housing project = US$2000 + (US$5000 – $1500) = US$5500
§  EAC = AC + [(BAC-EV)/(SPI*CPI)]
If we believe that both current cost and current schedule performance will impact future cost performance
§  The performance of the project will continue with sub-prime standards (over budget and behind schedule)
§  This formula is less likely to be used for the PMP® Exam
§  example: the EAC for the housing project = US$2000 + [(US$5000 – $1500)/(0.75*0.75)] = US$8222
§  EAC = AC + New Estimate
If we believe the original conditions and assumptions are wrong
§  Will not be tested as there is nothing to calculate
§  Variance at Completion (VAC) — the variance at completion, i.e. the difference between the new estimate at completion and original planned value
§  VAC = BAC – EAC
If we forecast the project will be over budget, VAC will be negative
If we forecast the project will be under budget, VAC will be positive
§  example: the VAC for the housing project = US$5000 – US$6666 (just take the 1st EAC as an example only) = -US$1666
§  To Complete Performance Index (TCPI) — the efficiency needed to finish the project on budget, it is the ratio between budgeted cost of work remaining and money remaining
§  TCPI = (BAC-EV)/(BAC-AC)
Use this equation if the project is required to finish within BAC
§  example: the TCPI for the housing project at end of week 4 = (US$5000 – US$1500) / (US$5000 – US$2000) = 1.16
§  TCPI = (BAC-EV)/(EAC-AC)
Use this equation if the project is required to finish within new EAC
§  example: the TCPI for the housing project at end of week 4 with new EAC US$6666 = (US$5000 – US$1500) / (US$6666 – US$2000) = 0.75
Notes on Earned Value Measurement
The following will discuss how earned value is measured for project and work, from simple physical measurements, percentage complete to weighted milestones. Since the PMP® EVM questions cannot describe a lot of information, the part on earned value measurements will normally be based on simplified situations like physical measurements or percentage complete.
It is likely that you will not be tested on the more difficult ways of measuring earned values. These are included here for your reference only.
§  Physical Measurement — directly transform the physical measurement of the amount of work completed into EV
§  example: building 10 houses each has a value of US$500 expected to be completed in 10 weeks in proportion, earned value of 3 house built is US$1500
§  Percentage Complete — directly transform the percentage of the amount of work completed into EV
§  example: building 10 houses each has a value of US$500 expected to be completed in 10 weeks in proportion, earned value of 30% complete is US$1500
§  Weighted Milestone — a EV is assigned to the 100% completion of each milestone of the work packages with prior agreement with stakeholders
§  Fixed Formula — a specific percentage of the overall PV is assigned to the start of a work package and the remaining assigned upon completion; these must be agreed upon in the project management plan
§  0/100 rule: 0% EV at the activity begins; 100% EV upon completion
§  20/80 rule: 20% EV at the activity begins; 80% EV upon completion.
§  50/50 rule: 50% EV at the activity begins; 50% EV upon completion
EVM Charts
In common practices, EVM will also involve plotting the values on a graph in order to help stakeholders concerned to visualize the progress and the health of the project. More often than not you will find the EV, AC and PV plotted on a graph and you will be asked on the interpretation of the graph.
Insights to be gained from the chart:
§  If EV line is below PV, the project is behind schedule; if EV is above PV, the project is ahead of schedule.
§  If AC line is below EV, the project is within budget; if AC is above EV, the project is over budget.
Below is an example of the EVM charts you would be likely to encounter in your PMP® Exam — solid lines represent actual figures while dotted lines represent forecasted figures:

Judging from the chart above, we can infer that the project is currently over budget and behind schedule.

PMP® Earned Value Management (EVM) Formulas in PMBOK® Guide At a Glance
Name (Abbreviation)
Formula
Interpretation
Schedule Performance Index (SPI)
SPI = EV/PV
EV = Earned Value
PV = Planned Value
< 1    behind schedule
= 1    on schedule
> 1    ahead of schedule
Cost Performance Index (CPI)
CPI = EV/AC
EV = Earned Value
AC = Actual Cost
< 1    Over budget
= 1    On budget
> 1    Under budget

sometimes the term ‘cumulative CPI’ would be shown, which actually is the CPI up to that moment
Schedule Variance (SV)
SV = EV – PV
EV = Earned Value
PV = Planned Value
< 0    Behind schedule
= 0    On schedule
> 0    Ahead of schedule
Cost Variance (CV)
CV = EV – AC
EV = Earned Value
AC = Actual Cost
< 0    Over budget
= 0    On budget
> 0    Within budget
Estimate at Completion (EAC) if original is flawed
EAC = AC + New ETC
AC = Actual Cost
New ETC = New Estimate to Completion
if the original estimate is based on wrong data/assumptions or circumstances have changed
Estimate at Completion (EAC) if BAC remains the same
EAC = AC + BAC – EV
AC = Actual Cost
BAC = Budget at completion
EV = Earned Value
the variance is caused by a one-time event and is not likely to happen again
Estimate at Completion (EAC) if CPI remains the same
EAC = BAC/CPI
BAC = Budget at completion
CPI = Cost performance index
if the CPI would remain the same till end of project, i.e. the original estimation is not accurate
Estimate at Completion (EAC) if substandard performance continues
EAC = AC + [(BAC -EV)/(CPI*SPI)]
AC = Actual Cost
BAC = Budget at completion
EV = Earned Value
CPI = Cost Performance Index
SPI = Schedule Performance Index
use when the question gives all the values (AC, BAC, EV, CPI and SPI), otherwise, this formula is not likely to be used
To-Complete Performance Index (TCPI)
TCPI = (BAC – EV)/
(BAC – AC)
BAC = Budget at completion
EV = Earned value
AC = Actual Cost
TCPI = Remaining Work
/Remaining Funds
BAC = Budget at completion
EV = Earned value
CPI = Cost performance index
< 1    Under budget
= 1    On budget
> 1    Over budget
Estimate to Completion 
ETC = EAC -AC
EAC = Estimate at Completion
AC = Actual Cost
Variance at Completion
VAC = BAC – EAC
BAC = Budget at completion
EAC = Estimate at Completion
< 0    Over budget
= 0    On budget
> 0    Under budget
12 PMP® EVM Formulas


Hint - Make sure you understand about CV, SV, CPI and SPI, 
EV Comes first in each of these formulas. Remembering this would help you to clear at least half of the earned value questions right.  

References – PMBOK® , RMC,  Internet Content