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Calculating Probabilities

A contingency plan has a 30% chance of failing. The corresponding risk event has a 40% chance of occurring. What’s the probability for the combination of having the risk occur AND the contingency plan failing?

 

(The answer is determined by this equation: 0.3 x 0.4 = 0.12.)

 

The answer is 12%.

 

 

 

"A little risk management saves a lot of fan cleaning."
 

                   - Anonymous

 

 
Issues vs. Risks

What is the difference between a risk and an issue?  Timing primarily. An issue is a manifested risk. From a management perspective, ideally risks will be managed so that they do not occur. Issues are active problems that must be managed to reduce the impact to minimise the consequences.

 

 
Project Risk Management

Is risk the dark side of project management?  It certainly adds drama. Project risk managmenet is a vast and fascinating subtopic involving both negative and positive aspects. Read select links under this section to learn more.

 
Risk Models

Project managers may use risk models to explore the possible outcomes using risk simulations.  For a model in Excel, software such as Frontline's Risk Solver, may be used to perform a Monte Carlo simulation on a model.  Project managers can run a simulation that performs many (thousands of) experiments or trials -- each one samples possible values for the uncertain inputs, and calculates the corresponding output values for that trial.

 

The first run of a simulation model can often yield results that are surprising to the modelers or to management -- especially when there are several different sources of uncertainty that interact to produce an outcome.  Even before an in-depth analysis of the results, simply seeing the range of outcomes -- for example, how low and how high Net Profit can be, given our model and sources of uncertainty -- can encourage a re-thinking of the risks we face, and the actions we can take.

 

 

Because a simulation yields many possible values for the outcomes we care about -- from Net Profit to environmental impact -- some work is needed to analyze the results. It is very useful to create charts to help us visualize the results -- such as charts and cumulative frequency charts. We can summarize the range of outcomes using various kinds of statistics, such as the mean or median, the standard deviation and variance, or the 5th and 95th percentile or Value at Risk.

 

Another tool for assessing model results is sensitivity analysis, which can help us identify the uncertain inputs with the biggest impact on our key outcomes. For example, a tornado chart can give us a visual summary of uncertainties with the greatest positive and negative impact on net profit.

 
Dealing with Critical Incidents in Project Management

What should a project manager do when things seriously fall apart? (Read now.)

 
The Risk Management Credential
The PMI Risk Management Professional (PMI-RMP) is one of the newer credentials offered by PMI. Here are some interesting numbers about this credential:
  • The first PMI-RMP granted was on June 2, 2008
  • There are 516 PMI-RMPs in 40 countries, worldwide
  • The top four countries with PMI-RMPs (in order): United States, United Arab Emirates, Brazil, and Canada
  • For the seven months of 2008, there were 64 PMI-RMPs awarded
  • For 2009, there were 179 PMI-RMPs awarded
  • For 2010, there have already been 273 awarded through October.

 

In order to sit for the PMI-RMP, project managers must meet the following requirements:
  • with a high school diploma (or equivalent) 4,500 hours of risk management experience in the past five consecutive years and 40 hours of risk management education
  • or with a bachelor's degree (or equivalent) 3,000 hours of risk management experience in the past five consecutive years and 30 hours of risk management education
  • pass the multiple choice exam (3.5 hours / 170 questions), demonstrating proficiency in the following domains: risk communication, analysis, response planning, and governance
 
Project Risk Board Game
Re-energize your project management skills using discovery learning.
 

"If you don't attack the risks, the risks will attack you."
 

                            - Anonymous

 

 
Contingency Reserves

A Contingency Reserve is the amount of money or time needed above the estimate, or previously allocated amount, to reduce the risk of overruns of project objectives to a level acceptable to the organization. Planning this is a part of budgeting, scheduling, and risk management.

 

Best Practices: It is recommended that this contingency be shown in the WBS and schedule. The project manager should take the lead in planning and controlling this - and treat it as a team contingency pool as opposed to creating a buffer for each and every activity or deliverable.

 
Minimax vs. Maximax

Minimizing the maximum (minimax) or maximizing the minimum (maximin) gain and possible loss is a categorization that helps project managers understand their project stakeholders risk tolerance approach.

Minimax Maximax
Risk avoider Risk seeker
Mostly concerned with control of loss Mostly concerned with taking opportunities
Associated with Wald Associated with Herzwald

 
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