Hello and welcome back to project risk management. In this lesson, we will identify the project risk manager processes and review the risk groups. Most of the project management risk processes take place during the planning stage of the project. During planning, we will put together our risk management plan, we'll identify the risks likely to impact our project, we'll perform both qualitative and quantitative risk analysis, and we'll develop our responses to those risks. Later in the project during the monitoring and control phase, we'll actually implement our risk responses and monitor the risks. What looks like a fairly straightforward process is actually anything but straightforward. During the course of the project, we should be continually reviewing our plans, checking to see if any new risk have appeared, and we perform our analysis based on the latest information. Risk management is an interactive process that starts on the day one of the project and continues throughout the work until the final close out. The actual risk management process looks a little different. First, we start by identifying risk. This is a team effort that should involved both the project team and our stakeholders. Then, we analyze and prioritize the risks. In this step, we select those risk that will have the biggest impact and focus on them. If we try to focus on all the risks, it can divert our attention from the more important things. In reality, some risks are not large enough to significantly impact the project, while others are not likely to occur. In both cases, we should not focus on these risks, but we should use our limited resources to manage risk that can have a large impact or are highly, likely. We should develop strategies to address these higher priority risk. We will try to mitigate any threats to the project and try to enhance any opportunities. After we have developed these strategies, we will estimate any monetary reserves and contingencies we might need to address the potential impact of these risk. The next step in the process is to implement the risk responses that have been developed. As we do this, we will update our project plans to account for any changes in the situation. As the project progresses, we actively monitor the risk and the risk responses to value how we're doing. If risk occur, the monitoring process will allow us to react to them and adjust our activities and plans. As we stated earlier, this is only the beginning. As the project progresses, we should continually evaluate the situation to identify new risks, retire all risks that we've moved past, and update ongoing risk based on the latest project data. I recommend that you repeat the process every quarter for projects of a significant duration and more often for short duration projects. I'd like to think of the overall project risk in terms of three distinct categories: cost estimate contingency, schedule contingency, contract and business risks. The first two categories cover known unknown. Cost estimate contingency is a reserve to address those parts of the project that we know are uncertain. They may include labor productivity, replacing damaged goods, we work in a part of the project that isn't done correctly, changes of the cost of goods and services, missed estimation of the quantities, et cetera. These items are generally associated with the estimate and the uncertainty that surrounds it. Cost estimate continues to maybe a fixed percentage or a fixed amount based on experience or getting calculated based on quantitative techniques. In any case, it's important that we document how we've arrived at this value based in our estimate basis. Schedule contingency is similar to a cost estimate contingency. Schedule contingency is one or more allowances in the project schedule for increases or decreases in the duration of activities on the project. They account for the fact that it may take longer to complete an activity or that it may be impacted by an outside agent such as weather. Again, we can estimate schedule contingency as a percentage of the project, or an activity duration as a fixed period, or we can perform a quantitative analysis to determine the recommended amount. The final category, management reserves or contract business risk account for unknown unknowns. These are typically low probability, high impact events that can significantly affect the project. Many times, management reserves also include an allowance for potential scope increases during the project. So this last category kind of an essence, we split the two, one part for risk allowances and one part for scope increases. The first two categories of risks, cost and schedule contingencies, are based on the known scope and baseline has developed. This latter category, management reserves, is based on things outside the scope and the baseline. Typical items in this category include unusual and unpredictable weather patterns, acts of God, unforeseen increases in scope, changes in law or regulation, and the like. We can estimate this last category of risk like the first two by adding a percentage to the total cost and time or a fixed amount to either or both. There are also techniques to analyze and quantify these risks based on experience. The way cost and schedule contingencies and management reserves are handled can vary widely from one organization to the other. It is important that you understand the standards and processes for your organization and follow them. No matter how you do it, it is important to recognize that we cannot estimate all the impacts to our project or how much experience we might have. Cost and schedule contingencies, as well as contract and business risks are a fact of life on every project. We should do our best to allow for them and include them in our project budget forecasts. Now that we have taken a high level look at the risk management processes, let us review how to develop risk management plan. That will be the subject of the next lesson.
