Mastering Risk and Procurement 

Mastering Risk and Procurement

Instructions/Descriptions

This proactive approach enables the project manager time to think through responses and, in some cases, identify more than one response where the project manager can use strategy as to the best course of action. Proactive response planning also allows the project manager time to document best responses and assign ownership of particular risks to individuals who can carry out the response.

This is an efficient way the project manager can oversee risk response, as preapproved responses can be assigned to individuals to be carried out in the occurrence of a risk event and do not require subject matter experts to use a cumbersome, last-minute decision process.

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Proactive planning in risk responses is truly the best way to manage risk for project activities; it gives the project manager much more control of not only how to respond to risk, but who can assist in risk responses being carried out correctly.Mastering Risk and Procurement

Both reactive and proactive response modes are the general condition the project manager and project staff will be in based on pre-project planning. In most cases, the assumption in risk response planning is to address problems that will have a negative effect on work activities and the project.Mastering Risk and Procurement

Although in most cases this is true, occasionally an issue can result in a positive outcome that was unexpected and will also need a response. Projects, then, have the potential of both negative and positive risks.

Negative risks

Any influence that has a negative effect on a work activity is considered to be a negative risk and results in problems that will have to be addressed. The project manager and other project staff evaluating work activities for potential risks can generally spot areas that may have a potential for a problem and will need a response plan to address the risk, should it occur.Mastering Risk and Procurement

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There are four typical strategies the project manager can use in addressing a risk event, which typically would take into consideration the overall risk tolerance of the project and organization as well as options that might be available for response planning and strategy project manager might use in a response that may affect other work activities within the project.

Management

Chapter 5 • risk response strategies 131

• avoid risk— identify the root cause of a risk event and eliminate or alter the conditions of the activity to create a new scenario without the potential risk. This is simply eliminating the risk before it happens and should be the best-case action in response to a risk.

The caution to the project manager and project team for eliminating a risk is what actions have to be taken to eliminate or alter a condition and what effects that could have on the output deliverable for that work activity.

• reduce risk— similar to avoidance in altering the conditions of a work activity such that although it may not be possible to completely eliminate the potential risk, it can reduce the impact or probability of its occurrence. Any action that can be taken to either reduce or eliminate a risk event should be the first course of action the project manager takes in planning response.
• transfer risk— requires the reassignment of responsibility in such a way that the impact of the risk is absorbed by an alternate party. An example of this would be using an external subcontractor for a particular work activity with significant potential risk items as opposed to using the organization’s internal resources, thus transferring some or all of the responsibility of identified risks out of house.
• accept risk— the last course of action the project manager should use in planning a response for a potential risk event— simply accepting the outcome of the risk. There may be some conditions given a specific work activity where specifications do not allow any alteration of the conditions to eliminate, mitigate, or transfer the impact of a risk event, and the project must bear the full brunt of the impact.

But this response can be accept- able as a function of risk tolerance if the specific risk event has minimal potential impact to the success of the project.

Benefits, trade-offs, and pitfalls

The ability to avoid potential problems is the best course of action, given this has the least amount of impact to an original plan for an activity. This is an important factor for the project manager to

Mastering risk and procurement in project management

Consider when planning risk responses because one of the primary responsibilities of the project manager is to complete all project activities as scheduled and on budget. This being the case, the project manager would design risk responses in the best interest of maintaining the project plan and having no negative influences alter the course of that original plan. Avoidance is the only option that has maximum benefit with little or no trade-off or pitfall.

If the project manager chooses to use actions that would reduce risk or transfer risk, this usually is not accomplished without a trade- off or pitfall of some kind. The strategy for mitigating or transferring of a risk is the cost to benefit ratio and what course of action would be available that has the least amount of impact to the budget or schedule yet accomplishes the goal of minimizing the impact the risk event has.

Something as simple as utilizing a claim to an organization’s insurance policy to cover a particular problem transfers financial responsibility away from the project budget, leaving only residual issues with quality and delay in schedule. Contractual stipulations allow the project man- ager to transfer liability of a problem to another party, which opens the door for benefits, such as the subcontractor having to pay for dam- ages, schedule delays, or quality issues.

Although acceptance might be seen as having to bear the full brunt of impact a risk event might have, it should not be seen as failure in that consideration must be made as to what level of impact the problem actually has. If a problem is unavoidable and there is no solution for transferring the risk to another party, having to accept the impact of the problem is unavoidable.

It may be the only course of action. If the problem is a very large problem that may have severe impact to schedule, cost, or quality, this can be detrimental to the project. In some cases, acceptance might be the best course of action if the impact is negligible to the schedule or budget and has little or no impact on the quality of the deliverable.

Designing an alternate response for a minor risk could cost the project more than simply accepting the risk impact as is. Regardless of the impact a risk has, acceptance always comes at a price because it has an influence on cost, schedule, or quality in some way, even minor, that was not originally planned.

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Positive risks

Any influence that has a positive effect on a work activity is considered to be a positive risk and an opportunity that should be addressed. Just as unplanned problems can affect work activities, unplanned opportunities in some cases present themselves where the project manager should be prepared with a response.

An opportunity can manifest itself simply out of a special condition of events. In some cases, a problem or risk event, although unfortunate and still causing a problem, can also generate an opportunity that would not have been otherwise available if the problem had not occurred.

Positive risks can also influence response plan designs that would give the project manager options in how to best utilize the opportunity. There are four basic response plans that can be used when an opportunity is present:

• exploit— an option where the project manager would take full advantage of the opportunity, accepting all benefits that might be available. He encourages any actions to increase the probability of this opportunity to maximize the benefit that would be realized.
• enhance— an option where the response is to promote further actions that would not only increase the probability of its occurrence, but more importantly increase the impact of the opportunity. The focus here is to get maximum benefit.
• share— an option where an opportunity was discovered by more than one party and therefore the benefit is also to be shared by each party. An opportunity might have been discovered by one party and further enhanced by one or more parties to maximize the benefit shared by all.
• accept— this is simply acknowledging that the opportunity exists and taking advantage of the opportunity if presented, but not necessarily engaging in activities that would increase its probability.

5.3 contingency response strategy

If risk identification and response planning is possible at the beginning of the project, response planning will be designed around

Mastering risk and procurement in project management

General forms of risk and only have enough detail to adequately respond to each type of risk. An example would be several work activities being performed outdoors. If weather is a problem, the response would be to delay activities or rent large outdoor tents to cover the activity zone(s), allowing work to continue.

There may be cases where a much more specific risk was identified and an actual plan that specifically states actions will be carried out if certain conditions are present this is called a contingency response .

By definition, a specially designed response is only carried out contingent on certain conditions that would warrant specific actions. A general response plan would probably be sufficient, but detailed information suggests conditions that would warrant a very specific response, and this response would be custom-designed for only one risk. Project managers can therefore design contingency responses as a form of strategy in resolving specific issues to accomplish a specific outcome.

Designing contingencies is usually seen in the case where a work activity has a specialized resource requirement (critical human resource, specialized piece of equipment, and so on), and this activity is required to take place at a specific time, where the risk will be high concerning the resource or completing the activity in the specified timeframe.

With this risk being associated with this one potential problem and activity, a contingency or backup plan would have a secondary resource in place to ensure the activity is completed in the specified timeframe. The project manager may also have contingency funds set aside in the budget for this one activity to respond quickly if a secondary plan has to be implemented.

How the specific contingency plans are designed can involve a strategy of how internal versus external resources are used, contingency budget planning, and schedule buffers can be evaluated for the best course of action and the least impact to the project budget and schedule.

Contractual response strategy

Another form of contingency planning and strategy can be seen in the use of contracts between the organization and

Mastering Risk and Procurement

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