PM Risk For Dummies

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Project Risk
Management
Deltek Special Edition
These materials are © 2017 John Wiley & Sons, Inc. Any dissemination, distribution, or unauthorized use is strictly prohibited.
Project Risk Management For Dummies®, Deltek Special Edition
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Table of Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
About This Book......................................................................... 1
Foolish Assumptions.................................................................. 2
Icons Used in This Book............................................................. 2
Where to Go From Here............................................................. 2
Chapter 1: Preparing for Project Risk Analysis. . . . . . . . 3

The Importance of the Plan....................................................... 3
Deviating from the Plan.............................................................. 4
The Right Ingredients................................................................. 5
No missing logic or links.................................................. 5
Logic density that’s just right......................................... 6
An unbroken critical path................................................ 6
Ease up on the restraints................................................. 6
Say no to negative float.................................................... 7
All of the details are filled in........................................... 7
Relationship lags are a drag............................................ 7
The lowdown on leads..................................................... 7
The trouble with merge hotspots................................... 7
Avoid the Pitfalls......................................................................... 8
Chapter 2: Schedule Risk Analysis . . . . . . . . . . . . . . . . . . 9

One Thing Is Certain: Duration Uncertainty............................ 9
Create a duration uncertainty template........................ 9
Get help ranging activities............................................. 10
Examining Schedule Risk Events............................................ 12
Set up a risk matrix......................................................... 12
Build the risk register..................................................... 12
Map the schedule risks.................................................. 14
Chapter 3: Schedule Risk Exposure. . . . . . . . . . . . . . . . . 15

Time for the Analysis............................................................... 15
Comparing Schedule Risk Exposure....................................... 17
Chapter 4: Schedule Risk Drivers. . . . . . . . . . . . . . . . . . . 19

Determine the Schedule Contribution................................... 19
What’s Driving the Schedule Risk?......................................... 21
Compare Schedule Risk Drivers.............................................. 22
iv Project Risk Management For Dummies, Deltek Special Edition
Chapter 5: Schedule Risk Mitigation. . . . . . . . . . . . . . . . 25

Mitigation Isn’t Free.................................................................. 25
Time for the Cost/Benefit Analysis......................................... 26
The End Game: A Risk Adjusted P-Value Schedule............... 28
Chapter 6: Cost Risk Analysis. . . . . . . . . . . . . . . . . . . . . . 29

Cost Risk Analysis versus Schedule Risk Analysis............... 29
A Question of Time................................................................... 30
Identify the Base Cost Uncertainty......................................... 30
The cost uncertainty template...................................... 31
The process of ranging costs........................................ 32
How time affects cost..................................................... 32
Determine the Cost Risk Events.............................................. 32
The risk matrix................................................................ 33
The risk register.............................................................. 33
Cost risk mapping........................................................... 34
What about opportunities?........................................... 35
Chapter 7: Cost Risk Exposure and Mitigation . . . . . . . 37

Ready to Analyze...................................................................... 37
Comparing Cost Risk Exposure............................................... 38
Understand the Cost Contribution......................................... 39
Analyze and Handle the Cost Risk.......................................... 40
Chapter 8: Nine Thoughts on Delivering

the Risk Message. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Keep It As Simple as Possible.................................................. 41
Try the Risk Driver Analysis.................................................... 42
The Hard-to-Convince Sponsor............................................... 42
Words from the Skeptics.......................................................... 42
If the Message Is Challenged................................................... 43
Boost the Credibility of the Message..................................... 43
Acknowledge That More Details Will Always Help............... 43
You Got the Green Light. Now What?..................................... 44
Never Over ’Til It’s Over.......................................................... 44
Introduction
R isk is an everyday part life of every project. Bad weather
could delay progress on a construction site. So could
late arrival of key materials. The start of a new contract
year could cause labor costs to increase. Countless factors
threaten the schedule as well as the budget. How in the world
does any project manager or sponsor sleep at night, knowing
how many things could go wrong?
Project risk management is the systematic, thoughtful process

of foreseeing the many possible risks that face an upcoming
project. Not just foreseeing them, but analyzing them to figure
out how likely it is any particular risk will actually happen,
how painful it could be, if there’s any way to keep it from hap-
pening or reduce the potential impact, and how much it would
cost to do so.
About This Book

Project Risk Management for Dummies, Deltek Special Edition,
spells out the processes of project risk management. It starts
at the beginning, noting that you can’t really get an accurate
understanding of risk if you don’t have a solid project plan. It
spells out the process for identifying and understanding the
uncertainties and discrete risk events that threaten to cause
headaches for the schedule, for the budget, or both.
The book outlines the creation of a risk register that serves

as a library of bad things that can happen, and describes how
to map the risks to understand which specific project activi-
ties each risk might impact. It describes how to analyze the
risks to figure out which ones are the biggest concerns, how
to calculate contingencies, and how to decide which risks to
consider mitigating.
2 Project Risk Management For Dummies, Deltek Special Edition
Foolish Assumptions
One should not make too many assumptions, but because you
chose to pick up and start reading this book, we’re able to
make a few assumptions about you, the reader:
✓✓Your organization’s lifeblood is projects: construction,

design, maybe something else — unique initiatives with
individual timelines that need to be successful.
✓✓You’ve got risks on your mind and are hoping to improve
your ability to foresee them and get a handle on them.
✓✓You’d love some quick insights into tried‐and‐true ways
for managing risk and making your projects successful.
Icons Used in This Book

Lovely icons decorate the margins of this book, and they’re
not there just to be cute. Check out the paragraph next to
each icon for some helpful information.
Here’s a helpful hint for making the process of project risk

management easier or more fruitful.
As you work your way through the pages, be sure not to miss
the important point next to this icon.
This book is all about risk, and this paragraph is all about
something that could go awry if you’re not careful.
Are you one of those people who likes the little details? This
paragraph might be of interest to you.
Where to Go From Here

Read on, of course! The next page would be a great place to
start, but it’s not the only option. Check the chapter titles
and flip to whatever is most on your mind right now, whether
it has to do with schedule risk, cost risk, or something else.
Whatever you choose, enjoy!
Chapter 1
Preparing for Project Risk
Analysis
In This Chapter
▶▶Understanding what a plan can do for you
▶▶Dealing with variations from the plan
▶▶Evaluating the quality of the plan
W hat ingredients do you need before you dive into proj-

ect risk analysis? You won’t get anywhere without two
key ingredients: a project, and a well‐crafted project plan. This
chapter spells out some of the basics that a project plan must
cover and explores the characteristics the plan must have if
it’s going to be useful for project risk analysis.
The Importance of the Plan

For the record, a project. . .
✓✓Is a unique, temporary endeavor.

✓✓Contains a defined start and finish.
✓✓Is an individual or collaborative enterprise that is care-
fully planned and designed to achieve a particular aim.
Take a look at that third bullet point — the project should

be “carefully planned.” Any worthwhile project needs a plan,
though the project plan can take any number of different
formats. It could be anything from a hand drawing to a fully
built mathematical project model constructed in a Critical
Path Method (CPM) project scheduling tool. Or anything in

between.
Without a project plan, the players in the project are kind of

like the cacophony of an orchestra tuning up — there’s a lot
of talent, but the sound is hardly musical. When the project
plan is fully built to include the entire scope of the project —
sequenced with all handoffs documented and agreed upon
by all project participants and stakeholders — it becomes a
“single sheet of music” that all involved can utilize.
After the project plan has been established, it’s time to begin
performing work on the project according to the plan. Let the
beautiful music begin!
Deviating from the Plan

The project plan is exactly that: a plan. Even the best‐made
plans will experience small problems, and sometimes large
problems. These deviations from the planned execution strat-
egy and timeframes are called variances. When you construct
the project plan in a logical sequence, you’ll be able to see
how early‐project variances will ripple throughout remaining
sequence of work.
Project risk management provides you with information to

help you understand a number of important things:
✓✓What’s certain about your project, and what is not

✓✓Which specific threats and opportunities may affect your
ability to deliver the project
✓✓Which of these threats are the most important to mini-
mize and mitigate
✓✓How much mitigation each risk will need
✓✓How much time delay and cost overrun, if any, the proj-
ect team should expect
The only way you’ll be able to successfully answer those ques-

tions during risk analysis is if you have a project plan that’s an
accurate, living, breathing representation of all aspects of the
project. If there’s a chance that threats will ultimately delay
the project, stakeholders will need to be able to see this delay
Chapter 1: Preparing for Project Risk Analysis 5
in advance. That way they can make proper decisions to maxi-
mize use of resources and potentially prevent a significant
delay. An inadequate project plan won’t function properly as
a predictor of schedule and cost overruns.
The Right Ingredients

How can you tell whether a project plan is adequate and up to
the task at hand? Just check it against nine crucial character-
istics. These are quantitative measures that have proven to be
critical in understanding whether a particular project plan will
be a reliable tool for forecasting the outcome of a project.
Here are the nine leading characteristics of a well‐constructed

project plan. Following this list, there’s more discussion about
these vital points.
✓✓There isn’t any missing logic. The project schedule is

fully linked.
✓✓The average number of logic links per activity is 2.0.
✓✓The project has an unbroken critical path.
✓✓It doesn’t rely too much on hard constraints.
✓✓There’s no negative float in the project baseline.
✓✓There’s enough detail on all of the activities in the plan.
Generally, the duration of each individual activity should
be less than 10 percent of the overall timespan of the
project.
✓✓Relationship lags have been used minimally or not at all.
✓✓Relationship leads have not been used.
✓✓Merge hotspots have been avoided.
No missing logic or links

Each activity in the schedule should, at the very least, have
one predecessor link and one successor link. In this ideal situ-
ation, the activity can’t begin until the predecessor has com-
pleted, and this activity’s completion triggers the successor
activity. When this can be said about all of the activities in the
plan, it’s an indication that the plan’s activities and handoffs

have received proper attention and sequencing.
Logic density that’s just right

An activity with exactly one predecessor link and one succes-
sor link has a logic density of 2.0. If the project as a whole has
an overall logic density of 2.0, it’s considered to have lean and
efficient logic. It’s an indicator that the project logic will be
easy to interpret by all project team members, including those
who have only limited project planning experience. On the
other hand, a logic density approaching 4.0 or higher suggests
that project logic may be confusing. That would undermine
the usefulness and efficiency of reviewing and updating the
project plan during project execution.
An unbroken critical path

A properly sequenced project will have one critical path, yet
while this path can be viewed as necessary, it’s fragile. Any
interruptions to critical path work will flow through to the
end of the project. If an activity on the project’s critical path
is delayed, it can cause the entire project to be delayed. That,
of course, can result in a very unhappy customer! In the ideal
project plan, every day that project work is occurring will
have one or more critical activities. If that’s not the case, it’s
likely that the integrity of the project plan has been compro-
mised by confusing, inaccurate activity links or the use of
unnecessary activity constraints.
Ease up on the restraints

CPM project plans thrive when dates are treated as system
outputs. Inputs from the project team are activities, durations,
and logic. CPM planning software can take these inputs and
readily produce scheduled dates for all project activities. A
date input, on the other hand, is a constraint. That can under-
mine the project date calculations, resulting in unachievable
dates. Introduce fewer hard constraints into the project plan,
and the forecast reliability will greatly improve.
Chapter 1: Preparing for Project Risk Analysis 7
Say no to negative float
When an activity has negative float, that can delay the over-
all completion of the project or a key milestone. Delays will
happen, for sure, but when a project plan has negative float
from the outset, it practically guarantees that the project will
not complete on or before the planned finish date.
All of the details are filled in

Activities with insufficient detail can be cumbersome to
manage, and it’s too easy to assume that “all is well” with
them. Activities with shorter durations are easier to assess for
progress, which leads to a more reliable project status assess-
ment overall.
Relationship lags are a drag

Relationship lags introduce artificial time gaps between activi-
ties. They’re sometimes used to describe a natural waiting
period between two activities, but these are better expressed
as unique activities with a clear description and visibility in
the project plan.
The lowdown on leads

Leads are negative time lags, allowing overlap between activi-
ties. Leads are often misunderstood and misused, which
reduces the quality and accuracy of the project plan.
The trouble with merge hotspots

Merge hotspots have a very high number of direct predeces-
sors. The problem is, the more predecessors that lead to a
task, the less likely it is that the task can start and complete
as planned. Imagine what would happen if a professor decides
not to begin the day’s lecture until each of 100 students
arrives at class. That professor may be waiting a long time,
if not forever, because some students will inevitably be late,
and some probably won’t show up at all. The professor in this
example is experiencing a merge hotspot.
No project plan is perfect. It’s a prediction, after all. But it

must be a high‐integrity plan, or it can’t be properly analyzed
and adjusted for risk. Project risk analysis can be performed
to a high level of quality and predictability, but only when the
project plan itself is a high‐quality, accurate depiction of proj-
ect events and the relationships between those events.
Avoid the Pitfalls

To avoid the pitfalls of “risk done wrong,” consider these
examples of trouble spots.
✓✓Assure that the project plan is properly constructed and

robust.
✓✓Rally the team to participate in the risk exercise. Make it
interactive, engaging, and fun.
✓✓Agree on a simple language and conventions for risk
inputs and outputs.
✓✓Work continually toward developing a follow‐up plan
throughout the exercise.
Chapter 2
Schedule Risk Analysis
In This Chapter
▶▶Understanding direction uncertainty
▶▶Examining schedule risk events
▶▶Introducing correlation to the model
E very effective project needs a solid plan, and every good

plan needs a reliable schedule. But just how reliable is
that schedule? There’s not a schedule in the world that c arries
no risk of going awry. That’s just a fact of life. Stuff happens.
The real key to success, then, is analyzing the plan to under-

stand what risks might mess up the schedule and what should
be done about them.
One Thing Is Certain: Duration

Uncertainty
Duration uncertainty describes the range of values that result
from things such as incomplete scope definition, resource vari-
ability, estimating variability, and the like. These are things that
everyone knows will happen, but because they aren’t predict-
able for probability or impact, you must accommodate them.
Create a duration uncertainty

template
To make it easier to identify duration uncertainty, you can
create a template. This template suggests levels of uncertainty
and uses percentages of the remaining duration to calculate the
minimum, the most likely, and the maximum values for the risk
model. Typically, the “most likely” value is equal to the remain-

ing duration, but as indicated in Figure 2‐1, it can be adjusted.
Source: Deltek
Figure 2-1: The duration uncertainty template.
The uncertainty range will use a shape or distribution — the

most common choices are triangular, beta pert, normal, or
tri‐gen. The triangular distribution is the default in most
tools, because it’s simpler to explain and easier for users to
understand.
Get help ranging activities

The most efficient way to determine the ranges for the sched-
ule activities is to realize that this endeavor requires harness-
ing technical exercise, which bears some resemblance to
herding cats. You must manage the people in the room and
make it as easy as possible for them to participate in the work.
With that in mind, first organize the schedule activities to

match the group you’re working with. For example, if you’re
working with the procurement group, show only that group’s
activities. And there’s no point in showing the construction
group anyone else’s activities.
Grouping by Work Breakdown Structure (WBS) or code

field — whichever is more familiar — will speed up the rang-
ing process. Then, remove all of the nonrelevant columns and
the date columns. Remember that the ranging exercise is not
about picking a new date, but simply about setting a range. Be
sure the team doesn’t get distracted by the date columns.
Begin by setting everything to “realistic” (that indicates

plus or minus 10 percent). Trying to range every activity
is an exercise in craziness, so by setting everything first to
Chapter 2: Schedule Risk Analysis 11
“realistic,” the group can focus its attention on what is clearly
not realistic, or the exceptions. That’s a simple trick for making
the ranging work much more manageable. See Figure 2‐2.
Source: Deltek
Figure 2-2: Ranging activities for duration uncertainty.
Going section by section, have the team identify the excep-

tions, referring back to the actual range for the activity. Don’t
hesitate to ask if something doesn’t make sense: “On what
planet have we ever delivered this work in five to ten days?”
After all of the exceptions are adjusted, examine the duration

uncertainty profile for the project activity grouping (WBS or
code field). See Figure 2‐3. The project team has been heavily
involved in the details in this exercise. The profile lets team
members see the portion of those activities in each uncer-
tainty category. That helps them confirm that they got it right,
and if not, shows them where additional adjustments and
exceptions are required.
Source: Deltek
Figure 2-3: Procurement duration uncertainty profile.
Examining Schedule Risk Events

Just like duration uncertainties, discrete risk events must be
accounted for appropriately in the risk model. So, after you’ve
gotten the uncertainties calculated, the next step is to quan-
tify and assign the discrete schedule risk events. Although
duration uncertainty isn’t predictable, discrete risk events are
predictable and are likely to add either time to the schedule
or cost to the budget (or both).
Set up a risk matrix

The first step for discrete risk events is to set up the risk
matrix (see Figure 2‐4). On this grid, the probability of the risk
event happening is on the vertical axis, and the severity of the
consequences are displayed on the horizontal axis. When the
risk event is evaluated, it’s given the score and color that cor-
responds to the place where its probability and impact values
intersect.
This score gives you a qualitative evaluation of the risk

event. In the early days of schedule risk analysis, this was the
only way to rank‐order risk events. Project teams typically
received the list of risk events in color order, and their job
was to “mitigate all of the red ones, consider the yellow ones,
and ignore the green ones.”
Build the risk register

The risk register (Figure 2‐5) is a library holding all the informa-
tion about discrete risk events. This includes the risk event base
information, mitigation actions, and post‐mitigation ratings.
The base information includes the risk ID, risk type, risk
name, probability, and impacts. The mitigation portion of the
risk register includes the mitigation name, the time and cost
to implement the mitigation, and the probability and impact
ratings for the risk event after implementing the mitigation.
Chapter 2: Schedule Risk Analysis 13
Source: Deltek
Figure 2-4: The risk matrix.
Source: Deltek
Figure 2-5: The risk register.
The risk register documents different types of schedule risk

events, including:
✓✓Threats: If this kind of event happens, it creates negative

consequences for the project.
✓✓Opportunities: This is a potential event that’s a good
thing for the project.
✓✓Calendar event: This is a time‐based threat with different

probabilities and/or consequences depending upon the
month.
✓✓Risk window: This is a time period when work can’t
occur, with variable start and variable finish dates.
Map the schedule risks

The last step before running the risk analysis is to attach the
risk events to the activity or activities they will impact if they
happen. This is called mapping the risks. See Figure 2‐6.
Source: Deltek
Figure 2-6: Risk mapping.
For some risk events, the mapping can be clear and easy. But
if there’s a chain of activities, it can be a bit tricky deciding
which activity the risk event should be mapped to. Map the
risk event to the earliest activity it will impact in the chain,
unless the risk event could uniquely impact every activity in
the chain.
Chapter 3
Schedule Risk Exposure
In This Chapter
▶▶Crunching the numbers
▶▶Comparing schedule risk exposure
T his chapter explores the analyses you’ll run to determine

schedule risk exposure, and how you can then compare
the various analyses to learn how much risk comes from
uncertainties, how much from risk events, and perhaps most
important, how much benefit you can gain by doing some-
thing about those risks and uncertainties.
Time for the Analysis

With the risk model assembled, you’ll use a numerical
analysis — such as Monte Carlo or Latin Hypercube — to
crunch the numbers. You can use the entire risk model for
the analysis, or it can be done using parts of the risk model.
During each analysis, the activity durations are sampled and

used to create a critical path schedule. Then, the activity
durations are sampled again and another critical path sched-
uled. Then again, and again, and again, and again. In fact, risk
modeling software will typically generate 1,000 to 10,000 criti-
cal path schedules, which are referred to as iterations. The
discrete risk events are added to the results in the proportion
that they occur. So, if a risk event has a 50 percent probability
of occurring, it would be present in about half of the itera-
tions. Check Figure 3‐1 for a sample critical path schedule
with risk modeling.
Source: Deltek
Figure 3-1: Critical path schedule with risk modeling.
The results from all the iterations are then charted into a his-
togram, which shows the profile of the results. The left‐side
date, or earliest date, shows the result if all the activities
happen in the minimum amount of time estimated. The right‐
side date, or latest date, shows the result if all the activities
took the maximum amount of time. Different middle dates
result from the many various combinations of durations. The
profile is created as each iteration, or result, is charted during
the analysis, and the result is the risk exposure chart.
You can determine several things from this risk exposure

chart. You’ll learn the probability (P‐value) of delivering the
project by a specific date or earlier — that shows up along
the right side of the chart. The blue curved line in the diagram
represents the cumulative probability curve.
The second thing you’ll learn from the risk exposure chart is
the confidence — that’s the probability that the original deter-
ministic delivery date can be met. In the example in Figure 3‐2,
this confidence level is only 3 percent. For most typical proj-
ects this value is less than 10 percent. Sounds like the original
schedule wasn’t done very well, right? No, that’s not what this
means. Schedules aren’t designed to account for uncertainty
unless the durations are padded.
So how many iterations should be run during risk analysis?

That depends on the complexity of the schedule, the number of
activities, or cost lines, and the desired P‐value for the results.
The higher the P‐value, the more iterations that will be needed
for repeatable results, because at high P‐values, you’re out on
the end of the risk exposure histogram with fewer samples.
Chapter 3: Schedule Risk Exposure 17
Source: Deltek
Figure 3-2: Risk exposure.
Comparing Schedule Risk

Exposure
One of the best ways to analyze the risk exposure results is
to set up a side‐by‐side comparison of the cumulative prob-
ability curves, or S curves. A common comparison is to show
the results of the uncertainty‐only risk analysis next to those
of the uncertainty‐plus‐risk‐events analysis. You can calculate
the variance between the two analyses for a desired value.
See Figure 3‐3. At a P‐80 level, the discrete risk events add an
extra 20 days to the contingency need compared with just the
uncertainty‐only analysis.
Source: Deltek
Figure 3-3: Risk exposure comparison.
Another common analysis is the uncertainty‐plus‐risk‐events

and a risk‐mitigation analysis. It includes all the duration
uncertainty modeling plus all of the discrete risk events, with-
out any mitigation. After you run the analysis with possible
mitigation, you can add that S curve. That way you can dis-
play the amount of benefit gained by implementing the mitiga-
tion as another variance.
Chapter 4
Schedule Risk Drivers
In This Chapter
▶▶Determining the schedule contribution
▶▶Figuring out what’s driving the risk
▶▶Comparing schedule risk drivers
Y our analysis so far has done a great job of identifying

what the biggest schedule risks are, how likely they are
to occur, and what kind of impact they are likely to create.
That’s all useful information, but when you’re trying to figure
out which risks need the most attention, you want to know
what’s going to have the biggest impact on the schedule.
This chapter discusses how you go about exploring and quan-

tifying schedule risk drivers, determining what the schedule
contribution is, and comparing the relative importance of the
various schedule risk drivers.
Determine the Schedule

Contribution
After you’ve created the risk exposure and calculated the
contingency, the next step is to examine which activities are
impacted the most, and which risk events are the biggest
drivers. That’s where a tornado (or Pareto) diagram comes
into play. Up at the top, it identifies the activities and risk
events that are the biggest concern. This helps sort the deck,
allowing you to focus resources only on the activities and risk
events that matter the most.
You’ll pick a P‐value for this analysis, and it’s usually the
same P‐value you used in the risk exposure analysis. The con-
tingency needed to have that P‐value level of confidence is
identified. The schedule contribution reveals the top activities
that contribute to the contingency. For example, in Figure 4‐1,
the activity Site Clearance contributes 34 days to the total
103 days of contingency your project will need to achieve the
50 percent confidence date of February 19.
Source: Deltek
Figure 4-1: Schedule contribution.
The analysis also shows how much of the duration contribu-

tion comes from logic, duration uncertainty, and discrete risk
events. In this example, most of the schedule contribution
Chapter 4: Schedule Risk Drivers 21
for the Site Clearance activity comes from the R42 risk event
(that’s the risk that you won’t be able to hire craft). The analy-
sis is very helpful, because it shows the activities that should
be the biggest focus of any optimization efforts, and points
out which activities aren’t worth focusing on.
For this example, even if you were able to eliminate all of the
contribution for Communications, Initial Long Lead Items,
and Third-Party Validation, you still wouldn’t get as much
benefit as you would just by reducing the contribution from
Site Clearance. That doesn’t mean those other activities
aren’t important or don’t have a contribution. But it points
out in no uncertain terms that if you only have limited project
resources, it makes a whole lot more sense to work on the
largest impact first.
Rather than spread the team across all the items on the criti-
cal path in the single view that you get from the scheduling
tool, the risk analysis lets you use the team more effectively
by focusing only on the activities that make a difference in the
end delivery date. Remember, the scheduling tool’s critical
path is only one possible outcome for your schedule. The risk
analysis shows you 1,000 potential critical paths.
What’s Driving the

Schedule Risk?
The driver analysis can be evaluated from the discrete risk
event as well as from the activity perspective. The analysis
is flipped, showing the top risk events that contribute to the
contingency. Check the example in Figure 4‐2. One risk event
(Redesign in the Field for MCCs) is clearly the largest contrib-
utor. Perhaps it seemed like late delivery of steel vessels was
bound to be a problem, but this analysis reveals it to be much
lower on the list.
A risk analysis saves you from spending time and money on

mitigation that doesn’t matter, or missing mitigation that
could provide a substantial benefit.
Source: Deltek
Figure 4-2: Risk driver analysis.
Schedule risk analysis does keep track, during each itera-

tion, of which activities fall on the critical path. But criticality
doesn’t give any indication of the size or degree of impact. So,
two activities that are both on the critical path are treated as
equally important, if criticality is the only thing considered.
That doesn’t make sense when one activity has a duration of
two days and is highly certain, while the other activity has a
duration of 15 days and is highly uncertain and, on top of that,
has a risk event.
Because what is defined as critical changes with the building

of the risk model, use it as an output from the schedule risk
analysis. Remember, a much more useful measure is to look
at schedule contribution, as it gives a rank order, and quan-
tification, of the activities that are actually “pushing” your
schedule.
Compare Schedule Risk Drivers

Just as you can compare risk exposure curves, you can com-
pare the schedule risk drivers (see Figure 4‐3). By comparing
Chapter 4: Schedule Risk Drivers 23
the risk drivers, before and after mitigation, you can deter-
mine the benefit to a particular activity or the neutralization
of a particular risk event.
Source: Deltek
Figure 4-3: Risk driver comparison.
Chapter 5
Schedule Risk Mitigation
In This Chapter
▶▶Analyzing the mitigation possibilities
▶▶Performing a cost/benefit analysis
▶▶Creating the new deterministic schedule
A ll of the work so far has been leading up to this impor-

tant place: mitigating the risks. In the simplest of terms,
you’re considering which risks to try to do something about,
and then doing what you can to either prevent those risks
from occurring or lessen the impact if they do occur.
Mitigation Isn’t Free

Mitigation is the possible new work that can reduce the
probability, or the impact, of a discrete risk event. Some
people call it risk handling. Mitigation options include trans-
ferring the risk, reducing the risk, or accepting the risk.
Mitigation analysis is a cost‐benefit analysis through which a

possible solution to “high risk” is proposed. The analysis eval-
uates the benefit of implementing the proposed mitigation.
Then you can compare that benefit with the time and money
it will take to implement the mitigation. Many project teams
like to pretend that mitigation is free. It isn’t. Figure 5‐1 shows
risk event mitigation in action.
There’s a specific methodology for mitigation analysis, and

it’s frequently misused. Just as you need clear, specific
language to describe the risk events, it’s important for
mitigation, too.
Source: Deltek
Figure 5-1: Risk event mitigation.
To begin with mitigation, start with the top discrete risk

events. Capture the possible mitigation in the risk register,
along with the cost and time to implement the mitigation.
See Figure 5‐2.
Now it’s time for “let’s pretend.” The project team must think
of the discrete risk event and assume that the proposed miti-
gation has been implemented. With that assumption, team
members re‐evaluate the probability and impact for that dis-
crete risk event.
Source: Deltek
Figure 5-2: After mitigation risk score.
Time for the Cost/Benefit

Analysis
You’ve reached the point in the process where the true cost/
benefit analysis can be done. Before starting the mitigation
analysis, it’s important to identify the most important result
you’re trying to deliver in the project — is it cost or sched-
ule? Of course, every stakeholder or customer always wants
to protect both cost and schedule, but there are times when
Chapter 5: Schedule Risk Mitigation 27
it’s possible to deliver only one or the other, so choices must
be made.
Knowing which option “wins” helps with the cost/benefit anal-

ysis of possible mitigation work. In addition, if the schedule
is cost‐driven and a schedule risk analysis is being done, it’s
important to identify the cost of a day saved (or lost). Know
these parameters ahead of time, and your mitigation proposal
can be in sync with the goals of the project.
You’ll run a third risk analysis, this time using the probabili-
ties and impacts from the risk events — but after mitigation.
This analysis can tell you whether there’s enough benefit to
make the mitigation worth the cost and time.
Figure 5‐3 suggests that doing the mitigation reduces the risk

event impact by 15 days. But the mitigation costs $50,000, so
is this a good business decision or not? It all depends upon
the business, the specific project, and the value of a day.
Source: Deltek
Figure 5-3: Risk exposure comparison with mitigation.
The End Game: A Risk Adjusted

P‐Value Schedule
Now that you’ve completed the schedule risk analysis with
mitigation, you can create a deterministic schedule — using
all the risk modeling, including duration uncertainty, risk
events, and mitigation adjustments.
Figure 5‐4 shows how a P‐50 risk‐adjusted schedule will be

created. The P‐50 durations, from the schedule risk analysis,
will be calculated. These durations will then be used, with the
original schedule logic, to assemble a new project schedule.
The only difference between the original schedule and this
risk‐adjusted schedule will be the individual activity dura-
tions. You’ll have a 50 percent probability of delivering the
activities in the new durations or less.
Source: Deltek
Figure 5-4: Creating a risk adjusted schedule.
Chapter 6
Cost Risk Analysis
In This Chapter
▶▶Accounting for time in the cost model
▶▶Identifying the base cost uncertainties
▶▶Determining cost risk events
T he cost risk analysis process is a lot like the schedule

risk analysis process. You define cost uncertainty, then
identify and map cost risk events. This chapter explores the
difference between cost and schedule risk analysis, discusses
how to account for time in the cost model, and details the
process of cost risk analysis, including the identifying risks,
exploring uncertainties, creating a risk model, and building a
risk register.
Cost Risk Analysis versus

Schedule Risk Analysis
Think of a project that includes the installation of piping. Both
a schedule risk analysis and a cost risk analysis should be
conducted on the project. Here are factors that the two differ-
ent kinds of analyses might focus on.
Cost risk analysis:
✓✓Variation in the pipefitter’s labor rate is included in the

cost uncertainty.
✓✓Variation in the price per foot of the piping material is
included in the cost uncertainty.
Schedule risk analysis:
✓✓Variation in the time it takes to install the piping is

included in the schedule uncertainty.
A Question of Time
The biggest question when doing a cost risk analysis is how to
account for the impact of time on the cost model. It’s impor-
tant to make this a conscious decision so that you don’t miss
or double‐count costs due to time. There are several ways to
go about this:
✓✓Have the cost estimator include the impact of time on the

individual time‐dependent costs.
✓✓Use the schedule risk analysis results to provide the
cost estimator with a risk‐adjusted schedule, and thus,
updated activity durations
✓✓Use the schedule risk analysis results to directly adjust
the cost uncertainty profiles in the cost risk analysis.
Identify the Base Cost

Uncertainty
As with schedule risk exposure, total cost risk exposure is
divided into two buckets: cost uncertainty and cost discrete
risk events. And also similar to schedule risk, it’s important
when you’re setting up the risk model that you put the right
things into the right buckets, so items aren’t missed and
aren’t double‐dipped.
Cost uncertainty has two components: base cost uncertainty

and the uncertainty contribution due to time. You must
account for both of these components in the cost uncertainty,
and it’s best if you can do so independently of each other.
Including and analyzing them separately makes it easier to
determine where to spend time and effort.
Chapter 6: Cost Risk Analysis 31
Organize the cost estimate with separate lines for time inde-
pendent and time‐dependent costs. This way of organizing will
make the assembly of the cost risk model a whole lot easier.
It also makes both the model and the analysis more accurate
and precise.
The cost uncertainty template

You’ll have to identify cost uncertainty and include it in
the risk model for every cost line in the estimate that has a
remaining cost. You’ll get your best estimates from your proj-
ect team and other individuals who have the knowledge and
experience related to this work.
The best approach is to create a template to make it easier for

the team to range the costs. The template features levels of
uncertainty and uses percentages of the remaining cost to cal-
culate the minimum, the most likely, and the maximum values
for the risk model.
Typically, the most likely value is equal to the remaining

cost, but as in Figure 6‐1, it can be adjusted. Frequently, the
project’s cost uncertainty template and duration uncertainty
template are exactly the same.
Source: Deltek
Figure 6-1: Cost uncertainty template.
Go ahead and use a different distribution if you’ve got a good,

technical reason, but be sure to document the reason. Don’t
change it just to be different, though.
The process of ranging costs

Begin the cost ranging with only the base cost uncertainty.
You’ll use the expected materials and labor contracts as refer-
ences for how much these costs will vary.
You can speed up the ranging process if you organize the cost
lines to match the group you’re working with, by area, depart-
ment, or control account. That way, you can remove all the
nonrelevant columns and date columns. See Figure 6‐2.
Source: Deltek
Figure 6-2: Base cost uncertainty range.
How time affects cost

With the base cost uncertainty ranges established, you can
layer the effect of time into the cost risk model. Not every cost
line has a time impact. For those that don’t, identify the sched-
ule activity that best informs how long the costs will last.
Determine the Cost Risk Events

The next step in the process is to quantify and assign the
discrete cost risk events in the model. Just like setting up
schedule risk events, the discrete cost risk events are cap-
tured in the risk register. Frequently, the discrete schedule
risk events and the discrete cost risk events are the same.
The risk matrix
The risk matrix used for the cost risk analysis will be the same
as the matrix used for the schedule risk analysis. You do, how-
ever, need to evaluate the cost impact range for accuracy and
appropriateness. See Figure 6‐3.
Source: Deltek
Figure 6-3: Risk matrix.
The risk register

Similarly, the information contained in the risk register is no
different for cost risk events as it is for schedule risk events.
You’ll see the same risk event base information, mitigation
actions, and post‐mitigation ratings. See Figure 6‐4.
Source: Deltek
Figure 6-4: Risk register.
The risk register will show different types of cost risk events,
such as:
✓✓Threats: These are bad things that will happen to the

project if the event happen.
✓✓Opportunities: If the event happens, these are positive
consequences.
After the cost risk events are captured in the risk register, you
must quantify both the probability and the impact. This leads
to the calculation of the overall risk score (which should not
be used).
Cost risk mapping

The last step before running the cost risk analysis is to attach
the risk events to whatever line or lines they will impact if they
happen. As with the schedule work, this is called mapping the
risks. See Figure 6‐5.
Once the appropriate risks are mapped to the cost model, you
must examine and verify the impact on the individual cost
lines. Many risk models will map an individual risk event to
multiple cost lines, so you must be sure that’s done correctly.
Source: Deltek
Figure 6-5: Risk mapping.
What about opportunities?

As with the schedule risk analysis, most risk registers only
contain threats related to costs, but not opportunities.
Shouldn’t you just scoop up all of the opportunities and put
them in the cost estimate? Not so fast. Opportunities, like
mitigation, cost time and money to implement. By includ-
ing them in the risk register and risk model, you can make
smarter choices about which provides the biggest benefit. It
may be that spending resources pursuing a cost opportunity
is wiser than spending the same amount mitigating a cost risk.
It’s worth considering.
Chapter 7
Cost Risk Exposure
and Mitigation
In This Chapter
▶▶Crunching the numbers
▶▶Comparing cost risk exposure
▶▶Determining the cost contribution
▶▶Figuring out what’s driving the risk
T here are lots of similarities between the schedule risk

analysis process and what you’re going through to iden-
tify, analyze, and consider mitigating cost risks and uncer-
tainties. It’s all about anticipating cost issues that otherwise
might be surprises, and deciding what to do about them, if
anything.
This chapter explores the analyses you’ll run to determine

cost risk exposure, and how you can then compare the vari-
ous analyses to learn how much risk comes from uncertain-
ties and how much from risk events.
Ready to Analyze
Cost risk analysis works the same way, mechanically, as
schedule risk analysis does, with a total cost be calculated
rather than a delivery date. During each analysis, the cost
lines are sampled and a total cost value is added up, using the
sampled costs. If a risk event has a 50 percent probability of
occurring, then it would be present in roughly 50 percent of
the iterations. See Figure 7‐1.
Source: Deltek
Figure 7-1: Cost risk analysis.
The results from all of these iterations are charted into a

histogram for cost, just like they were for schedule. The his-
togram shows the profile of the results. The left‐side figure
shows the lowest cost, with the right‐side showing the high-
est cost. The various costs in the middle result from different
combinations of costs.
From this analysis you can determine the probability of deliv-

ering the project at cost, as well as the confidence level.
Comparing Cost Risk Exposure

Like schedule risk analysis results, the cost risk analysis
results can also be evaluated using a side‐by‐side comparison
of the cumulative probability curves, or S curves.
For cost, a common comparison is to show base uncertainty,

time overlay, and the risk events as additive curves. In
Figure 7‐2, the variance between the base uncertainty analysis
and the base uncertainty plus time overlay can be calculated.
Chapter 7: Cost Risk Exposure and Mitigation 39
Source: Deltek
Figure 7-2: Cost risk exposure comparison.
Understand the Cost

Contribution
Once the risk exposure is created and the contingency cal-
culated, the next step is to examine which cost lines are the
most impacted and which risk events are the biggest drivers.
A tornado (or Pareto) diagram is handy for this. At the top are
the cost lines and risk events that are of the biggest concern,
which helps you determine where to direct resources. See
Figure 7‐3.
This analysis sets the priorities for your consideration of

mitigation. It ensures that you’re spending time and money
on mitigation that matters the most, and that you’re not miss-
ing mitigation that could provide a substantial benefit to the
project.
Source: Deltek
Figure 7-3: Cost contribution.
Analyze and Handle the

Cost Risk
The mitigation process for cost risk events is the same as for
schedule risk events. Once you’ve identified the top cost risk
drivers, you can evaluate options for mitigation. The analysis
indicates the benefit of a proposed mitigation, and you can
then compare that benefit with the time and money it will take
to implement the mitigation. See Figure 7‐4.
Source: Deltek
Figure 7-4: Cost risk mitigation.
Your next step is to propose mitigation, based on your evalu-

ation of the top cost risk events and taking into account the
cost and time to implement the mitigation.
Chapter 8
Nine Thoughts on Delivering
the Risk Message
In This Chapter
▶▶Keeping it simple and focusing on the audience
▶▶Challenging the skeptics
▶▶Moving forward with risk management
▶▶Understanding risk avoidance
▶▶Keeping the message alive
Y ou’ve gone to a lot of effort to analyze risk and determine

the best way to respond to it. Now, you need to sell your
findings to the powers that be, the ones who hold the purse
strings and have the ultimate say in dealing with risk. You
need to create a compelling risk message.
That’s easier said than done, and no matter how well you do
your work, you may run into stubborn obstacles to the risk
management for which you’re advocating. Here are some
thoughts about creating the message and ensuring its success.
Keep It As Simple as Possible

Like all important messages, the content of the risk mes-
sage should be tailored to the audience. A risk exercise for
a medium or large project can be rather complicated, with
many charts and tables to be created and analyzed. You’ll
find yourself creating quite an epic as you try to recap the
exercise for senior management and the customer. No doubt
they’ll appreciate the hard work, but they will also appreciate
a concise summary of outcomes. In fact, the project sponsor

may simply want to be in the position to answer the question,
“Where can we help?”
Try the Risk Driver Analysis

The risk driver analysis is often the perfect document to share
with the sponsor. Above and beyond all the other charts,
the risk driver analysis illustrates exactly which threats will
drive the project to a delayed schedule and higher cost.
The sponsor can use this concise information to determine
the consequences of inadequate risk mitigation or inadequate
contingency funding.
While statics, P‐values, and histograms are longstanding

aspects of risk analysis, they’re not necessarily required to
prompt action when you deliver the message. Stakeholders
who want the additional detail should receive it, but the best
bet may be to steer them toward the risk driver analysis, as it
is the true bottom-line outcome of the risk exercise.
The Hard‐to‐Convince Sponsor

You can put forth all of the risk analysis available, and no
matter the importance or threat to the project, the evidence
may prompt no action other than a wait-and-see approach.
It may take several updates regarding impending delays
before the sponsor begins to believe that the threats you’ve
warned about are likely to drive true delay to the project.
With a situation such as this, the sponsor should receive

updates to the risk exercise. Each time the project plan’s
progress is assessed, there should also be an assessment of
the threats, opportunities, and uncertainty. This will allow the
review of changes in the risk charts, so that the sponsor and
team can determine if the probable risk impact to the project
is increasing, unchanging, or decreasing.
Words from the Skeptics

You may have conducted the most incredible risk analysis
exercises, and still find them challenged by management.
Chapter 8: Nine Thoughts on Delivering the Risk Message 43
You’ll hear all kinds of comments and questions. “These risk
models don’t apply to us.” “Risk always tells us that we can’t
finish on time or that the project will be too expensive, but we
have to deliver anyway.” “This looks like it was cooked up by
some number‐crunchers, not the project team.” “We have to
make the charts, but they don’t really mean anything to our
project.”
If the Message Is Challenged

Confidently recap the risk inputs that the team has provided.
Candidly describe areas where sufficient information wasn’t
provided. Explain that risk analysis involves the concepts of
probabilities and likelihood. No one will know for certain what
will happen until the project is complete. Until that point,
project risk analysis is the science of translating educated
team inputs into reliable predictions of project performance.
Boost the Credibility of the

Message
Have team members who provided risk inputs explain the
information that they provided, and elaborate on how it can
affect their ability to complete their work. This will reinforce
the message from the risk driver analysis. Reaffirm that
project risk management isn’t just guesswork. It’s an objec-
tive exercise, using the proven concept of project simulation
based on targeted inputs from the team members who are
responsible for executing the work.
Acknowledge That More Details

Will Always Help
Convey that the message will certainly need refinement and
updates as work progresses on the project. As more work is
performed on the project, much more will be known about the
dynamics of executing the project.
You Got the Green Light.

Now What?
Often, the sponsor does want to take action based on a cred-
ible risk assessment. Working with the sponsor to determine
the best action can be an interactive exercise, and the risk
message will likely change as different strategies are dis-
cussed. The sponsor may be able to make an adequate case
to have funds provided to the project in order to mitigate risk.
In this case, the risk assessment needs to be fortified with this
information, with new risk driver analysis charts created.
In some cases, even with additional funding or resources,

it’s still not possible to mitigate for certain threats. It may
be that it would take even more funding, or maybe the risk is
simply too complex. When this occurs, risk avoidance may be
discussed as a reasonable strategy. With a clear understand-
ing of these challenging threats, the sponsor may engage the
team to seek opportunities, or perhaps try to accelerate areas
of the project which occur prior to the impact of the risk.
Never Over ’Til It’s Over

The “message” is never truly complete. It will evolve based on
action or inaction taken by the project team. The only point
when the risk picture is truly final is when the project is com-
plete! Until that final moment of project completion, there will
always be some level of threat, meaning that some form of
risk analysis will continue to be needed. For this reason, it’s
essential to keep the risk message alive in the consciousness
of the project team.
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Deltek Special Edition

LIMIT OF LIABILITY/DISCLAIMER OF WARRANTY: THE PUBLISHER AND THE AUTHOR MAKE

Development Editor: Steve Kaelble Business Development Representative:

Chapter 1: Preparing for Project Risk Analysis. . . . . . . . 3

Chapter 2: Schedule Risk Analysis . . . . . . . . . . . . . . . . . . 9

Chapter 3: Schedule Risk Exposure. . . . . . . . . . . . . . . . . 15

Chapter 4: Schedule Risk Drivers. . . . . . . . . . . . . . . . . . . 19

Chapter 5: Schedule Risk Mitigation. . . . . . . . . . . . . . . . 25

Chapter 6: Cost Risk Analysis. . . . . . . . . . . . . . . . . . . . . . 29

Chapter 7: Cost Risk Exposure and Mitigation . . . . . . . 37

Chapter 8: Nine Thoughts on Delivering

Project risk management is the systematic, thoughtful process

About This Book

The book outlines the creation of a risk register that serves

✓✓Your organization’s lifeblood is projects: construction,

Icons Used in This Book

Here’s a helpful hint for making the process of project risk

Where to Go From Here

W hat ingredients do you need before you dive into proj-

The Importance of the Plan

✓✓Is a unique, temporary endeavor.

Take a look at that third bullet point — the project should

Path Method (CPM) project scheduling tool. Or anything in

Without a project plan, the players in the project are kind of

Deviating from the Plan

Project risk management provides you with information to

✓✓What’s certain about your project, and what is not

The only way you’ll be able to successfully answer those ques-

The Right Ingredients

Here are the nine leading characteristics of a well‐constructed

✓✓There isn’t any missing logic. The project schedule is

No missing logic or links

plan, it’s an indication that the plan’s activities and handoffs

Logic density that’s just right

An unbroken critical path

Ease up on the restraints

All of the details are filled in

Relationship lags are a drag

The lowdown on leads

The trouble with merge hotspots

No project plan is perfect. It’s a prediction, after all. But it

Avoid the Pitfalls

✓✓Assure that the project plan is properly constructed and

E very effective project needs a solid plan, and every good

The real key to success, then, is analyzing the plan to under-

One Thing Is Certain: Duration

Create a duration uncertainty

model. Typically, the “most likely” value is equal to the remain-

Figure 2-1: The duration uncertainty template.

The uncertainty range will use a shape or distribution — the

Get help ranging activities

With that in mind, first organize the schedule activities to

Grouping by Work Breakdown Structure (WBS) or code

Begin by setting everything to “realistic” (that indicates

Figure 2-2: Ranging activities for duration uncertainty.

Going section by section, have the team identify the excep-

After all of the exceptions are adjusted, examine the duration

Figure 2-3: Procurement duration uncertainty profile.

Examining Schedule Risk Events

Set up a risk matrix

This score gives you a qualitative evaluation of the risk

Figure 2-1: The duration uncertainty template.

Figure 2-2: Ranging activities for duration uncertainty.

Figure 2-3: Procurement duration uncertainty profile.

Figure 2-4: The risk matrix.

Figure 2-5: The risk register.

Figure 3-1: Critical path schedule with risk modeling.

Figure 3-3: Risk exposure comparison.

Figure 4-2: Risk driver analysis.

Figure 4-3: Risk driver comparison.

Figure 5-1: Risk event mitigation.

Figure 5-2: After mitigation risk score.

Figure 5-3: Risk exposure comparison with mitigation.

Figure 5-4: Creating a risk adjusted schedule.

Figure 6-1: Cost uncertainty template.

Figure 6-2: Base cost uncertainty range.

Figure 7-1: Cost risk analysis.