What does project risk management mean to you?
What does “the effect of uncertainty on objectives” (ISO 31000 definition) mean in a project environment? Standard risk management processes are focussed on identifying and managing risks that MAY happen. That applies to both a project and non-project environment.
Where projects differ is that management practice also introduces (correctly!) two other areas of uncertainty – cost and time. Any project manager is required to estimate what a project will cost and when it will be completed. Estimating by its nature is uncertain. Some items will be well understood with a quite accurate estimate while others will be little more than a guess. The total cost and final completion date are therefore uncertain. So, the perennial question is how to improve these estimates.
Looking first at cost. There are three areas of uncertainty:
- The cost associated with risks that may happen, noting that not all risks will have a direct cost impact.
- The variability related to the estimate which largely revolves around quantities and rates.
- Predicting how much issues will change (normally increase) a project’s end cost. (Issues may be risks that have eventuated or a new unforeseen item).
Assessing the likely outcome of a range of variables is readily undertaken using a Monte Carlo (MC) simulation. Each of the above have different variables so require different models. In the past this required specialist (and expensive) consultants so was only appropriate for large projects. This has now changed with software that any project team can drive. A project manager needs to hold a workshop to identify and input the initial data and then literally press a button to derive MC reports. Ongoing management is quite easy as it only requires changes to be updated and then re-running the model for an updated forecast.
Turning to time, the areas of variability are similar. Rather than quantities and rates (in 2 above) the variable is duration. The challenge with time is that it requires specialist software. A MC simulation needs to integrate with the core scheduling algorithms that calculate a project’s critical path. Such software is generally expensive and even more importantly requires specialist skills to operate. With some projects (eg planning possessions for rail projects or outages for power station improvements) this is certainly worth the effort but with smaller or simpler projects the cost/benefit should be assessed.
Interestingly time issues normally result in an extension of time and/or cost. The latter aspect can be handled with 3 above.
A key benefit of managing the three aspects of cost uncertainty is they can substantially help improve project governance. It is also a process that can be progressively introduced in steps. The link below summarises the steps and provides links to more detail on each step.
Would these steps improve the management of project uncertainty? Would they enhance governance? Most importantly of all – would it make your life easier?
