As promised in my last post, here are three very valuable Risk Management best practices that you should apply on your project (and you should always carry out risk management on every project, whether big or small).
1. Remove the most likely risks from your project.
If you estimate the probability of the risk occurring is 50% (0.5) or above, treat the risk as an event, not a risk. You are predicting that the risk is more likely to happen than not, so why not build your plan and project activities assuming it is definitely going to happen. By removing these potential risks from your project, you are automatically avoiding many potential issues and dealing with them in a more controlled and less costly way. Think about the effort that is needed to save the Titanic before (compared to after) it hits the iceberg.
2. Establish a Project Contingency reserve
Add up the Expected Monetary Value (EMV) for your top five to ten risks - this amount will typically be about 10 to 15% of your project budget and should be obtained as an additional "Project Contingency reserve". You should use your list of top risks and expected impacts as justification to your management and client for the additional budget needed to establish this project reserve. If the total EMV for your top risks is greater than say 15%, even after you have eliminated the risks with probability of occurrence greater than 50%, than you still have too many risks and should also treat some of them as events and eliminate those from your project risks.
3. If you cannot get approval for a Project Contingency reserve, carve it out anyway!
Set aside 15% of your budget as a Project Contingency reserve and reduce the budget for all project activities accordingly. In most cases, with the buffers already built in to most estimates, your project team will be able to complete their activities with 85% of their original estimate. For the few cases where they cannot, as well as for all the threats that do occur, you now have a reserve to draw upon. Without any project contingency reserve at all, your project is destined to go over budget.
Let us know your experiences with these and any other risk management best practices that you have applied on your projects.
Webinar: Risk Management Made Easy
If you are interested in learning more about Risk Management processes and best practices, and also would like an Excel based Risk Register that you may use for all four stages of Risk Management, sign up for the recorded webinar APM05 "Risk Management Made Easy" at www.alphapm.com/webinars.
I was interested to read - 'Without any project contingency reserve at all, your project is destined to go over budget.' What is being proposed is to take 15% of the budget to create a reserve. What is the difference if you don't create a reserve so have more money in the budget as opposed to reducing the budget by 15% and creating a reserve. The pot of money doesn't change?
ReplyDeleteGood question, Tony Y.
DeleteThe difference is, that with the 15% removed as a contingency:
- all activities now have to be achieved within 85% of their original budgeted amount and appropriately reduced time frame. Since estimates usually have a buffer already built in, most activities can easily be completed within the reduced budget and time frame.
- the 15% buffer is now available for those few activities that cannot be met within the reduced budget and time frame, as well as for other unplanned activities that would otherwise have caused your project to go over budget and schedule.
This principle of "forcing" buffers is used in Critical Chain project management, where in fact activity estimates are reduced by 50%, so you may even try reducing the allocations for each estimate (within reason) by 50% and keep that as a buffer. I say "within reason", because you may want to keep some activities fixed (such as a 4 hour kickoff meeting). If you are interested in learning more about critical Chain Project Management check out this paper:
http://civiles.org/publi/Gestion/Critical-Chain-Concepts.pdf
Sounds magic - and it is! Try it and let me know how it works for you.