Guest Post by John Ayers (first posted on CERM ® RISK INSIGHTS – reposted here with permission)
A risk is an event or activity that can go wrong and cause an impact to the project. Risks can have a negative or positive impact to the project. Risks that have a positive impact are called opportunities. If they have a negative impact, they are called risks. A goal on a project is to try and balance risks and opportunities to mitigate the chance of cost or schedule growth.
There are two basic categories of project risk. They are the known and unknown. The known risks are the four project constraints (scope, cost, schedule, quality). Poor execution of these constraints is a major reason why projects fail. This paper addresses how to manage known risks.
Known risks are identified, analyzed, mitigated and planned for in advance. Known risks can be significantly mitigated with application of basic Project Management methods and processes.
The known risks on a project are:
Scope: Poorly understood scope. Unauthorized (non-contractual changes) scope changes.
Schedule: Insufficient planning. Resources and schedule not aligned. Undefined or ill-defined requirements.
Cost: Insufficient budget. Poor budget control. Poor planning.
Quality: Quality compromise to offset poor schedule or cost planning and execution.
The contract statement of work (SOW) defines the project scope. The challenge to the project manager is to perform to the scope but not more and not less. Sometimes the scope is not fully defined or mis-understood creating a serious risk situation which may not be known until late in project. The project manager is responsible to ensure that the scope is clear to the project team, so everyone is on the same page.
When I was the project manager for a major subcontract, I insisted the subcontractor generate a scope compliance spreadsheet listing: each SOW paragraph number; description of scope; and how they were accomplishing scope to minimize a scope risk. I also sat down with the subcontractor’s project manager and went through their SOW paragraph by paragraph. I asked him to explain what each scope meant to confirm we were on same page. We did not have any scope issues throughout the project.
The Request for Proposal (RFP) specifies the project schedule or period of performance. The challenge to the proposal team is to generate a plan that includes a schedule that meets the RFP requirements. The schedule must have margin built into it. Contractors can control their own schedule by adding resources or working two shifts. However, contractors do not have any control over their subcontractors. As a result, subcontractors are a major source of project risk to the schedule.
A labor strike concern and risk became known during the proposal phase for one of our major subcontractors. To mitigate the risk, we decided to subcontract with another company in a leader follow scenario. Our prime subcontractor received the majority of the units with the secondary supplier the smaller quantity. If the strike occurred, we would award the secondary supplier more units. As it turned out, the strike was averted but we were covered for the risk.
The project’s cost risk begins with the proposal response time frame, often 60 days. The short time puts a lot of pressure on the proposal team to collect, review, and approve costs. Typically, a bottom-up cost estimate and a top-down estimate are compared to confirm they are in alignment within a specified tolerance. This is the in-house cost estimate. Subcontractor proposed pricing is more of a challenge because they have 3-4 weeks to prepare their proposal to ensure it gets into our company’s proposal. This is the biggest risk for establishing the budget. The other major risk is executing the project to the budget and avoiding serious issues.
For one major supplier, I was assigned the mission to visit their facility and work with them to get the cost down. Management thought their bid was too high. I spent about two weeks in a conference room going through every cost line with them. At the end of the session, I asked them to add about $500 K to their proposal. One example of why I did this was to increase the proposed number of visits and number of people per visit to a foreign bearing vendor. I felt their estimate was low. They actually needed three visits to the bearing vendor and with a few more people in attendance because the bearing was very special and warranted multiple visits during the manufacturing phase. My goal was to ensure the subcontractors bid was fair even if it meant adding costs. It must be a win- win situation for you and your subcontractor.
The quality constraint works similar to the other constraints. For example, if a project is running late and over cost, the project manager may deliver the product on time but with less testing and inspection, compromising the quality.
The Hubble telescope is a good example of this. Due to immense pressure from management, engineers were directed to eliminate a final mirror shape test in order to launch it into space sooner. The first operational test in space showed the image to be fuzzy. The shape was wrong. It took several years and hundreds of millions of dollars to fix the telescope in space. This is an example of comprising quality to satisfy a late schedule resulting in delayed use of the telescope and added costs of hundreds of millions of dollars.
Good project management practice is essential to managing known project risks. Studies show that most projects fail due to known risks. If you manage the known risks well, then the project success probability is increased significantly.
Currently John is an author, writer and consultant. He authored a book entitled Project Risk Management. It went on sale on Amazon in August 2019. He authored a second book titled How to Get a Project Management Job: Future of Work. It is on sale on Amazon. The first book is a text book that includes all of the technical information you will need to become a Project Manager. The second book shows you how to get a Project Manager job. Between the two, you have the secret sauce to succeed. There are links to both books on his website.
He has presented numerous Webinars on project risk management to PMI. He writes columns on project risk management for CERM (certified enterprise risk management). John also writes blogs for APM (association for project management) in the UK. He has conducted a podcast on project risk management. John has published numerous papers on project risk management and project management on LinkedIn.
John earned a BS in Mechanical Engineering and MS in Engineering Management from Northeastern University. He has extensive experience with commercial and DOD companies. He is a member of PMI (Project Management Institute). John has managed numerous large high technical development programs worth in excessive of $100M. He has extensive subcontract management experience domestically and foreign. John has held a number of positions over his career including: Director of Programs; Director of Operations; Program Manager; Project Engineer; Engineering Manager; and Design Engineer. He has experience with: design; manufacturing; test; integration; subcontract management; contracts; project management; risk management; and quality control. John is a certified six sigma specialist, and certified to level 2 EVM (earned value management). Go to his website to find links to his books on Amazon as well as numerous papers he has written. https://projectriskmanagement.info/