How to Manage Known Risks
Guest Post by John Ayers (first posted on CERM ® RISK INSIGHTS – reposted here with permission)
There are two categories of project risk:
- Known risks
- Unknown risks
Known risks comprise:
Unknown risks are the uncertainties and variations that surround every project. For example, an unplanned labour strike at one of your major subcontractor’s.
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, then the project success probability is increased significantly.
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 minimise 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 requirement. 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. Subcontractors are a major source of project risk to the schedule.
A labour 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 pricing is more of a challenge because they have 3-4 weeks to prepare their proposal to ensure it gets into the 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 added about $500 K to their proposal. One example of why I did this was to increase the proposed the 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 quality. Due to immense pressure from management, engineers deleted 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.
These are also known project risks. The majority of projects fail due to known risks, but if you succeed in understanding these four constraints as best you can, you will have the knowledge ns tools to manage known risks on your project.
Known risks is the major cause of project failure. Effective project management practices are necessary for a high project success probability.
I authored a new book entitled ‘Project Risk Management’. How to manage known and unknown risks is discussed in detail in my book. The book contains much more detail, examples, and risk stories. It is easy to read and understand. Visit my website https://projectriskmanagement.info/. It includes a link to Amazon and my book as well as the technical papers I have written over time.
Currently John is an author, writer and consultant. He authored a book entitled ‘Project Risk Management. He has written numerous risk papers and articles. He writes a risk column for CERM.
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
If you want to be a successful project manager, you may want to review the framework and cornerstones in my book. The book is innovative and includes unique knowledge, explanations and examples of the four cornerstones of project risk management. It explains how the four cornerstones are integrated together to effectively manage the known and unknown risks on your project.