Plan Risk Responses
The output of Plan Risk Responses is the further updated risk register plus other items.
- Project Management Plan Updates The efforts spent in risk management will result in changes to the risk management plan and therefore to the project management plan. Work packages or activities could be added, removed or assigned to different resources. Thus, planning is an iterative process.
- Updates to Risk Register including:
- Residual Risks It is these risks which remain after risk response planning, and those that have been accepted for which contingency plans and fallback plans can be created. Residual risks should be properly documented and reviewed throughout the project to see if their ranking has changed.
- Contingency Plans Contingency plans are plans describing the specific actions that will be taken if the opportunity or threat occurs.
- Risk Response Owner A key concept in risk response planning is that the project manager does not have to do it all and neither does the team. Each risk must be assigned to someone who may help develop the risk response and who will be assigned to carry out the risk response or “own” the risk.
The risk response owner can be a stakeholder rather than a team member. Think about how the application of risk management can change your real-world projects. The risk occurs; the risk response owner takes the pre-arranged and pre-approved plan for action determined in project planning and informs the project manager. No meeting is needed, just action! How powerful is this!
- Secondary Risks Included in risk response planning should be an analysis of the new risks created by the implementation of selected risk response strategies. Frequently, what is done to respond to one risk will cause other risks to occur. For example, a risk of fire can be allocated to an insurance company, potentially causing the risk of cash flow problems. Cash flow should then be analyzed and if appropriate, added to the risk management process.
- Risk Triggers Events that trigger the contingency response. A project manager should identify the early warning signs (indirect manifestations of actual risk events) for each risk on a project so that they will know when to take action.
- Contracts A project manager must be involved before a contract is signed. Before the contract is finalized, the project manager will have completed a risk analysis and included contract terms and conditions required to mitigate or allocate threats and to enhance opportunities.
- Fallback Plans Specific actions that will be taken if the contingency plan is not effective. Think how prepared you will feel if you have plans for what to do if a risk occurs and what to do if that original plan does not work.
- Reserves (contingency) Let’s spend a little more time talking about this. First, realize that having reserves for schedule and cost is a required part of project management. You cannot come up with a schedule or budget for the project without them. Reserves are covered in the Cost lesson, but it makes sense to cover them here as well.
There can be two kinds of reserves for time and cost; contingency reserves and management reserves. Contingency reserves account for “known unknowns;” items you identified in risk management.
They cover the residual risks in the project. Management reserves account for “unknown unknowns,” items you did not or could not identify in risk management. Projects can have both kinds.
The contingency reserve is calculated and is made part of the cost baseline. Management reserves are estimated (e.g., 5 percent of the project cost) and are made a part of the project budget, not the baseline. Therefore, management approval is needed to make use of management reserves.
Reserves should be managed and guarded throughout the project life cycle. Let’s try an example of calculating contingency reserve.
Exercise You are planning the manufacture of an existing product’s modifications. Your analysis has come up with the following. What is the cost contingency reserve that you would use?
• 30 percent probability of a delay in the receipt of parts with a cost to the project of $9,000
• 20 percent probability that the parts will be $10,000 cheaper than expected
• 25 percent probability that two parts will not fit together when installed, costing an extra $3,500
• 30 percent probability that the manufacture may be simpler than expected, saving $2,500
• 5 percent probability of a design defect, causing $5,000 of rework
Answer The answer is $1,075.
30% × $9,000 Add $2,700
20% × $10,000 Subtract $2,000
25% × $3,500 Add $875
30% × $2,500 Subtract $750
5% × $5,000 Add $250
The exam often asks questions such as:
Plan Risk Responses – What do you do with non-critical risks?
Answer Document in a watchlist and revisit periodically.
Would you select only one risk response strategy?
Answer No, you can choose a combination of choices.
What risk management activities are done during the execution of the project?
Answer Watching out for watchlisted (non-critical) risks that become more important.
What is the most important item to address in project team meetings?
How would risks be addressed in project meetings?
Answer By asking, “What is the status of risks? Any new risks? Any change to the order of importance?”