Join Bob McGannon for an in-depth discussion in this video Managing integrated risk and cost, part of Project Management Foundations: Integration.
- At one time I worked on a project to procure a new software system. Although there was a clear winner from a capability standpoint, we decided to engage both of the top two contenders. This was an expensive exercise because there was twice as much work involved in the final evaluation process. However, it considerably reduced the risk associated with choosing a suboptible vendor and therefore, it was a worthwhile undertaking. Risks play an influential role in determining the cost of your project.
It's not just the cost of risk management activities, which need to be considered and factored into your budget. But also the impact of unforeseen positive or negative risk events on your budget, scope, or schedule, should they occur. As these can be substantial, they need to be managed. One of the rules of project risk management is to ensure the cost of risk treatments do not outweigh the cost of the risk occurrence. In other words, if it's going to cost us $5000 to put a risk treatment in place, and the impact of the risk occurring will result in a $3000 cost to the project, it makes better sense to allow the risk to take its own course.
However, there are some risks that will have major implications for your budget if they're allowed to go unchecked. In other words, it is better to address them head on to reduce the probablilty or impact of them occurring. An example of this is an identified technical risk. Perhaps you have three or four key technical experts in a particular field working on your project. These technical experts are almost fully allocated and suddenly one of them has to be absent for personal reasons.
You may need to bring in certain technical expertise to fill that gap. But an external consultant will cost you almost twice as much as the technical expert on your payroll. This will have a negative impact on the budget, but that may be appropriate as it is more costly to go without the technical expertise you need. Another example of this is an identified opportunity. Your competitor may have failed to deliver that easy to use feature for the latest Android tablet opening the door for you to add features to your projects product.
This may have short term cost implications but could deliver an extensive revenue opportunity to the business. So back to my original story. By engaging both of the top two contenders on the project I worked on we were able to reduce our risk exposure. However, what would happen if we did not have two contenders? What would the ramifications be? We may have engaged one contender, and as a result, we would have been locked into a higher price or a longer schedule without any other option to fall back on.
Sometimes it's not always possible to take action in advance, including spending money to reduce risk and enhance opportunity. However, balance is the key. And judgment needs to be used in each circumstance to ensure you're in the best position to get the best outcome you can for your organization. So take a look at your project risks and integrate your risk management approaches with a cost management methodologies on your project. The result can mean a project that balances both risks and the costs of your project to the business.
Lynda.com is a PMI Registered Education Provider. This course qualifies for professional development units (PDUs). To view the activity and PDU details for this course, click here.
The PMI Registered Education Provider logo is a registered mark of the Project Management Institute, Inc.
- Planning for integration
- Managing scope, cost, and risk
- Integration and communication techniques
- Staffing the integration
- Mapping project interrelationships
- Dealing with multiple critical paths