PMI RMP – MATH FORMULA GUIDE part 4

6. COMMUNICATION CHANNELS

Hi and welcome back again to a new simple concept for the exam. Not counting the communication and channels of the communication lines on your project. So how many people need to talk to one another? A good project manager needs to get a handle on all this communication because it’s easy to lose a track effect. That’s why you need to know how to calculate the channel’s communication on each project. Now for small projects with very few number of stakeholders to be very easy to determine the number of communication lines on your project. But the formula you are going to learn in this lecture is very important in large complex project. So how to count the communication lines? You have to take the total number of people on your project including the project manager and call that number N.

Then plug this number to this simple formula n by n minus one divided by two where n represents the number of stakeholders. This is the only formula you need to memorize to count the communication channels. It’s very simple, it’s N by n minus one divided by two. So let’s assume you have four stakeholders and you have a project. Each stakeholder is represented by one box. If you want to count the communication channels by counting the lines between the boxes, you will have 123456. So you have six communication lines between the four stakeholders. Apply the four here on this formula four by three or four by four minus one, which is 312 by two x six.

As well, having a four stakeholders group will be very simple to draw the lines between the boxes. But if you have a large number, you need to use this formula. Now for the exam questions, read the question carefully to understand if the project manager is included in the number of stakeholders the question is asking about. Omen should be added. So you should read the words of the question to find out if you as a project manager is included within the number of stakeholders given in the question. Or you should add yourself. The second trick or note some questions will ask you how many channels added after adding two stakeholders? So you should calculate the original and the new to subscribe and find the difference.

So trick if the question is asking about the new number of communication channels or the question is asking about the added number of communication channels, these are the only tricks you can see in the communication channels questions. Example number one, there are 15 people in a project including the project manager. How many lines of communication are there? This is the easiest application of the communication channels formula n by n minus one divided by two n is 15. So it’s 15 by 14 divided by two. You have 105 communication lines for the project, 15 stakeholders. Example number two, you are working at a major project, you have a 24 person team working for you on a project with five major sponsors.

The company announces lay offs and your team is reduced to half its size. How many lines of communication are on your new smaller team? So your team 24 person team, and now it was reduced to half its size. So now you have twelve person team. Also you have five project major sponsors. And you need to add yourself as a project manager. So it’s twelve plus five for the sponsors plus the project manager. Overall, you have 18 stakeholders. M by N minus one, divided by two will give you 153 communication channels. This is all for this concept. It’s very easy. It’s very simple. You need to guarantee the exam questions asking about communication channels on your project.

7. NUMERICAL RISK ANALYSIS

Hi and we’ll come back again to a new topic, a new lecture about the risk analysis math. So what are the math formulas you will use in order to perform the quantitative risk analysis? So once you have identified risks and ranked them according to the team’s assessment, you need to take your analysis little further and make sure that the numbers back you up. This is the reason why the perform quantitative risk analysis process is performed as all the math formulas I’m going to explain in this lecture are used in the performing quantitative risk analysis process. It’s also called the objective risk analysis process. Most of the tools for analyzing risk data are about figuring out how much the risk will end up costing you and the basic formula.

And the basic concept of all direct numerical analysis is the expected monetary value, which is a method used wide to establish the contingency reserve requirements for both budget and schedule for your project. Now, if you use this technique for all of your risks, you can ask for a risk contingency budget to cover the impact to your project if one or more of the risks occur. So this is the main reason why we identify the project risks, ranked them in the qualitative analysis, and then perform the quantitative risk analysis. At the end, you need to determine the required contingency reserves for your project. Now, the expected monetary value is a risk management technique to help quantify and compare risks in many aspects of the project.

EMV is a quantitative risk analysis technique since it relies on specific numbers and quantities to perform the calculations rather than high level approximations like high, medium and low. As the high level approximations of high, medium and low are performed within the qualitative or the subject of risk analysis process. In the quantitative risk analysis process, we will talk about numbers only. The expected monetary value is a recommended tool and technique for quantitative risk analysis and project risk management. The phrase expected monetary value analysis refers to a specific analytical technique in which a calculation is made to determine the average of all potential outcomes.

When the future includes a number of particular scenarios that may or may not ultimately happen. These are the risks particular scenarios that may or may not ultimately happen uncertainty. Now, the expected monetary value formula is probability multiplied by the impact. A very simple formula, but a lot of use for applications and project and risk management. A and B equals p by i, the probability by the impact, which is usually suppressed in dollars or in dates. Now, generally, the opportunities will be expressed as positive values and threats as negative values. So in calculating the EMV or the expected monetary value, you will give a positive value for the opportunity, a negative value for the threat.

EMV relies on two basic numbers the probability, which is p, and the impact, which is I. And usually the impact can be broken down further into the cost impact and the schedule impact. The steps you will follow while performing the expected monetary value technique. First of all, you need to assign a probability of occurrence for the risk. Assign monetary value of the impact of the risk when it occurs unusually, as I mentioned, it’s represented by dollars or days. Then you need to multiply the values produced by step one and step two to find out the EMV for the project. Sum the EMV all the project risks. That’s simple. If you are calculating the EMV for one individual risk, you need to multiply the probability by the impact.

If you are doing for a project, you need also to find the EMV for each risk alone and then do the sum by assigning a negative value for the threat, a positive value for the opportunity. An example here you have identified an opportunity with a 40% chance of happening. However, it may help you gain $2,000 if this positive risk occups calculate the expected monetary value for this risk ever. This is a very simple question. The probability of an opportunity is given as 40%. The impact is $2,000. We know that the expected monetary value equals the probability by the impact. So it’s 40% by 2000. The EMV for this risk described in the question will be $800. Now, another example here in your project you have identified two risks with a 20% and 15% chance of procuring.

They will cost you $1,000 and $2,000 respectively. If both of these risks happen, what’s the expected monetary value of these risk events? So here is a scenario with two risks. Probability and impact are given for each and both are threats because they will cost you. So there are negative events. Expect monetary value of tourists. Events will be EMV of the first event plus EMV of the second event. EMV of the first event will be 20% by 1000 will be minus $200. For the second event will be 15% by minus $2,000 will be minus $300. Therefore, the EMV of these two risk events will be minus $500. Even the question states 20 risks. You will do the same for each risk. Assign a negative value for a threat, a positive value for the opportunity, and just do the sum.

An important application of the expected monetary value formula will be the decision tree analysis, where decision trees are used to show probability and arrive at the dollar amount associated with each risk. It’s an important modeling technique used in the quantitative risk analysis process. It’s a graphic representation of various automated solutions that are available to solve a problem. Now it calculates the expected monetary value in more complex situations than the simple expected monetary value cases. For each branch of the decision tree compute the expected monetary value EMV for the event. Assuming this is a decision tree, each branch represents a decision.

So p two is a decision. P one is a decision. And so on. You need to find out the EMV for each decision or each branch. A Decision Three is a decision support tool that uses a three like graph or model of decisions and the possible consequences with the probabilities for each branch you will have the probability of occurrence and the possible consequences of that path. Now an example here a project manager strikes to determine to buy a commercial solution or to do it in house based on the decision tree shown below. What’s the EMV of each decision? So the scenario we have is to buy a software or to build it. So buying this commercial solution will cost you as an initial cost $2,250,000 with a 10% probability of failure with a cost impact of $5 million as the 10% here is the probability of the failure, 90% is the probability of success.

All the sum of the two branches should be 100%. There is no impact for the success. Now, if you are building the software in house, the initial cost will be $1,325,000 with 30% probability of failure and $5 million impact. So what’s the EMV for each decision? We have two decisions here by commercial solution P by I equals 10% by 5 million impact will give you $500,000, doing it in house will be 30% probability Habeas by 5 million impact $1,500,000. In order to decide you should add the initial cost of each decision. So buying the commercial solution is $500,000 as the EMV plus the initial cost so it’s $2,750,000 doing it in house you will add the EMV plus the initial cost which will give you $2,825,000. So it’s better to buy the commercial solution.

This is the benefit of using the decision tree analysis. It will help you make decisions today based on future outcomes. Another example he referred to the diagram below was the expected monetary value of result A. So we have resolved A here with an impact of $200,000 but to reach result A will pass from risk one to risk two with a 50% probability and from risk two to result A with 25% probability. So emb of result A will be this probability, by this probability, by the impact. So it’s 50% by 25% by $200,000 it will give you $25,000. Reserves Creation reserves is a provision in the project management plan to mitigate cost and or schedule risk and it’s often used with a modifier like management reserves or contingency reserves to provide further detail on what types of risks are meant to be mitigated.

So reserves are providing in the project management plan to deal with cost or schedule risks. What are the two types of reserves? The first one is the contingency reserves to deal with known unknown, known because they are identified unknown because they are risks. These uncertain events are identified using the Identifier risks process but the amount to which they can affect project objectives is not predictable with a reasonable degree of confidence. This is why it’s known as known unknown risks. Risks remain after applying risk response strategies are residual in the risk register and usually risk remains after applying the risk response strategies are known as residual risks. So a reserve is identified for these residual risks are known as Contingency reserves.

So the Contingency reserves are meant to deal with identifying risks, while the management reserves of these are meant to deal with unknown, unknowns or unforeseen risks. Some risks are not identified using identify risks process and we are not aware about their identity, amount, probability and time of their occurrence known as unknown unknown press management reserves are defined to deal with these kind of rests which are not mentioned in the risk register. In this lecture we are focusing on the Contingency reserves which you can determine using the expected monetary value formula. This table is a high level comparison between the Contingency and management reserves.

Contingency reserves are designed to deal with known unknown uncertainties while the management reserves to deal with unknown unknown uncertainties. Contingency are developed for the accepted risk remains after applying mitigation or risk response strategies. These are residual risks and the risk register, while the management reserves are developed for unforeseen events and these are not mentioned in the risk register. Contingency reserves are included in the performance measurement baseline while the management reserves are not included in the performance measurement baseline. Contingency reserves are part of the cost baseline, but the management reserves, sorry are not part of the cost or schedule baseline.

The management reserves are part of the project schedule of the project budget, but they are not part of the baseline. So what’s the difference between the cost baseline and the project budget? The management reserves are the difference. These reserves are used when residual and unaccepted risk occurs. Management reserves are used when unforeseen events occurs. The amount of time and costs used to account unforeseen work is added to the project performance baseline. The project manager usually has complete authority about the usage of the Contingency reserves, while management reserves usually a formal approval is requested from the project sponsor or the senior manager. Now let’s do some math.

Example number one you are managing a large construction project. The risk analysis reports results are shown in the table below. Based on this information, what are the required cost contingency reserves for your project? So the question is asking about the cost contingency reserves. Five rests are identified in the table, each with given probability and impact. Rest A is an opportunity. Rest B-C-D and E are all threats. The question is asking about the course contingent reserves. So nothing to do with rest C, it’s affecting the schedule. We will check the EMV for risk A-B-D and E. So for risk A is 20% by 100,000, it’s $20,000. Opportunity risk B is 40% by $250,000 it’s $100,000.

Threat risk D is 5% by $400,000 it’s $20,000. Threat risk E is 15% by $300,000, it’s $45,000 threat. So reserves required will be minus $20,000 plus 100 plus 20 plus 45. Always remember to give a negative sign for the opportunity while determining the reserves for your project, as threats will add to the reserves, while opportunities will reduce it. This is why you will give a negative sign for the opportunity, a positive sign for that risk. So to deal with cost identified risks on your project, you will need $145,000 as contingency reserves. Example number two you are done with all your project scope before the risk manager is released from site, he’s discussing with you the final version of the Contingency reserves report of your project.

As per the reserves report shown below what’s the amount of contingency reserve remaining on your project. So this is the final version of the reserves report on your project. Six risks were identified probability impact are given for each risk reserves also are calculated and here is the status at the end of the project. And the question is asking about the remaining reserves on the project. The initial project reserves were $170,000. It’s a very simple question. You will look at risks occurred already we have risks C and D. The only threat you need to be aware of here, that when a risk happened or when a risk occurred, all the impacts will be consumed, not the reserves. Mean when I say that risk C or could already. So the probability of C now is 100%, it’s not 30%.

So the whole $100,000 were consumed from the reserves. So 100 plus 50 we have $150,000 consumed. The remaining would be $20,000 as risk C and D. Accrued the impact of these risks was consumed from the project contingency reserves. So the remaining reserves on your project are 170 -150 per b 20,000. You asked dollars always remember that if a risk occurred, remove its impact, not the associated reserves only the last example, your project contingent reserves are 480,000 kilos dollars now you are middle path your project and you want to update your reserves report. Given that the most critical investment the project was outdated, as it was due to heavy rain in winter, and now you are in June.

The probability and impact assigned for this risk were 20% and $300,000 respectively. What are the remaining reserves on your project? So we have a critical risk which was outdated, and you want to update the reserve report on your project. The very simple question you need to find out the reserves associated with this outdated risk and remove these reserves from the total project reserves. So if the risk outdated, you need to remove its reserves from the total reserves for the remaining will be $480,000 -20% by 300 the remaining reserves. Are $420,000. Always remember that if a risk was outdated, remove associated reserves with the risk, not its impact. This is all for the numerical risk analysis looking forward to see you at the nice lecture.