PMI RMP – PLAN RISK RESPONSES part 2

4. CONTINGENCY RESERVES CALCULATIONS

Hi and welcome back again. So in this lecture I’m going to highlight a very important topic for your Pmirmp exam, also for your real life, how we are going to deal with the residual risks, with the accepted risks, we have the contingency reserves. Now, the general defense definition of a reserve. It’s an amount of time or cost added to the project in order to account for risks. So this is the general definition of a reserve. It’s usually in days or weeks or in US dollars. So it’s an amount of time or costs. We are adding this amount to the project in order to account for the risks. There are two types of reserves a the contingency reserves to deal with known unknowns. Known unknowns means the identified risk.

Why it’s known because it’s already identified, why it’s unknown at the same time, because it’s a risk. It’s an uncertain event, so it’s called a known unknown. So the contingency reserves are to deal with the identified risks on the project. Why? The management reserves are used to deal with unknown unknowns risks that might emerge or occur during the project life. And these risks were not identified already. So the contingency reserves to deal with the identified risks, while the management reserves to deal with the unknown unknown or the not identified risks. The management reserve is usually a percentage of the total project cost or duration, and usually this percentage falls between two and 15%.

The contingency reserves can be calculated using a guest percentage or with the expected monetary value formula, which is the most accurate method. So what I want to tell you from this paragraph that there is no formula, there is no math to be done in order to calculate the management reserve. The management reserve is used to deal with unknown unknowns, so there are no basis to find out the required management reserve. So it’s usually a percentage, it depends. Usually in the senior management decision it falls between two and 15%. The contingency reserve can be used can be determined sorry by using the expected monetary value formula.

This is what I’m going to explain in this lecture. When calculating the contingency reserve, threats are going to add to the reserve amount, while opportunity is well reduced. It’s very important to understand this point. When we are determining the contingency reserves for a project, you want to account an amount of time or money to deal with the project risks. So the threat will make the required amount bigger to deal with the threat, while the opportunity will reduce the required amount. This means that when you are calculating the expected monetary value of each risk in order to determine the contingency reserve required for the project, you will give a positive sign for a threat and a negative sign for the opportunity.

Now, what’s the relation between the contingency reserves, management reserves and the project budget or the project duration? The cost baseline equals the cost of activities plus the contingency reserves. How you are going to find out the cost baseline on your project. It’s the cost of the activities which you will have as an output of the estimated activity costs process plus the contingency reserve. What’s the total project budget? It’s the cost baseline plus the management reserve. So management reserves are not a part of the cost baseline. It’s an important concept to understand. The same for the schedule.

The schedule baseline equals the critical path method plus the contingency reserve. The project schedule equals the schedule baseline plus the management reserve. So again, management reserves for the schedule are not part of the schedule baseline. Now, let’s assume you want to find out the project budget, the cost budget of the project. You will start with the lower level, which is the activity or task level. If we have three activities here, a one, a two, a three, a one with $100, a two with $200 and a three with $200, the upper level of an activity or task is the work package. So you will do the sum to find out the work package. One cost is $500.

We have another work packages here. The upper level of the work package as per the work breakdown structure is the Control accounts. So we have control account one and Control account two. The sum of the control accounts is the total costs for the project activities. It’s $2,200. Then you need to add the contingency reserve at this point of time, how we get these $200 through few expected monetary value math formulas which I’m going to show you in the coming slides. Now, the project estimates, cost estimates plus the contingency reserves will give you the cost baseline. So the cost baseline for this project is $2,400. Again, you will add the management reserves.

Now, management reserves plus the cost baseline. Management reserve figure is based on an expertise or a guess or a percentage of the project. The cost baseline plus the management reserves will give you the total project budget. This is called the cost aggregation, how we are going to find the total cost budget from the lower level. So what I want you to understand from this slide that the contingency reserves are part of the cost baseline or the schedule baseline, while the management reserves are not part of the baseline. Now, we are going to solve few examples like the ones you will see in your real example. Example number one, you are planning the manufacture of a new product.

Your estimates result in a net cost of $195,000 and 200 days. So you are managing a product or you are managing a project of manufacturing a new product with a total budget of 195 and a total duration of 200 days. There is a 20% probability of delay in the delivery of final product resulting in 30 days delay. So this is a threat because it will cause a delay to the delivery of the product. So it’s a threat with a probability of 20% and an impact of ferry days. The second risk, there is 10% probability that raw material will be available before expected, saving 20 days. It will save the project 20 days. So it’s an opportunity with a probability of 10% and an impact of 20 days.

The third risk, there is 15% probability of design defect resulting in 80 days delay. So there is a design defect, it’s at risk with a 15% probability and 80 days of delay. The fourth risk, there is 30% probability that resources used are not professional enough in this type of project, resulting in 100 days delay. So again, this is a threat. The last risk, there is a probability of 25% that the design may be simpler than expected, saving 40 days. So this is an opportunity. So we have a threat, an opportunity, a threat, a threat and an opportunity. The risk analysis come up with three threats and two opportunities upon this given information. What’s the required contingency reserve? It’s a very simple question.

In order to find out the contingency reserve for your project, you need to calculate the expected monetary value of each risk alone.Then you will do a regular sum while giving a negative sign for the opportunity. Always remember that opportunities were reduced the required contingency reserve and giving a positive sign for the threats. So we should calculate the expected monetary value for all risk events, memorizing the threats add to the reserve while opportunities reduce it. So risk number one, expected monetary value equals 20% by 30 days. It’s six days of a threat. Risk two, it’s 10% by 20 days. So it’s two days as an opportunity as it will save the project. Risk three, it’s 15% by 80 days, equals twelve days as a threat.

Risk four, it’s 30% by 100 days, equals 30 days as a threat. Risk five equals 25% by 40 days, equals ten days as an opportunity. That’s simple. You need to do a sum, giving a negative sign for the opportunity, a positive sign for the threat. So the two three reserves required for the project, six plus or sorry, minus two, it’s an opportunity. Plus twelve, plus three, minus ten. We need nine days as a contingency reserves for the schedule in this project. That’s simple. Example number two, given the table below, what are the contingency reserves considering risk two occurred already? There is a simple trick in this question. Here is the table. We have risk one with 20% probability, $6,000 of loss, et cetera. Risk two with 10% probability, $4,000 lost.

Again, it’s a threat. Risk 325 percent with an impact of $10,000. It’s a loss again, risk 420 percent by $7,000 and risk five of 10% by $20,000. So we have five risks. The five risks are threats. They all have a loss impact. How? We’re going to find out the contingency reserve for this project, we will calculate the expected monetary value of each risk alone doing a normal sum and we will have the required contingency reserves. Given that risk to occurred already, you are middle back of the project and risk to occur. What does that mean? Risk two occurred already, so the probability of risk two is not 10%, it’s 100% occurred, so it’s a fact. Now a fact have a probability percentage of 100%.

So what is the remaining reserves? We need to remove the total impact of risk two to find out the remaining reserves, not the expected monetary value of risk two because the risk occurred already, so all the impact of the risk occurred. As all risks are threats, it will cost the company. The total reserves will be the sum of each risk. Expected monetary value formula equals probability by impact. So it’s 20% by 6000 plus 10% by 4000 plus 25% by 10,000 plus 20% by 7000 plus 10% by 20,000. So the total reserves on the project are $7,500. Now, as risk two occurred already, we need to remove the whole impact of risk two applying the same formula but with 100% probability because the risk occurred, will give you the impact value.

So the remaining reserves will be $7,500 minus the impact of risk two which is $4,000 equals $3,500. Remember, if a risk occurred, remove its impact, not its associated reserves because the risk occurred already, so the whole impact was consumed from the reserves. Example number three, given the table below, what are the contingency reserves needed for the project? We have four risks risk A with an impact of $20,000 lost and the contingency reserve is given 4000. For risk B it’s 6000. For risk C it’s 8000. For risk B it’s 4000, so the probability is not given. Here the question is asking about the contingency reserves for the project. The four risks are lost, so they are old threats.

The reserves are given for each risk, so it’s a simple sum the reserves will be 4000 plus 6000 plus 8000 plus 4000 it’s $22,000. Example number four, given the table below, what are the contingency reserves needed for the project? If risk C probability become 30%, so we have four risks here the impact of each risk is given and the contingency reserve for each risk is given. The question is asking about the two reserves f risk C probability become 30%. That simple. Risk A reserve is given, risk B reserves is given and risk D also reserves are given. If risk C probability becomes 30%, I need to calculate the reserves associated with risk C which is 40,000 by the new probability per each person.

So the risk C new reserves equals $12,000. So the new reserves equal for the total project 4000 plus 6000 plus 12,000 plus 4000 it’s now $26,000. Now the last example given that below, what are the contingency reserves needed for the project? S risk a is outdated. So here is a new track in this question. We have four risks here risk A with a probability of 10% and an impact of ten days delay. Risk B with 10% probability and 20 days delay. Risk C with 15% probability and ten days savings. Risk B 30% with six days delay. So we have three risks here. Three of them are threats and one of them is an opportunity. The question is asking about the remaining reserves given that risk A is outdated. Now, risk A is outdated means that risk A is expired.

Assuming you are identifying a risk for dealing with tough weather in the winter at January and today it’s June, so this risk is outdated, it’s expired. The trick here that when a risk is outdated, you will remove the associated reserves of this risk and return back to the organization. You will not remove the total impact. It was outdated only it was expired. So what are the reserves associated with the expired risk? You need to remove them from the contingency reserves. The total reserve will be the sum of each risk expected monetary value. Applying the AMV formula equals p by I given positive four threats as they will add to the reserves, while opportunities will reduce it. Reserves equal 10% by ten days plus 10% by 20 days minus because this one is an opportunity, it’s a saving 15% by ten days plus 30% by six days.

So the total reserves of the project is 3. 3 days. Now, if Fresk A was expired or outdated, I need to remove the reserves only of Fresque A. The reserves of Fresque A is 10% by ten days. It’s only one day. The remaining reserves are 2. 32. 3 days. Remember, if a risk was outdated or expired, remove the associated reserves with the risk and not its impact. If the risk was accurate, you will remove its impact. As the risk here is only outdated, you will remove the risk. Associated Reserves this is all for the contingency reserves calculations, a very important topic for the exam. You need to expect much less than four to five questions similar to the ones I explained in this lecture. Thank you so much. Looking forward to see you at the following lecture.

5. OUTPUTS

Hi and welcome back again. Now what are the outputs we will have once we are done with the planned risk responses process? We will have a lot of updates on the risk register which you need to memorize for the PMI Rmp exam. First of all, we will have the change request. Planned risk responses may result in a change request to cost and schedule baselines or other components of the project management plan. As we are developing risk responses in this process, these risk responses may trigger a change request to any of the project documents of the project management plan components, especially the resources, cost and schedule management plan and the cost and schedule at scope baseline. Project Management Plan Updates The first document that will be updated as a result of the plan that’s responsible process will be the schedule management plan.

Changes to resources loading or leveling or to the overall schedule strategy might occur as a result of this process. The Cost Management plan as changes to cost accounting, tracking and reports quality Management plan changes to approaches meeting quality requirements and quality management approaches in case there is any agreed upon best response that might affect the quality requirements on the project. The Resources Management Plan as changes to resources allocation and strategy might occur. The Procurement Management Plan There is a strong connection between the response strategies of the transfer and share and the procurement management plan changes to alterations and contract types scope Baseline changes to scope may arise due to agreed upon risk responses.

Changes also to the schedule and cost might arise due to the agreed upon risk responses. Few project documents might be updated starting with assumption block that will be updated to the new assumptions made in this process. The cost forecast might be updated due to risk response plans. The Lessons Learned Registered if there are any new lessons related to the plan risk responses, process the project schedule as activities relating to agreed upon risk responses will be added. Project Team Assignments once responses are approved and confirmed, necessary resources should be allocated to each action associated with the risk response plan.

The risk register updated when appropriate risk responses are chosen and agreed upon updates may include now the updates of the risk register are very important for the exam. First of all, the agreed upon risk response strategies will be documented and the risk registered the residual risks which are risks that remains after risk response planning, including those that have been accepted and for which contingency and pullback plan can be created. So the residual risks are the ones that remain once you are done with the plan risk responses process the contingency plan plans describing the specific actions that will be taken if the opportunity or threat occurs. Now, we have few risks, either threats or opportunities that was accepted.

It was an active acceptance. So what we are going to do once these risks occur we will implement the contingency plan. So contingency plans are made to deal with the actively accepted risks. The risk owners, the person who may help develop the risk response and who might be assigned to carry out the risk response. The secondary Risks what is done to respond to one risk might cause other risks to occur. Those are the secondary risks. The risk traders. The early warning signs for each risk on a project should be determined to know when to take action. Risk Triggers it’s the responsibility of the risk owner and the risk action owner to monitor the risk triggers. They are early warning signs. They are like symptoms that risk is about to occur. The fall back Plans specific actions that will be taken if the contingency plan is not effective.

So the contingency plan is the first thing we are going to implement once an accepted risk. Of course, if the contingency plan was not effective, we will implement the full back plan. The contingency reserves for schedule and cost are required as part of the project management and they will be finalized and determined as a part of the plan risk responsive process. The risk report also will be updated to present the agreed upon responses to the current overall project risk exposure and high priority risks. So this is all for the outputs of the planet’s response to the process. You need to memorize these updates of the risk register as an output of the planet’s response to the process. Thank you so much. I will see you at the next lecture.

6. SUMMARY

Hi and welcome back again. So as a summary of the plan risk responsive process, the objective of the planet’s response to the process is to determine what you can do to reduce the overall risk of the project by reducing the probability and impact of negative risks or threats and increasing the probability and impact of positive risk risks or opportunities. Strategies are agreed upon in advance by all parties. Not enough to suggest a risk response strategy. They need to be approved by all concerned parties. Risk responses, contingency plans and fullback plans are selected within the plan risk responses process. Risks are assigned to individuals or groups vote for the risk and take responsibility of implementing the planned risk responses. Specifically the risk owner and the risk action owner.

Strategies are reviewed over the life of the project for uncertainties about the project become known as possible. So we need to keep a look on the strategies and to update them when needed. Now, the key terms which you need to be aware of. Now, first of all, the plan risk responses process the exploits enhanced accept escalate, avoid mitigate transfer you can mitigate the probability or mitigate the impact residual risks secondary risks trigger risk response plans, contingency plans fall back plan reserves management and contingency reserves insurance contract risk owner and risk action owner. You need to be aware of all these terms for the PMI Rmp exam. This is all for this lecture. Thank you so much and we’ll see you at the next lecture.