Chapter 20: Managing Risks in Projects with Decision Technologies

Timothy J. Lowe, Ph.D.University of Iowa
Richard E. Wendell, Ph.D.University of Pittsburgh

Introduction

Chapman and Ward (1997) define project risk as a "threat to [the] success" of the project. They investigate the roots of uncertainty through the systematic analysis of their Project Definition Process—providing answers to the following six questions: 1) Who are the parties involved? 2) What do the parties want to achieve? 3) What is it the parties are interested in? 4) How is it to be done? 5) What resources are required? 6) When does it have to be done? Further, they state that the purpose of risk management is to improve project performance via a systematic identification, appraisal, and management of project-related risk.

Alternatively, Kangari and Boyer (1989) define risk management as a systematic approach to risk identification, goal description, risk sharing and allocation, risk evaluation, and risk minimization and response planning. In a recent paper, Huchzermeier and Loch (2001) define five different types of uncertainty (leading to risk) in research and development (R&D) projects, and study the value of options when these uncertainties are present. The uncertainties considered are variability in market payoff, budget, performance, market requirement, and project schedule.

Thus, under these broad definitions of risk and quite general descriptions of risk management, it is clear that risk avoidance/risk mitigation programs must be multidimensional. These programs often include good management practice and leadership and human resource issues, as well as scheduling, contingency planning, and buffer management (buffer sizing and placement). The focus of this chapter is this latter set of programs in that we analyze the way that a project team can utilize quantitative planning tools to contain project risk and to hedge against its impact on success. We are mostly concerned with schedule risk—the uncertainty of project completion time. We wish to point out early on that our work in this area has just begun, but it appears to be a fruitful area for future research.

Hulett (1995) outlines seven sources of schedule risk:

1. Lack of a realistic schedule developed to a level of detail that accurately reflects how the work will be done, with fully developed work scopes and sequential logic.

2. Inherent uncertainty of the work, arising from advanced technology, design and manufacturing challenges, and external factors including labor relations and such.

3. Complexity of projects, which requires coordination of many contractors, suppliers, government entities, and so forth.

4. Estimates prepared in early stages of a project with inadequate definition of the work to be performed and inaccuracies or optimistic bias in estimating activity durations.

5. Overuse of directed (constraint) dates, perhaps in response to competitive pressures to develop aggressive, unrealistic schedules.

6. Project management strategies favoring late start scheduling or fast track implementation.

7. Lack of adequate float or management reserve.

Hulett argues that the key to risk management is the quantification of risk and the use of software tools to reduce the impact of risk on project schedules. We agree! Indeed, with the increasing power of the computer, better and easier-to-use software, more and better data available, and increasing pressures to manage projects effectively; we believe that using decision technologies to manage risk in projects is now an important part of project risk management. Accordingly, it is the focus of this chapter.