Question

Question 3 a) Compare and contrast the top-down and bottom-up cost estimation approaches in project management. (50%) b) Explain and describe the purpose of the British Standard BS 6079-3:2000 on project risk management, outlining the typical phases one would have to consider to effectively address project-related risks. (50%)

Project management problem

Answer 1

3.a) Top Down approach:

The Top-down approach is practical for the initial stage of strategic decision-making and in situations where the information required to develop accurate duration and costs estimates is not available in the initial phase of the project. Hence, top-down estimates are used initially until the tasks in WBS are defined clearly, which enable the development of well-defined schedules and budget.

Delphi (Consensus) Method: Uses the pooled experiences of senior and/or middle managers to discuss thoroughly and ultimately reach an agreement of best estimate of the total project duration and costs in the initial stage.

Apportionment (analogous) technique: Uses good historical data of past projects that are relatively standard with minor variation or customization as a reference to allocate duration and costs to the current project.

Bottom-up approach:

The Bottom-up approach is typically more reliable and preferred for estimating because it assesses each work package from the bottom, working up to a deliverable and phase. It is practical to use when project schedules and budget from previous similar projects are available for reference. Estimating duration and costs for each work package facilitates the development of schedules and a time-phased budget, which are required to monitor and control the project as it progresses.

Template Method: The schedules and budget from past projects of similar starts but with different endings can be used as a starting point for the new project. For example, an engineering services company has different sets of standard templates for different equipment repair and site maintenance projects. These templates are used as starting points for estimating the duration and costs of new projects which are similar. Though similar in technical specifications, the equipment of the new project may require to be more sophisticated in performances. Hence, the differences in resources required are defined, and times and costs are adjusted accordingly. Storing of such templates in the company’s database enables the project manager and members to develop potential schedules and budgets of optimal accuracy in a short time frame.

Parametric technique: Uses arithmetic means based on historical data and project parameters that are similar as the current project to calculate its duration and costs. This technique is typically used when the environment is stable.

3. b) This British Standard, a part of the BS 6079 series, provides guidance on the identification and control of business related risks encountered when undertaking projects. It is applicable to a wide spectrum of project organizations operating in the industrial, commercial and public or voluntary sectors. It provides advice on identification and control of business related risks met when carrying out projects. It covers a wide range of project organizations which operate in the commercial, industrial, voluntary and public sectors. It is aimed at project managers and sponsors who are usually responsible to higher authority levels for one or more projects of various kinds. It gives generic advice only and is not appropriate for contractural or certification purposes.

roject risk management is the process of identifying, analyzing and then responding to any risk that arises over the life cycle of a project to help the project remain on track and meet its goal. Risk management isn’t reactive only; it should be part of the planning process to figure out risk that might happen in the project and how to control that risk if it in fact occurs.

A risk is anything that could potentially impact your project’s timeline, performance or budget. Risks are potentialities, and in a project management context, if they become realities, they then become classified as “issues” that must be addressed. So risk management, then, is the process of identifying, categorizing, prioritizing and planning for risks before they become issues.

Risk management can mean different things on different types of projects. On large-scale projects, risk management strategies might include extensive detailed planning for each risk to ensure mitigation strategies are in place if issues arise. For smaller projects, risk management might mean a simple, prioritized list of high, medium and low priority risks.

Project risk is dealt with in different ways depending on the phase of the project.

INITIATION PHASE

Risk is associated with things that are unknown. More things are unknown at the beginning of a project, but risk must be considered in the initiation phase and weighed against the potential benefit of the project’s success in order to decide if the project should be chosen.

Risks by Phase in John’s Move

In the initiation phase of John’s move, John considers the risk of events that could affect the whole project. He identifies the following risks during the initiation phase that might have a high impact and rates the likelihood of their happening from low to high.

1. His new employer might change his mind and take back the job offer after he’s given notice at his old job: Low.
2. The current tenants of his apartment might not move out in time for him to move in by the first day of work at the new job: Medium.
3. The movers might lose his furniture: Low.
4. The movers might be more than a week late delivering his furniture: Medium.
5. He might get in an accident driving from Chicago to Atlanta and miss starting his job: Low.

John considers how to mitigate each of the risks.

1. During his job hunt, John had more than one offer, and he is confident that he could get another job, but he might lose deposit money on the apartment and the mover. He would also lose wages during the time it took to find the other job. To mitigate the risk of his new employer changing his mind, John makes sure that he keeps his relationships with his alternate employers cordial and writes to each of them thanking for their consideration in his recent interviews.
2. John checks the market in Atlanta to determine the weekly cost and availability of extended-stay motels.
3. John checks the mover’s contract to confirm that they carry insurance against lost items, but they require the owner to provide a detailed list with value estimates and they limit the maximum total value. John decides to go through his apartment with his digital camera and take pictures of all of his possessions that will be shipped by truck and to keep the camera with him during the move so he has a visual record and won’t have to rely on his memory to make a list. He seals and numbers the boxes so he can tell if a box is missing.
4. If the movers are late, John can use his research on extended-stay motels to calculate how much it would cost. He checks the moving company’s contract to see if they compensate the owner for late delivery, and he finds that they do not.
5. John checks the estimated driving time from Chicago to Atlanta using an Internet mapping service and gets an estimate of eleven hours of driving time. He decides that it would be too risky to attempt to make the drive by himself in one day, especially if he didn’t leave until after the truck was packed. John plans to spend one night on the road in a motel to reduce the risk of an accident caused by driving while too tired.

John concludes that the high-impact risks can be mitigated and the costs from the mitigation would be acceptable in order to get a new job.

PLANNING PHASE

Once the project is approved and it moves into the planning stage, risks are identified with each major group of activities. A risk breakdown structure (RBS) can be used to identify increasing levels of detailed risk analysis.

Risk Breakdown Structure for John’s Move

John decides to ask Dion and Carlita for their help during their first planning meeting to identify risks, rate their impact and likelihood, and suggest mitigation plans. They concentrate on the packing phase of the move.

EXECUTION PHASE

As the project progresses and more information becomes available to the project team, the total risk on the project typically reduces, as activities are performed without loss. The risk plan needs to be updated with new information and risks checked off that are related to activities that have been performed.

Understanding where the risks occur on the project is important information for managing the contingency budget and managing cash reserves. Most organizations develop a plan for financing the project from existing organizational resources, including financing the project through a variety of financial instruments. In most cases, there is a cost to the organization to keep these funds available to the project, including the contingency budget. As the risks decrease over the length of the project, if the contingency is not used, then the funds set aside by the organization can be used for other purposes.

To determine the amount of contingency that can be released, the project team will conduct another risk evaluation and determine the amount of risk remaining on the project. If the risk profile is lower, the project team may release contingency funds back to the parent organization. If additional risks are uncovered, a new mitigation plan is developed including the possible addition of contingency funds.

CLOSEOUT PHASE

During the closeout phase, agreements for risk sharing and risk transfer need to be concluded and the risk breakdown structure examined to be sure all the risk events have been avoided or mitigated. The final estimate of loss due to risk can be made and recorded as part of the project documentation. If a Monte Carlo simulation was done, the result can be compared to the predicted result.

Risk Closeout on John’s Move

To close out the risk mitigation plan for John’s move, John examines the risk breakdown structure and risk mitigation plan for items that need to be finalized. He makes a checklist to be sure all the risk mitigation plans are completed.

Risk is not allocated evenly over the life of the project. On projects with a high degree of new technology, the majority of the risks may be in the early phases of the project. On projects with a large equipment budget, the largest amount of risk may be during the procurement of the equipment. On global projects with a large amount of political risk, the highest portion of risk may be toward the end of the project.

To summarize:

• During the initiation phase, risks are identified that could threaten the viability of the project. Mitigation options are considered to see if they would be sufficient to protect the project.
• During the planning phase, risks are identified and analyzed for each activity group in a risk breakdown structure, and mitigation is planned for each risk
• During the execution phase, risks are checked off as activities are completed or mitigation is performed if loss does occur. New risks are identified and added to the plan.
• During the closeout phase, insurance contracts are cancelled and partnerships terminated. A summary of actual costs associated with risks are compared with initial estimates to refine estimating capabilities. The successes and failures of the risk management plan are summarized and saved with the project documentation to add to the company’s corporate knowledge.