Estimating and risk management are two very important areas of project management. To estimate is to make approximations of future outcomes, mostly based on incomplete input. To manage risks is to discover unknowns that may impact your project objectives. Good project management practices include tools and techniques to manage uncertainties and risks.
Let’s take a look at an example to explain some of the techniques and their application. Assume you drive to work by car every day. Your work starts at 9 a.m. and the distance is 15 km. You want to know when you have to leave in order to arrive on time (not too late, but also not too early).
On your first day you are most likely to leave early, to make sure you are on time. After driving to work for 5 years, you may know very well when you have to leave in order to arrive on time. However, an exact estimate will still not be possible. This built-in variability in driving times is called estimating uncertainty. Using a 3-point estimating technique instead of giving a deterministic one-figure estimate can cover this uncertainty.
Taking the same route for years will result in lower estimating uncertainty. However, some unforeseen events may still happen. For example, a car accident may block the road for half an hour which will make you late. A risk is an uncertainty that may occur. If it occurs, it will result in a deviation from our estimate.
As a project manager you have to identify risks and have to decide if you want to take pro-active actions to mitigate for the risk (risk responses) or if you will accept the risk (do nothing). Risk responses are actions included in the plan in order to reduce our exposure to a risk.
Both estimating uncertainty and risk responses are part of the project baseline.
You may decide to accept a risk. Doing nothing is called passive acceptance. This means, you always leave on the same time, whatever happens.
Another option would be to create a back-up plan, a contingency plan. You could listen to the news on the radio as soon as you wake up. When you hear an accident has occurred, you may leave earlier. It is something you will do only in case the risk occurs. If the risk does not occur, you won't do anything. A contingency reserve is a reserve you foresee in order to cover for the exposure for known risks.
While a contingency reserve is directly related to the risks identified in the risk register, there may still be unforeseen events. Suppose you listen to the news in the morning and no traffic problems were announced. But on your way to work you get a flat tire. You may decide to incorporate buffers for unknown unknowns in your estimate. For example, you know that it normally takes 20 minutes to drive to work, you may leave at 8:30 p.m. to cover for unexpected events.
The management reserve is not a part of the project baseline and is a buffer for unknown unknowns. The project manager can only use management reserve after approval of the project sponsor. Contingency reserve is typically included in the baseline. It can be used in case an identified risk occurs.
It's important that project managers are aware of uncertainties and risks and know to deal with them appropriately. A well thought out approach can help reach project success. Feel free to contact us for more information.