UNIT-4

Risk Management

Risk Management is the art and science of dealing with risks. During planning this involves defining

a comprehensive approach to risks: identifying them, quantifying them, and creating a risk response

plan. During execution, the project manager monitors and controls risks.A risk is an uncertain event or
condition that, if it occurs, has a positive or negative effect on the project.

It often comes as a surprise that the definition of a risk includes the idea that a risk can be positive.

People usually assume that a risk has only negative consequences, and that risk management consists

of mitigating the impact of the things that can go wrong. However, it is as important to enhance the

effects of the positive risks as it is to mitigate the impact of negative risks.

Consider the following examples of risks:

1. The staf do not have the required technical skills.

This is a negative risk, and the job of the project manager is to develop a strategy either to

prevent the risk from occurring (e.g., by changing staff assignments), or mitigating the risk (e.g.,

by implementing a training plan).

2. The subcontractor can provide the deliverable earlier than planned.

This is a positive risk. If the deliverable is on the critical path, this may result in accelerating

the schedule. The project manager should work to maximize the positive impact of the

subcontractor’s early delivery, perhaps by providing extra staff to help with delivery

documentation.

Risk Causes and Consequences

Risks have causes: For example, people get sick, the scope changes, a construction permit takes

longer than anticipated.Risks also have consequences: For example, some consequences associated with
the above risks are:
Risk Consequences

People get sick Inexperienced, replacement personnel make mistakes.

Scope changes Change in scope increases the cost. Permit delayed Completion is delayed.

Scope creep.

• Insufficient or poor resources. An expert may be needed simultaneously in two places.

• Pressure to compress the schedule from customers or management.

• Pressure to reduce the cost from customers or management.

• Lack of a formal project management process. Uncontrolled changes are a major source of confusion
and delay.

• Stakeholder friction. Stakeholders can hold up approvals if they feel their particular interests

are not being satisfactorily addressed.

• Poor communications. Team members will not know what to work on, or how to prioritize

their time. Customers will not understand the status of the project. Stakeholders will not know

what is going on.

Known Unknowns and Unknown Unknowns

When trying to identify risks, one is always looking into the future, so it is an uncertain business. For

a risk, its degree of uncertainty can be classified as follows:

Known unknowns: These are risks that can be identified. A good way to identify risks is by

reviewing similar projects. An example from the New Kitchen project is:We have to install a gas line in
the kitchen and on the last project the permitting process was delayed by 6 weeks.

Unknown unknowns: These are the events we did not expect, things we had no idea about, as in:

What?! You can’t quit, you’re our best programmer!

Technically, unknown unknowns are risks that were not identified. NASA space exploration

missions provide fascinating examples of things that went wrong that no one could possibly have

anticipated. On a more mundane level, it is just not humanly possible to anticipate all risks.

Risk Strategies

The approach to dealing with risks is to formulate a strategy for both negative and positive risks.

Strategies for negative risks

The negative risk strategies are: avoid, transfer, mitigate and accept.

Avoid: If possible, this risk prevention strategy should be the first choice.

A technique of risk avoidance is to change the scope, which changes the project’s functionality so

that the risk cannot occur. For example, if the kitchen does not have gas, and the installation of a

gas stove introduces an unacceptable delay, then propose an electric stove.

Avoidance:This strategy is to defer risky parts of the specification to a future delivery.

The advantage of avoid is that you do not need any contingency funds or schedule buffers. You

have eliminated the risk.

Mitigate: In this approach, one attempts to reduce either the likelihood of the event occurring or

its impact, or both. This can result in lowering the ranking of the risk from high to medium, or

even low. In practice, it is unlikely that a risk can be entirely prevented from occurring.

An example of mitigation is as follows: Assume that an information technology project plans to

use a new, sophisticated development system, and the organization does not have any previous

experience with it. One mitigation strategy is to send the inexperienced staff members for training.

Notice that mitigation almost always involves extra cost. In the above case, training funds will be
required to mitigate the risk of inexperienced staff.

Transfer: In this strategy, we outsource the risk to a third-party. Often, risk transfer involves

investing in insurance, performance bonds, or warranties. An example of risk transfer is the

hiring an expert consultant to build a difficult piece of the project. The transfer of risk usually

involves extra funds.

Accept: In this strategy, we accept the reality that the risk can neither be avoided, mitigated, nor

transferred. The project team then decides to take a chance and accept the risk. The team

recognizes that they will have to deal with this risk if, and when, it occurs. To allow for the risk,

the project manager should set aside contingency reserves of time, money and staff. An example of

accepting a risk is: A deliverable is to be supplied by an unreliable subcontractor who holds a

monopoly on the technology and there are no alternatives. The only option is to accept the risk.

Strategies for Positive Risks

Positive risks can enhance the performance on a project. As there were with negative risks, there are

four strategies for dealing with positive risks: Exploit, enhance, share, and accept. These strategies

parallel those for negative risks.

Exploit: Here we leverage our strengths and attempt to take advantage of the risk. For example,

the company might have talented programmers and assigning them to critical deliverables may

result in early completion at a lower cost.

Enhance: In this strategy, we attempt to increase either the likelihood or the impact of the risk

occurring. An example of risk enhancement is as follows: If an activity is finished early freeing

up staff, then they can be assigned to activities on the critical path to shorten the schedule.

Share: Here, we enhance the opportunity for project success by teaming with a third party and

delegate to them pieces they are better equipped to perform. Large projects usually share risks

among several companies, each with their own expertise. For example, Boeing subcontracts the

design and development of jet engines to third parties.

Accept: Here we acknowledge that we cannot construct a viable strategy for maximizing the

benefits of the positive risk, so we accept the status quo.

Planning Risk Management

The purpose of the Plan Risk Management process is to create the overall management approach to

risks. Since this is a plan, the most appropriate tool is a template, the key components of which are:

• Risk management scope and objectives.

• The methodology to be used for risk identification, assessment, quantification, and response,

as well as for monitoring and control.

• The participants in the risk analysis process.

• The risk analysis tools to be used, and identification of helpful templates and other

organizational process assets.

• Risk prioritization, e.g., risks impacting cost take priority over schedule. Risk weights, labels,and
selection guidelines.

• The communications approach for risks when distributing status reports, including protocols

for elevating risks to sponsors and senior management.

Identify Risks

The goal of the Identify Risks process is to create the Risk Register, which contains a list of risks,

and evolves to include their assessment and ranking in importance.

PMI introduced a Practice Standard for Risk Management [29], which contains a comprehensive

description of risk analysis tools and techniques, their strengths and weaknesses, as well as critical

success factors for their effective application. The standard suggests that a useful method of

identifying risks is to continually repeat the following mantra:

Because of <one or more causes>, <risk> might occur, which would lead to <one or more

effects>.

The following is a list of risk identification techniques:

• Assumptions and Constraints Analysis: Each assumption and constraint in the project scope
statement represents a risk. This can be used as a starting point to identify risks during the

planning stage.

• Brainstorming: The project team, and other stakeholders, should be encouraged to generate a

list of risks in a facilitated process.

• Cause-and-effect (Ishikawa) diagrams: This visual diagram promotes brainstorming,

clarifies root causes, and helps develop mitigation strategies.

• Checklists: By examining historical data from similar projects, a list of relevant issues can be

developed. Project lessons are sometimes available in industry databases, and are a great

source for risk identification.

• Delphi Technique: This is similar to brainstorming, but is a structured and formal process that

requires formal facilitation and anonymity.

• Influence Diagrams: Risks can be inferred from this diagram, which shows the main project

entities and decision points, uncertainties and outcomes, and the relationships among them.

• Interviewing: This is similar to brainstorming in that expert consultants are interviewed to

help identify and understand risks.

• Historical information: Organizations with good project management assets have a

repository of lessons learned—an invaluable resource for identifying risks.

• Questionnaires and Software: Software that prompts the project team or stimulates creativity

can help with risk identification.

• Risk Breakdown Structure (RBS): The RBS is a valuable tool for identifying and classifying

risks.

• SWOT analysis: A SWOT analysis might be available, since it is often part of the business

case. If not, the team can perform a SWOT analysis, focusing on threats and weaknesses.

• WBS: This provides a comprehensive overview of all activities and can act as a starting point

for brainstorming another source of risks.

 QUALITY MANAGEMENT

Quality is the degree to which a set of inherent characteristics fulfills requirements.

Key Concepts

The International Standards Organization (ISO) is widely known to provide resources pertaining to

quality standards. The PMBOK approach is compatible with a variety of approaches, such as Total

Quality Management (TQM), Six Sigma, and Continuous Improvement, as well as approaches from

quality theorists such as Deming, Juran, Crosby and others. Here is a quick overview of some of the

above concepts.

TQM is a quality management philosophy from the noted expert Dr. W. Edwards Deming. It is uses

statistical analysis to measure whether a process is in control. More importantly, Dr. Deming

introduced the concept that quality should be planned in, not inspected in, and that investing in quality

saves money.

Six Sigma is a methodology also rooted in statistics. The focus of the Six Sigma Quality standard is to

reduce process output variation, for instance, focusing on processes continuously over time to reduce

the defect rate to no more than 3.4 defects per million opportunities. In terms of standard deviation,

for instance, Six Sigma translates to being 99.99966% defect free.

Continuous Improvement, which is also known by its Japanese name Kaizen, is a proactive approach

to quality management. It focuses on not being content with things the way they are, but instead

seeking continuous process improvement.

Zero Defects is a quality management philosophy from Philip Crosby. As the name suggests, its basic

approach is to do something right the very first time. Investing money up front will minimize the need

for rework and further expenses down the road to fix defects.

Fitness for Use was designed by Joseph Juran, and focuses on identifying and meeting the real needs

of stakeholders.
Gold plating is the practice of providing more features than the customer asked for. From a project

management perspective, gold plating can result in a project that is risky and expensive.

Quality Planning

The quality plan defines the standards that the project should achieve. The team can either adopt

existing, well-defined quality standards or create new standards by defining quality metrics for the

deliverables. A good quality plan guides the project team by identifying procedures for both quality

assurance and quality control and provides a means to confirm that quality objectives are being met.

Cost-Benefit Analysis.

The concept of a quality cost-benefit analysis is similar to a traditional cost-benefit analysis. The

team focuses on creating a business scenario for several quality activities and compares the

investment in such activities with the perceived benefits, such as higher productivity, less rework,

lower-cost and better reputation.

Benchmarking.

This refers to comparing a project’s internal production process with industry standards with the idea

that the comparison will result in establishing a viable quality standard for the project at hand.

Cost of Quality.

This refers to determining the total cost of quality over the life of a project, and includes:

• Cost of Conformance, which is the money spent to avoid problems and to build a quality

product or service. Investing in cost of conformance is money well spent as it reduces failure costs.

Examples include:

–Prevention Costs: Investment in quality through testing and inspection; training or

acquisition of automated equipment; investment in time and effort to document processes

properly; and creating checklists to communicate the correct way to do things.

–Appraisal Costs: The costs associated with determining the appropriate level of quality
required, such as inspections, testing and stakeholder product evaluation.

• Cost of Non-Conformance: This is the money spent to fix problems and is a result of failures

or quality expectations not being met.

• Internal Costs: Costs identified with the scope of the project, such as scrap or thrown-away

pieces, i.e., work that was not judged worthy of inclusion and that had to be re-done.

• External Failure Costs: The costs associated repairing a project after it was delivered, i.e.,

warranty fulfillment and liability costs.

Quality Audits.

A quality audit should confirm if the quality processes are functioning correctly and deliverables are

meeting the project’s objectives. If the benchmark cannot be achieved then a comprehensive review is

undertaken to see if the initial goals were appropriate. Steps are taken to get the project to the

expected level of quality.Quality audits are formal reviews and should be scheduled at key intervals
during the project. They can also be conducted randomly as needed. The internal QA department is
involved along with experts from outside as required. The lessons learned from a quality audit should be
documented so that both shortcomings and strengths are evident to stakeholders.

Process Analysis.

The current processes are analyzed to determine if improvements are needed. For example, a process

analysis may reveal an opportunity to reduce waste or save time, in which case the project manager

might recommend a new process be implemented. Process analysis may include a root cause analysis.

Quality Control

Several tools play an important role in evaluating the quality of deliverables.

Cause and Effect Diagrams

These are also called Ishikawa diagrams or fishbone diagrams, and are a useful tool for getting to the

root cause of a problem. They are used in general problem solving, discovering bottlenecks and

uncovering process issues. In team meetings, Ishikawa diagrams are an excellent communication tool.

The source of a problem is uncovered by asking the ‘Why?’ question three times. For example,

suppose it is observed that pizza delivery is more likely to be late on weekends. The analysis of this
problem begins by asking the following question:

Why is pizza delivery late on weekends? Assume the response is that there are employee

issues, resource issues, and quality issues. Brainstorming continues with a second round

of ‘Why?’

Why are employees inadequate on weekends? The second ‘Why?’ is trying to uncover

possible causes. Suppose the causes are: Weekend employees are unhappy and quit

frequently. Therefore, adequately trained staff is not available on weekends.

Why are employees unhappy? Brainstorming continues with a third ‘Why?’ The answers

include: Wages are low and benefits non-existent. Also, funding is not available for

training and instructors are not available to train the weekend crew.

Human Resource Management

Human Resources (HR) management is one of the areas where project management borrows heavily

from general management principals. In this chapter we will cover some of the traditional HR theory

and wrap up with the tools and techniques that are associated with HR management as it applies to

projects.A project manager must possess a wide variety of skills, including leadership, communication,

negotiation, influence, and conflict resolution. A project manager must be a mentor, and be able to

motivate and manage the project team after the initial excitement of project kick-off has faded. A

project manager also needs strong skills in delegating and follow-up.

Develop Human Resource (HR) Plan

This is the process of organizing, managing, and leading the project team, and it is documented in the

HR Plan. To assemble the HR Plan, the project manager uses company organization charts and

position descriptions to define the positions. To acquire the team requires soft skills, such as

networking.

Hierarchical Charts.
These are the organizational charts that most organizations publish. They are hierarchical and show

titles, positions, and reporting relationships, and are easy to understand—see Figure 15.1.

Matrix Charts.

These are useful tools that associate a resource name with a work package and project responsibility.

One such chart frequently used during the planning stages is the Responsible, Accountable, Consult,

Inform (RACI) chart.

Typically, only one resource is assigned the Responsibility (R) label. The person accountable for the

work is given the (A) label. Of course, there might be sharing or delegation involved. Typically, the

sponsor is given the Inform (I) label as they need to be kept up-to-date on progress. Staff members

who are consulted are designated with the Consult (C) label.

You should try to avoid giving a person more than one label. Each person is assigned as either

responsible, accountable, consulted, or informed. An example is shown in Figure 15.2.

Acquire Project Team

During the execution phase, the project manager assembles the team. The project manager develops
staff assignments and resource calendars, which explain who is assigned to what activity and when.

In acquiring the team, the project manager makes sure that it is a balanced and effective mix.

When assigning resources, the project manager considers previous experience, matches skills with

activity requirements, and assesses leadership and communication styles. The personal desires and

interests of a team member should not be overlooked.

The key concepts in acquiring a team are:

Pre-Assignment:

This refers to the fact that some project team members may be selected in advance.

Negotiation:

In a matrix structure, the functional manager controls resources. The project manager has to influence

the functional manager to obtain the best mix of resources.

Acquisition:

This is the procurement of resources from outside the project.

Virtual teams:

This refers to teams that are not co-located and have very little opportunity for face-to-face contact.

Some of the team members could be in another city or even another country.

Since distributed project development occurs in many large organizations, the project manager must

be able to assure an effective pattern of communication, and develop a team where the members trust

each other.

Develop Project Team

After the project staff assignments have been completed and calendars created for the resources, the

next step is to Develop Project Team. The following skills, tools and techniques are used during this

process:

Soft skills:
Project managers that have good soft skills can ensure smooth running of projects by sincere

communication with project team members and true empathy. Such skills are vital in negotiation with,

and influence of, stakeholders.Do not forget that project team members are stakeholders.

Training:

This is essential to ensure that the team members are well prepared to accomplish their tasks,

preferably before they start working on them. Scheduling training proactively can mitigate quality

risks and reduce costs.

Team-Building Activities:

Good team building activities help teams to perform synergistically. Early team building activities

may include simple introductions (which help through communicating previous experience and

hobbies), clarifying roles and expectations, and describing the management process.

More significant team building may include comprehensive off-site, facilitated, workshops focusing

on bonding and integration of diverse personality types.

Phases of Working Teams:

Forming:The team is formed and they look to the project manager for guidance and direction.

Storming: Team members compete for position, as they establish their relation to other

team members. The project manager might be challenged at this stage. The project

manager must intervene proactively, before conflicts get out of hand. If a project manager

has defined clear roles and responsibilities, the storming stage will be brief.

Norming: Agreement and consensus occurs in the norming phase and the team works well

under the direction of a project manager.

Performing: The team is “strategically aware” and motivated, knows what it is doing, and

where it is going.4

Adjourning: The team breaks up, which occurs during the closing stage.
Recognition and Rewards

Motivation recognizes and promotes desirable behavior and is effective when carried out by the

management team and the project manager. This is an important skill for the project manager:

Encouraging the required behavior from the team. To develop teams requires understanding of the

following theoretical concepts:

Maslow’s Hierarchy of Needs

Dr. Abraham Maslow proposed that a person’s needs must be satisfied in the following hierarchy:

Physiological, Safety, Social, Self-esteem, and Self-actualization. See Figure 15.3.

The primary motivation for an individual is to satisfy their basic physical needs, such as food, drink,

shelter and warmth. Only when these needs are satisfied can a person begin to deal with the higher

level needs.

The next level deals with safety, and applies to needs such as protection, law and order, and stability.

Social needs deal with the desire to belong to a group and involves family, affection and

relationships.
The next level in the hierarchy is where individuals are motivated by self-esteem, which includes

achievement, status, responsibility, and reputation.

Finally, when all of the needs in the lower end of the hierarchy have been fulfilled, a person can begin

to deal with self-actualization. Such an individual is motivated by personal growth and fulfillment.

A project manager must realize that team members are usually motivated by personal growth and

fulfillment and so must take time to identify each member’s interests and how to achieve them.

McGregor: Theory X and Theory Y

Douglas McGregor defined two models of worker behavior: Theory X and Theory Y. Theory X

managers believe that team members will not perform their duties unless threatened or closely

supervised.

On the other hand, Theory Y managers believe the team will perform well if given the right

motivating environment and appropriate expectations.

Managers that practice Theory Y behavior are much more likely to succeed in a project environment

because, as we learned from Maslow’s Hierarchy, project team members tend to be motivated by

personal growth and fulfillment.

Herzberg’s Theory of Motivation

Herzberg’s “motivation-hygiene” theory proposes that certain motivator and hygiene factors affect job

satisfaction and dissatisfaction. The hygiene factors merely prevent dissatisfaction. Examples are

pay, benefits, the conditions of the work environment, and relationships with peers and managers.

The motivation factors are those that lead to satisfaction and deal with the substance of the work

itself. These include the ability to advance and the opportunity to learn new things.

According to Herzberg, pay (a hygiene factor) will not motivate project teams, but new

responsibilities (a motivation factor) might.

Expectancy Theory

Expectancy theory deals with how the expectation of a positive outcome can motivate people to

perform and drive outcomes. People will behave in certain ways if they think there will be positive

rewards for doing so.If a project manager expects the team to succeed, they will. If the project manager
believes they will fail, they will not be motivated and just might fail!

Manage Project Team

During the project, the project manager tracks each team member’s performance, provides feedback

to his or her manager, manages resources, and resolves conflicts. The following tools and techniques

are used when managing project teams:

Observation and Conversation:

A simple example of communication with team members is inquiring about their work and the issues

they face.

Project Performance Appraisals:

Periodic feedback can help team members, especially if constructively given.

Use of Issue Logs:

The project manager should keep a written log of issues with target dates for them to be resolved.

Interpersonal Skills:

This involves an appreciation of:

• Leadership: Varying leadership styles exist, such as, directing, facilitating, coaching,

supporting, autocratic, consultative, and consensus.

• Influencing skills: This requires good listening skills, the ability to persuade and articulate

points and positions, and building trust.

• Effective decision-making: This requires clearly understanding the project goals, having a

well-defined process to follow, consideration of risks and opportunities, and the ability to

come up with creative solutions.

Conflict Management:Conflict and frustration occurs in most projects. Conflict is natural in all
organizations due to different values. The modern theory is that conflict is good as it can create deeper
understanding and respect.

Two skills that a project manager must develop are:

• Encouraging functional conflict: The project manager encourages dissent by asking tough questions,
encouraging different points of view, and even asking the team to consider an unthinkable, or even
unpopular, alternative.

• Managing dysfunctional conflict: This involves working through the natural stages of a

conflict: mediate, arbitrate, control, accept, and closure.

The following techniques are methods for resolving conflict:

• Withdraw: Avoid or retreat from an actual or potential conflict scenario.

• Smooth: This is also called “accommodate,” and involves emphasizing areas of agreement,

rather than the conflict at hand.

• Compromise: This involves concession and conciliation. Neither party involved in the

conflict gets what they value the most. This is generally considered to be a lose-lose strategy!

• Force: One of the parties involved in the conflict imposes their viewpoint at the expense of

the others. This is a win-lose scenario!

• Collaborate: This leads to consensus and commitment and involves consideration of multiple

viewpoints.

• Confront: This is also known as “problem solving,” and involves facing the conflict boldly,

and brainstorming to come up with a win-win alternative. This takes more effort than

collaborate or compromise, but is generally considered to be the best approach for resolving

conflicts.

Communications Management

Communications Management is all about keeping upper management, stakeholders, and the project

team in the loop throughout the life of a project. In large projects, communications can become a very
complex because the number of communication paths rises rapidly as the number of people increases.

Projects led by project managers with strong communication skills have a much better chance of

success.

Examples of communications skills include listening and understanding people, in all modes of

communication, speaking, writing, and presenting. Communication management skills also include

communication planning, information distribution, performance reporting, and stakeholder

management. We introduce some communications theory as well tools and techniques to assist the

project manager in these activities.

Communications Planning

Inexperienced project managers often spend too little time planning their project communications.

This should be a big concern, however, as project managers spend a substantial fraction of their time

communicating. It is less glamorous and more challenging to identify communication requirements and

to create a communications management plan than to analyze risks.

There are four main types of communication and, generally, a combination of all four occurs in all

projects. The four types of communication are: formal, informal, written, and verbal. They are used in

the following combinations:

Formal Written: Used to communicate specifications, product requirements and change control.

Formal Verbal: Used in official presentations such as status reviews.

Informal Verbal: This includes project team meetings.

Informal Written: This includes non-legal documents and general notes.

The Communication Management Plan is the primary output of the communications planning

process, and becomes part of the project plan. It informs all stakeholders how and in what form

communications will be handled on the project. An example of a portion of a communications plan is

given in Figure 16.1.

16.3 Techniques to Identify Communication Requirements

The following resources are helpful in identifying communication requirements: organization charts,

project structures, the stakeholder register, and data on the functional departments involved with the

project.

Communication complexity and communication channels increase rapidly as the number of people on

the project rises. For example, the number of interactions between n people is n(n−1)/2. For example

if a project has two stakeholders n = 2 and the number of communication channels is 2(2 − 1)/2 = 1.

If the project has four stakeholders the project has 4(4 − 1)/2 = 6 communication channels. If a

project has 12 stakeholders there would be 66 communication channels indicating a challenging

communication problem if the project manager needs to manage them all.

A theoretical communication model is helpful in understanding the communication process. This

model is shown in Figure 16.2, and consists of the following components: Encode and decode;

message and feedback; and medium and noise. The message refers to the verbal (spoken or written)

symbols, as well as nonverbal signs, which also represent information that the sender attempts to

convey.
The first issue in the above simple model is that unless the sender receives feedback of the message

just communicated (e.g., via parroting), the sender cannot be sure that the message was properly

received (let alone understood). The model also indicates that both the sender and the receiver have

to be good listeners, otherwise the message cannot be decoded properly.

Adding to the complexity of the basic communication model is that many things can interfere with the

transmission of the message. We classify such barriers as filters and noise, and list some examples

below:

• Distance, unfamiliar technology, lack of background information.

• Different spoken languages or use of unfamiliar technical jargon; physical separation;

different cultural, educational, or social backgrounds.

• Sabotage also hinders communication and could include hidden agendas, and power plays.

• Having a pre-determined mind-set or a self-fulfilling philosophy, can result in

miscommunication.

• Historical considerations, such as the manner in which a task was “always done in the past,”

can also jeopardize communication.

A project manager facing the challenges described above must create a communication plan which

clearly specifies the appropriate format, duration and frequency of communications to mitigate the

risk of communication failure.

Tools & Techniques to Distribute Information

The goal of Distribute Information is to share information with the team, project sponsors, and

stakeholders. Examples used to distribute information include individual and group meetings, video

and audio conferences, and computer chats.

Examples of information distribution tools include electronic communication and conferencing tools,

such as e-mail, telephone and web conferencing, as well as web portals and project management

software.

Procurement management

Procurement management defines how the project manager purchases products or services from

sellers outside the project. This is accomplished by developing and awarding a contract. There are

many types of contracts, and the project manager selects the type that assigns to the seller both a

reasonable risk and the greatest incentive for efficient and cost-effective performance.

We begin with the definition of a contract:

A contract is a mutually binding agreement that binds the seller to provide specified

products and services, and also obligates the buyer to provide monetary or other

valuable consideration.

For a project, the contract will usually reference the scope document as the definition of what is to be

provided. We note here that the scope not only includes the specification (the definition of the

project), but also major milestones, schedule constraints, etc. Thus the scope becomes the

fundamental basis of the contract, and every statement carries legal implications.

The above definition is a simplified version of that found in legal books.

The project manager is considered to be the buyer of the services and the contractor providing the
goods or services is called the seller.

There are two contracts that the project manager must be aware of. The first is the contract for the

project itself. That is, the project manager is probably working on a contract to deliver the project to

the buyer. This contract defines what it is that the project manager must do. In this case, the project

manager is the seller.

The second type of contract occurs during the execution of the project, when the project manager

decides it is necessary to employ a third party to perform some of the work. This is called a

subcontract, and the project manager is the buyer.

The fact that the project manager is both a seller and a buyer means the project manager has to

understand all aspects of contracting, its terminology, and the different types of contracts. For the rest

of this chapter, we will assume that the project manager is the buyer.

In order to pursue a subcontract, the project manager must have a clear description of the physical

product or service to be delivered. Therefore, the project manager begins the subcontracting process

by separating out a well-defined piece of the scope. Next, the project manager creates a Statement of

Work (SOW), which is the most important contracting document.

When developing a subcontract, the project manager must answer the following questions:

1. What should we procure and how?

2. When should we procure it?

3. What type of contract will we use?

4. What metrics will we use to measure completion and success?

5. How will we administer the contract?

The work to be completed may not be well specified. This occurs when someone is asked to analyze

a problem where the answer is not known. In that case, the SOW should define the problem to be

solved, along with goals and objectives and success criteria. The document that defines the goals is

called a Statement of Objectives (SOO).

Contract Types

There are three broad categories of contracts:

1. Fixed Price: The contractor is awarded a total sum as payment for performing the project,

no matter how much time, effort, and money it took to deliver the project.

2. Cost Reimbursable: All legitimate project costs for performing the work of the project are

reimbursed to the contractor. A fee (or profit) may also be added. This is also known as

cost-plus contract.

3. Time and Materials: The buyer pays a fixed hourly rate for the labor spent working on the

project and also reimburses the contractor for all the materials and expenses associated

with the project work.

Selecting a Contract

When selecting a contract, the project manager must balance the risks versus the available

information.

1 Fixed Price Contracts

In a Fixed Price contract, the seller agrees to pay a fixed amount to the seller. Usually the seller

requests a certain percentage at the start (or award) of the contract and progress payments tied to

major deliverables. The buyer will usually hold back a certain amount until the job is successfully

completed.For large contracts, a third party may be employed to define when the seller’s work is
satisfactorily complete. This is called a Validation and Verification contractor.The installment payments
are often driven by the seller’s cash flow.

For example, in the New Kitchen

contract, Mark requested major payments when he was facing expensive purchases. One such contract

condition was: $3,000 at delivery of blueboard. Since the purchase of blue-board was a major

expense, Mark inserted a provision for a payment at that time.

Cost-Plus Contracts

In a cost-plus contract, the seller is reimbursed for all allowable costs, which include labor,

materials, and travel. The seller must have an audited overhead rate, which determines the rate at

which overhead costs are reimbursed by the buyer. The seller also receives an additional prior-

negotiated fee, which is often set as a percentage of the initially specified contract cost.

For example, suppose you negotiate a CPFF contract with a cost of $100,000 and a fixed $6,000 fee.

The total cost of the contract is $106,000. You successfully perform the project and your costs are

actually only $90,000. The buyer audits your project, and your overhead rate, and agrees that these

are all legitimate costs. You receive $90,000 for the costs, plus your fee of $6,000. The fee was

“fixed,” so your fee rate is actually $6,000/$90,000 = 6.7%. You need to check the contract carefully

to determine what is fixed, the dollars or the percent.

Incentive Fee Contract Example

The best way to understand an incentive fee contract is through an example.

The project manager of the PMA website decides to subcontract out the work of building the web

site. The project manager prepares a detailed scope document, including a Statement of Work. The

project manager uses a macro estimation formula to determine a cost of $10,000. The project manager

then assesses all the risks and decides that a creative subcontractor might get the job done for less.

Ethics

Ethics plays an important role in project management. The Project Management Institute (PMI)

continually stresses that ethics is an integral part of the project management profession and has

defined a rigorous Code of Ethics and Professional Conduct, which we will refer to as the code.

The code defines the rules for the professional practice of project management. More important from

a practical perspective is that it communicates to stakeholders the values and standards that project

management professionals will bring to their work. Values that the PMI community defined as most

important were responsibility, respect, fairness, and honesty.

Some of the more interesting aspects of the code, at least to us, are:

• We do what we say we will do.

• When we make errors, we own up promptly, accept responsibility, and make amends.
• We listen to others’ points of view.

• We negotiate in good faith.

• We provide accurate information in a timely manner.

• We disclose conflicts of interest of stakeholders.

• We report unethical or illegal conduct.

An Example of an Ethical Issue

You are the project manager holding a team staff meeting. In last week’s meeting, the Technical

Director (TD) reported that his design group had run into technical difficulties, which had resulted in

a delay of a deliverable. You assigned the Assistant Project Manager (APM) the task of determining

the impact on the cost and schedule.

In this week’s staff meeting, the TD said that the design issues were now resolved. The APM reported

that the because of the delays, the new CPI = 0.93. The APM projected a small, but significant,

overrun in both the budget and the schedule.

In the meeting, the following conversation took place between the TD and the APM:

TD: The technical issues are resolved and we will be able to get back on track. I don’t foresee this as a
problem.

APM: The issue was an error in the spec. The CPI = 0.93, which reflects the true productivity.

We should not assume that was the only spec error. We should inform the customer.

TD: It is way too early to go to the customer. We have fixed the only error.

APM: We owe it to the customer to explain the situation.

TD: We don’t want to bother the customer yet. It will work out.

Terminology

First, let’s discuss some of the surrounding issues:

• Legal vs. Ethical: We should immediately remove any legal issues. Nobody in this meeting is

suggesting that the team should deliberately hide data, pad estimates, or engage in dubious

behavior. If that were to happen, the approach of the project manager is clear: Call the police!
• Difficult vs. Ethical: Not all difficult decisions involve ethical issues. For example, a really

difficult decision that project managers often face is to lay someone off (perhaps their task is

complete, and there is no more work). This would indeed be difficult for anyone, but if there

is no money to hire someone, it is inevitable. Although difficult, we would not consider this

an ethical dilemma.

• Competence: We assume that all of the actors are well qualified and that their conclusions are

based on reasonable data and informed opinion.

• Integrity: All actors are behaving well and genuinely believe in their respective positions.

There are two approaches to ethical decisions that philosophers use in handling ethical dilemmas:

1. Deontology:

Deontology is from the Greek “deon” meaning duty, and “logos” meaning logic. Deontology is

therefore the study of ethics based on duty. You do it because you think it is “right.” The basic

duties are usually considered to be:

Fidelity Keeping promises

Reparation Righting the wrongs you’ve done

Justice Distributing goods equitably

Beneficence Improving the lot of others

Self-Improvement Improving one’s own intelligence and virtue

Gratitude Exhibiting when appropriate

Non-injury Avoiding injury to others

2. Teleology:

Teleology is from the Greek “telos” meaning end, and “logos” meaning logic. Teleology is

therefore the study of ethics based on the end result. This is often summarized as “The end

justifies the means.” You evaluate whether the decision is a good one by examining the

consequences or outcomes. Correct actions produce the most good, while wrong actions do not
contribute to the general good. Outcomes are usually classified as:

Egoism Focusing on self-interest goals, and asking if the action benefits oneself.

Utilitarianism Operating in the public interest rather than for personal benefit.

Altruism Maximizing the benefits of some, even at the expense of oneself.

Altruism is generally regarded as the highest moral virtue. Notice that Deontology and Teleology are

alternative views, and that neither is right nor wrong. They are different approaches to an issue.

A project manager must be able to recognize and understand these different world views in order to

understand conflicts within the team. If two people are arguing from two different sets of ideals, then

it is difficult for them to compromise—they both think they are right.