Determinations: risk-adjusted project budget
Mapping of risks and issues to the project budget artifacts should begin with the WBS and WBS database due to the fact that if properly executed, it is the WBS which contains the work packages necessary to complete the project work effort and the assigned control accounts linking the project to the organizational accounting environment. If the project has not completed the WBS as a part of its initiation phase, mapping to the budget, schedule, or scope will be all but an exercise in futility.
The WBS serves as the central work effort artifact for projects seeking to produce “fit-for-use” deliverables on-schedule and on-budget. This should be a primary work activity for the project management and a part of the organizational processes in initiating any project or program.
With the WBS work packages with the assigned control accounts holding the primary bulk of the project’s proffered funding, the following project team members and external budgetary subject experts begin the process of determining the risk equivalent impact on each portion of the project budget. These members should include:
- Project manager
- Risk manager/analyst
- Financial analyst
- Risk owners
- Organizational accounting experts
- Business sponsor(s) and key stakeholders
Each risk or issue is dissected to review the preliminary risk cost of impact (RCI) that was determined during the initial risk or issue identification process. The prioritization of the risk and issues into the most severe RCI’s is only half the process since once ordered, their associated risk probability of occurrence (RPO) needs to be reviewed to provide a secondary sort to ensure the risk-adjustment process does not expend resources on those risks or issues that have a very high RCI, but a very low RPO. The team’s focus should be on those that expose the project budget to the highest RCI while characterizing at least a modicum of occurrence probability.
Lessons-learned and historical archives of previous completed projects can be a significant assistance in this budgetary impact prioritization since what has occurred in the past may offer some indication of the future impact a particular organization can expect to experience. This is standard insurance type actuarial operations.
With the sorted list of risks and issues, the team can now inspect each risk or issue with the assigned risk owner to uncover the overt and/or covert aspects of the risk or issue that would damage the project’s budgetary processes and reserves if the risk were to trigger, or as the issue is resolved. At this point, the weight of an issue’s actuality should be given preference due to the fact that an issue having already become reality is in fact draining project resources diverting them for the useful work of producing “fit-for-use” deliverables.
The use of a scatter plot with the axes of risk cost impact and prioritized probability of occurrence. This is different from the normal P X I plot in that the occurrence probability has been adjusted to take into account both the priority of risk in relationship to other risks, lessons-learned and historical budgetary impact experiences of the organization. The scatter plat will produce a value of those risks that should be mitigated from the need to reduce budgetary impact since in many projects the schedule appears to have more flexibility than the budget in these times of financial due diligence.
Those risks showing the highest placement on the scatter plot can now be analyzed from an accounting stand point to provide the actual budget impact value that when paired with the risk’s risk equivalent value (REV) will produce the needed risk-adjusted budgetary REV. This value becomes the parameter for more in-depth financial analysis to clarify the project’s risk environment impact on the budget and to plan the need and amounts of such contingency funding as management reserves and or “set aside” buffers. (See critical chain budgetary reserves).