Integrating Risk with Earned Value
Pikes Peak Regional Chapter
Project Management Productivity Tools
Symposium
Saturday, February 28th, 2009
Glen B. Alleman
VP, Program Planning and Controls
Lewis & Fowler
www.lewisandfowler.com
The notion of integrating cost, schedule, technical performance, and risk
is possible in theory. In practice care is needed to assure credible
information is provided to the Program Manager. 1

Today's Learning Objectives
 Cost, Schedule, Technical
Performance, and Risk Are
Inseparable
 All numeric values of
cost, schedule, technical
performance, and risk
assessment are random
variables drawn from some
underlying probability
distribution
 Managing these variables
must be done through the
eyes of a Risk Manager 2

There are
usually two
phases to many
projects …
1. Too early to tell
2. Too late to stop
3

Dependencies Between The Inseparable Variables
Cost
Funding margin for Schedule margin for over
under performance target baseline (OTB)
Over cost or
Over cost or
over
under
schedule
performance
Over schedule
Technical
Schedule
or under
Performance performing
Schedule margin for
underperformance or
schedule extension 4

But Many Times, The Information from
Cost, Schedule, Techncial Performance, and
Risk Management Systems Gets Mixed Up
When We Try to Put Them Together
5

Some Useful EV Information
EAC Floor Performance Factor
BAC B C W Pcum BAC
EAC ACW P
C P Icum C P Icum
EAC Ceiling Performance Factor
BAC B C W Pcum BAC
EAC ACW P
C P Icum S P Icum C P Icum
EVM Analyst’s EAC Range
• Addresses Risk
• Based on CPI & SPI trend analysis not on
plugging numbers into a formula
• Incorporates technical performance, schedule
progress, CAIV and other program information
http://www.daytonaero.com/Files/resource/31.pdf
6

Some Criteria for Successful EVMS
Beyond Full Compliance of the 32 Criteria
Define a Work Identify the Integrate WBS
Schedule all Indentify Products
Breakdown Organizations and OBS into a
Planned Work and Milestones
Structure doing the work RAM
Time Phase the Record all Direct Determine all Sum These Manage Action
Budget Costs Variances Variances Plans
7
Incorporate Changes

At The Same Time, Risk Management is
Commonly Misunderstood
It’s not about random chance, it’s about defining
mitigations and retirement plans in the presence of
uncertainty
8

Five Fundamental Principles of Risk Management
1. Hope is not a strategy
2. No single point estimate of cost or schedule can be correct
3. Cost, Schedule, and Technical Performance are inseparable
4. Risk management requires adherence to a well defined process
5. Communication is the Number One success factor 9

Revisions & Change Control
Define and Establish MR Authorize Work
Organize the Issue Budget Establish PMB Measure Analyze Results
Work Authorize Plan Performance
Integrating I think you
Earned Value should be more
and Risk explicit about
Management the steps here.
Plan Risk Perform Risk Develop Risk Assign Monitor and
Activities Assessment Handling Plans Responsibilities Communicate
Update Risk Register 10

Some Actionable Details For Putting
These Four Concepts Together
In Theory there is no difference between Theory and Practice.
In Practice there is — Yogi Berra
11

The Difference Between
Technical and Programmatic
Risk
 There are two types of ―uncertainty‖ on any
sufficiently complex program
– Technical – uncertainty about the functional and
performance aspects of the program’s
technology that impacts the produceability of
the product or creates delays in the schedule
– Programmatic – uncertainty about the duration
and cost of the activities that deliver the So much for our strategy of winning
through technical dominance
functional and performance elements of the
program, independent of the technical risk
 We’re interested in connecting the two in the schedule and cost
model(s)
– When the technical uncertainty arises what is the impact on the schedule
and cost?
– When the schedule or cost uncertainty arises what is the impact on the
functional and performance aspects? 12

Deterministic Versus Probabilistic
Deterministic Probabilistic
 Each activity has a planned value  The program elements are not
random, but they are random
 For the schedule each task has a
variables drawn from a probability
predecessor and a successor.
distribution.
 The longest path through the
 Three point estimates \"can\" be
network is the critical path
used to describe task duration
 The total duration of the project is
random variables
a fixed value - it is deterministic
 The total duration of the project is
 The total cost is the sum of all the
a random number
activity costs
 The total cost is a random number
 Risks are defined and handled as
 Risks are stochastic processes
static entities
that have probabilistic outcomes
for cost, schedule and technical
performance
13

Without these Principles The Program Train Wreck Starts When…
 Inattention to  Lack of predictive
budgetary variance analysis
 Untimely and unrealistic
responsibilities
 Work authorizations Latest Revised Estimates
that are not always (LRE)
 Progress not monitored
followed
 Issues with Budget and in a regular and
data reconciliation consistent manner
 Lack of an integrated  Lack of vertical and
management system horizontal traceability
 Baseline fluctuations cost and schedule data
and frequent replanning for corrective action
 Current period and  Lack of internal
retroactive changes surveillance and
 Improper use of controls
 Managerial actions not
management reserve Mary K. Evans Picture Library
 EV techniques that do demonstrated using
not reflect actual Earned Value
14
performance

Continuous Risk Management has Six Components
http://www.sei.cmu.edu/risk/index.html
15

This All Comes Together in The Risk Registry
http://www.mitre.org/work/sepo/toolkits/risk/ToolsTechniques/RiskMatrix.html
16

First, A (Notional) Big Picture
Risk ID Traceable to
IMS
work elements in the
IMS within the WBS Containing
Risk Database
the Risk
Activities
Risk reduction Standard program
waterfall metrics performance of TCPI
connected to Earned and IEAC
Value program
performance
Program
Performance
Metrics
no·tion·al
1. Of, containing, or being a notion;
mental or imaginary.
17
2. Speculative or theoretical

Modeling Schedule Risk
Cost, Schedule, Technical Model†  Research the Project
 Find Analogies
 Ask Endless Questions
Days, Facilities,
 Analyze the Results
Parts and People
WBS
 What can go wrong?
Probability
Density Function
 How likely is it to go wrong?
Task 100
 What is the cause?
 What is the consequence?
Task 101
Task 102
Monte Carlo Simulation
Task 103
Tool is Mandatory
Task 104 Cumulative Distribution Function
1.0
.8
Task 105
.6
.4
Task 106
.2
0
† This is a Key concept. This is the part of the process that Days, Facilities, Parts, People
integrates the cost and schedule risk impacts to provide the basis
of a credible schedule.
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Modeling Cost Risk
Combined Cost
Modeling and Technical
Uncertainty
Cost = a + bXc
Cost Modeling
Uncertainty
Cost
Estimate
Historical data point
$
Cost estimating relationship
Standard percent error bounds
Technical Uncertainty
Cost Driver (Weight)
19

Modeling Technical Performance Measures
20

One Approach to Integrating Risk Management with
Earned Value
Control
 Integrate across
functions
Program Manager  Reprioritize
 Authorize project
Top N risks resources Decisions
Assign
Control

Functional Managers Integrate
Responsibility
 Reprioritize
 Authorize
Top N risks  Functional area
resources
Work Package Managers Analyze Plan
 Review  Approve plans
 Prioritize EV Data
 Recommend actions
 Evaluate  Develop plans
 Classify
1
Individuals/Team
Members risks
Risk Status
EV Data
EV Data Identify Track
Trends
Required
Indicators 2
3 21

Example Schedule Risk Analysis
Monte Carlo tools model the task durations with random variables for
the durations and build ―pictures‖ of the likelihood of a task completely
on or before a specific date. 22
Deliverables Based Planning Handbook for A&D, Copyright © 2008, 2009, Lewis & Fowler

@Risk and Risk+ Sample Screens
23

Schedule for a Monte Carlo Risk analysis starts with a
credible schedule and defines the probabilistic behavior
of each activities and how it drives the deliverables
24
The Risk+ tool sets the upper and lower bounds of the possible durations

The output of Risk+ is a Probability Distribution Function and a
Cumulative Distribution of all the possible dates that ―watched‖
activity could take.
The result is a picture of the Confidence that the target date of
2/10/3 – can be met.
It shows 40% – which is not good
Date: 2/25/2009 3:34:12 PM Completion Std Deviation: 5.51d
Samples: 300 95% Confidence Interval: 0.62d
Unique ID: 30 Each bar represents 2d
Name: Final Testing
0.16 1.0 Completion Probability Table
0.9
0.14
Cumulative Probability
Prob Date Prob Date
0.8
0.05 Wed 1/29/03 0.55 Wed 2/12/03
0.12
0.7 0.10 Fri 1/31/03 0.60 Thu 2/13/03
Frequency
0.10 0.6 0.15 Tue 2/4/03 0.65 Fri 2/14/03
0.20 Wed 2/5/03 0.70 Fri 2/14/03
0.5
0.08
0.25 Wed 2/5/03 0.75 Mon 2/17/03
0.4
0.06
0.30 Thu 2/6/03 0.80 Tue 2/18/03
0.3
0.35 Fri 2/7/03 0.85 Wed 2/19/03
0.04
0.2
0.40 Mon 2/10/03 0.90 Thu 2/20/03
0.02 0.1 0.45 Mon 2/10/03 0.95 Tue 2/25/03
0.50 Tue 2/11/03 1.00 Mon 3/3/03
Mon 1/20/03 Tue 2/11/03 Mon 3/3/03
Completion Date 25

So with this information we can ask …
 What cost impact will there be?
 What resource impacts?
 What technical dependencies?
 What mitigation or retirement plans
must be in place to increase the
probability of success to something
greater than 40%?
 What other interdependencies are
there in the program?
26

Program Management is Risky Business
 Traditional Approaches Are Seriously Flawed
 Risk Management Is Not About Preventing Risk
 Risk Management Is About Managing In The Presence Of
Risk
 This means managing Cost, Schedule, and Technical
Performance
27

Source Materials
 Interfacing Risk & Earned Value: Management Reserve,
 ―Technical Performance Measurement, Earned Value, and Risk
Management: An Integrated Diagnostic Tool for Program
Management,‖ Commander N. D. Pisano, SC, USN, Program
Executive Office for Air ASW, Assault, and Special Mission Programs
(PEO(A))
 Practical Risk Management: The ATOM Method, David Hillson and
Peter Simon, Management Concepts.
 Project Risk Analysis and Management Guide, APM Publishing.
 ―Formal Risk Management,‖ DACS Gold Practices
 ―Quantify Risk to Manage Cost and Schedule,‖ Fred
Raymond, Acquisition Review Quarterly, Spring 1999, pp. 147–154
 Probabilistic Risk Assessment Procedures Guide for NASA Managers
and Practitioners, Office of Safety and Mission Assurance, April 2002
 Development Of Risk Management Defense Extensions To The PMI
Project Management Body Of Knowledge – Tutorial,‖ Edmund
Conrow, Acquisition Review Quarterly, Spring, 2003.
 Effective Risk management: Some Keys to Success, Edmund
Conrow, American Institute of Aeronautics and Astronautics, 2000.
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