This document discusses integrating risk management with earned value management. It provides several key steps: 1. Physically connect risk management tasks to the integrated master schedule and work breakdown structure to ensure risks are planned and tracked. 2. Start by identifying risks and owners, then analyze probability and impact to determine mitigation owners and plans. 3. Track risk status using the same processes as earned value, such as percent complete. Analyze impacts and make control decisions based on integrated data. The goal is to ensure risks are planned like any other task and progress is measured alongside cost and schedule performance to aid management decisions. Monte Carlo analysis can also model schedule risk using probability distributions.

1. INTEGRATING RISK WITH
EARNED VALUE
PIKES PEAK REGIONAL CHAPTER
PROJECT MANAGEMENT PRODUCTIVITY TOOLS
SYMPOSIUM
SATURDAY, FEBRUARY 28TH, 2009
GLEN B. ALLEMAN
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.

2. 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

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

4. The Fundamental
Program Management Question
Can we plan with
sufficient accuracy, to
allocate resources to
reduce risk while
meeting requirements,
and obtain timely
feedback in order to
adjust plans and
performance goals?
4

5. Dependencies Between The Inseparable Variables
Cost
Funding margin for Schedule margin for over
under performance Over cost or Over cost or target baseline (OTB)
under over
performance schedule
Over schedule
Technical
Performance
or under Schedule
performing
Schedule margin for
underperformance or
schedule extension 5

6. Some Simple Definitions
Programmatic and Technical
Earned Value
Technical Risk Performance
Management
Management Measures
Establishes project Looks to the A time phased
performance status unknown future to progress plan for
and extrapolates identify risks and the achievement of
that information to recommend early the Technical
understand future action to be taken Performance
trends and to limit the threat or Parameters (TPP)
allocation of maximize the that indicate key
resources needed exploitation of areas for risk
to successfully opportunities reduction and
meet project program success
milestones
APM EV-Risk Working Group, 2007 INCOSE G2SEBOK 6

7. The Integration of Risk and Earned Value is a Systems
Engineering Paradigm
Cost
Systems Engineering states Integrated Master Schedule &
deliverables performance and Earned Value Management
associated risks tracks risk activities
Technical
Performance
Schedule
Structure WBS contains risk
mitigations and retirement efforts 7

8. But Many Times, The Information from Cost,
Schedule, Techncial Performance, and Risk
Management Systems Gets Mixed Up When We
Try to Put Them Together
8

9. Every Program Manager Should Know…
9
 When will this project finish?
 What is the statistical confidence in this date?
 Is the project’s schedule realistic and achievable?
 What will it cost when we are done?
 How is the project performing against its plan?
 What deliverables are slipping?
 How are we going to get the deliverables back on schedule?
 What does past performance say about the future performance?
 What is the impact on the schedule of any change requests?
 Is there enough schedule slack and cost reserve to cover the risk?
 Where is the risk in the schedule?
 How can we get the work done sooner to reduce risk?
 How can we recover from any foreseen delays?
 How can we work around a problem?

10. The First Step is to Start with Key Elements of
Earned Value
10
BCWS
SV
BCWP
CV
ACWP
The Work planned, performed, and the cost of
performing that work, is the common variable across
each Earned Value variable

11. Some Useful EV Information
EAC Floor Performance Factor
BAC  BCWPcum BAC
EAC  ACWP  
CPIcum CPIcum
EAC Ceiling Performance Factor
BAC  BCWPcum BAC
EAC  ACWP  
CPIcum  SPIcum CPIcum
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
11

12. ANSI 748B Says on Page 1
12
 Plan all work scope for the program to completion.
 Integrate program work scope, schedule, and cost
objectives into a baseline plan against which
accomplishments may be measured.
 Objectively assess accomplishments at the work
performance level.
 Analyze significant variances from the plan and
forecast impacts.
 Provide data to higher levels for management
decision making and implementation of
management actions.

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

14. 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
14

15. 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 15

16. DoD’s Approach to Successful Risk Management
16

17. But ANSI 748B Also Says …
17
 Identify physical products, milestones, technical
performance goals, or other indicators that will be
used to measure progress.
 So why the disconnect between Risk and Earned
Value?
 Isn’t the measure of risk, the rate of risk reduction
an “…other indicators…”

18. 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 18

19. 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

20. 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
functional and performance elements of the through technical dominance
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? 20

21. Deterministic Versus
Probabilistic
Deterministic Probabilistic
• Each activity has a planned value • The program elements are not
• For the schedule each task has a random, but they are random
predecessor and a successor. variables drawn from a probability
• The longest path through the distribution.
network is the critical path • Three point estimates "can" be
• The total duration of the project is used to describe task duration
a fixed value - it is deterministic random variables
• The total cost is the sum of all the • The total duration of the project is
activity costs a random number
• Risks are defined and handled as • The total cost is a random number
static entities • Risks are stochastic processes
that have probabilistic outcomes
for cost, schedule and technical
performance
21

22. Without these Principles The Program Train Wreck Starts When…
 Inattention to  Lack of predictive
budgetary variance analysis
responsibilities  Untimely and unrealistic
 Work authorizations Latest Revised Estimates
that are not always (LRE)
followed  Progress not monitored
 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
management reserve  Managerial actions not Mary K. Evans Picture Library
 EV techniques that do demonstrated using
not reflect actual Earned Value
22
performance

23. AN INTRODUCTION TO SOFTWARE
ENGINEERING INSTITUTE’S
CONTINUOUS RISK MANAGEMENT
(CRM)
CRM is the Software Engineering Institute’s framework for managing risk in the
context of system integration, COTS based product development, and the
management of these activities.

24. Continuous Risk Management has Six Components
http://www.sei.cmu.edu/risk/index.html
24

25. Putting Continuous Risk Management Work
25
CRM Activity Project Representation
Risk items with IMP/IMS #’s, CA/WP & resource
Identify
assignments
Analyze Risk management responsibilities assigned
Mitigation plans with durations and resource
Plan
assignments
Track Status reported from Risk Management to IMS
Control Risk tasks reporting in weekly status process
Integrated Master Schedule (IMS) status reporting
Communicate
as Physical Percent Complete

26. This All Comes Together in The Risk Registry
26
http://www.mitre.org/work/sepo/toolkits/risk/ToolsTechniques/RiskMatrix.html

27. PHYSICALLY CONNECTING
EARNED VALUE WITH RISK
MANAGEMENT

28. Some Historical Background†
28
 Cost and schedule growth have been persistent
problems for decades
 The use of Earned Value is common in DoD
environments
 As is the use of Risk Management
 It’s the integration that is missing
† “Integrating Risk Management with Earned Value Management,” NDIA
Report, www.ndia.org

29. The Core Problems Before We Start
29
 Earned Value is a measure of quantity not quality
 Risk measures the probability of an unfavorable
occurrence but rarely monetizes this outcome
 Risk management focuses on dealing with future
events
 Earned Value focuses on reporting past
performance

30. Starting with the Individual Elements
30
Identify Analyze Plan Track Control
Risk board Mitigation and
Identify risk Connect PMB Vet members of
Organization assessment of retirement
owners with Risk registry the leadership
impact owners
Identify Probability PMB contains all Transfer
Planning & Baseline the risk
uncertainty and impact in risk active mitigation to PMB
Budgeting registry
response schedule activities and close risk
Assign risk to Risk budgets Risk Board Transfer through
Probability
Accounting CA/WP cost defined and management of EV change
impact on cost
baseline allocated cost impacts control processes
Risk registry
Asses impacts Risk Board and Manage budget
contains
Analysis and IMS Board assignment by
probabilities of
dependencies impact analysis risk level
cost and schedule
Updated PMB
Keep historical Update ETC from Revise PMB
Revisions from risk Risk review
records risk management forecast
activities

31. First, A (Notional) Big Picture
31
Risk ID Traceable to
work elements in the
IMS within the WBS
Risk reduction Standard program
waterfall metrics performance of TCPI
connected to Earned and IEAC
Value program
performance

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

33. 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.

34. @Risk and Risk+ Sample Screens
34

35. 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
35
The Risk+ tool sets the upper and lower bounds of the possible durations

36. 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
0.12 0.05 Wed 1/29/03 0.55 Wed 2/12/03
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
0.08 0.5 0.20 Wed 2/5/03 0.70 Fri 2/14/03
0.4 0.25 Wed 2/5/03 0.75 Mon 2/17/03
0.06
0.3 0.30 Thu 2/6/03 0.80 Tue 2/18/03
0.04 0.35 Fri 2/7/03 0.85 Wed 2/19/03
0.2
0.02
0.40 Mon 2/10/03 0.90 Thu 2/20/03
0.1 0.45 Mon 2/10/03 0.95 Tue 2/25/03
Mon 1/20/03 Tue 2/11/03 Mon 3/3/03
0.50 Tue 2/11/03 1.00 Mon 3/3/03
Completion Date 36

37. So with this information we can ask …
37
 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?

38. 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
38

39. Source Materials
39
 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.