Glossary

Actuary A person who analyzes business risk (primarily financial) using mathematical and statistical tools, most often found in the insurance industry.

Acceptance A risk management strategy involving no action whatsoever unless the risk actually occurs.

Assumptions For planning purposes, assumptions are things considered to be true, real, or certain, without actual proof or demonstration. For example, it might be assumed that organizational priorities will not shift in the next six months, or that the work is technically feasible even though it has not been done before. Assumptions are often necessary, but carry risk.

Authority The right to make decisions, spend funds, allocate resources, or approve choices. Your authority can be defined in three categories: things you can do for which you do not need permission, things you can do with permission, and things that must be done by someone else.

Average See mean.

Avoidance A risk management strategy that involves changing the project so the risk event cannot occur or the project is protected from its consequences.

Backward pass See forward and backward pass.

Baseline (v) The process of establishing the planned value of the project at different points of the project life cycle. The baseline (n) is therefore the approved project plan plus or minus approved changes. Use the baseline to compare actual to planned results so you can determine if the project is on track. Revise the baseline if there are major changes that make the original baseline useless as a measuring point.

Black swan event A risk event that is high impact, and either hard to predict or extremely rare.

Business risk A risk situation that combines the possibility of positive and negative outcome in the same decision or event.

Capping Establishing a maximum level for a risk. If you have an insurance deductible on your policy, your risk is capped at the amount of that deductible because that is the maximum amount you will have to pay for a covered event.

Cause-and-effect diagram A tool to help identify root causes of problems, risks, or other situations. Sometimes referred to as a fishbone diagram because it resembles the skeleton of a fish, and as an Ishikawa diagram for its creator, Kaoru Ishikawa.

Central Limit Theorem (CLT) A fundamental idea in probability theory, the CLT says, in short, that if there are a large number of independent random variables (rolling hundreds of dice of different shapes and sizes, some with six sides and others with eight or four or twelve, for example), the outcome will naturally fall into an approximately normal distribution. There is a full technical proof which is beyond the scope of this course; you can find it at http://mathworld.wolfram.com/CentralLimitTheorem.html.

Closeout The formal process of bringing a project to an end.

Confidence level A probability that a project will achieve a certain goal of time or budget based on its level of risk. The Program Evaluation and Review Technique (PERT) and the Monte Carlo simulation both provide methodologies for establishing confidence levels.

Contingency A risk management strategy involving a plan to be triggered if the risk occurs or appears likely.

Contingency allowance Extra time or money to compensate for known risks.

Contingency reserve Money or time set aside for unknown risks.

Convergence risk See schedule risk.

Cost-benefit analysis The process of comparing the total expected benefits of a course of action with the total expected costs of that action. In addition to analyzing a specific course of action, cost-benefit analysis can also compare costs and benefits of different alternative actions.

Cost estimating A process for determining the likely or potential cost associated with a project or work package.

Critical path The sequence of project activities that determines the duration of the project; the longest path through a project network diagram.

Decision tree analysis A graphical tool for comparing the Expected Monetary Values (EMV) of different alternatives.

Dependency relationship In a network diagram, a connection between two work packages that describes the conditions under which the dependent task can start or finish.

Deterministic costs Costs that are definite and known before they are incurred, such as the price in a firm fixed price contract. Compare with probabilistic costs.

Distribution The range of possible outcomes and the number of times each outcome has or is expected to occur. Distributions come in many types, of which the normal distribution (often described as the bell curve) is best known. In project management, the triangular distribution appears frequently, especially in three-point estimates.

Downside risk See threat.

Earned Value Project Management An advanced tool for comparing schedule and cost performance to plan. Considered an exceptionally valuable tool for identifying troubled projects early.

Enhancement A risk management strategy for improving the probability or impact of an opportunity.

Exclusion A provision in an insurance policy that removes a particular cause from the list of covered events. If a homeowner’s policy does not cover flood damage, for example, it is excluded from the risks assumed by the insurer, and the homeowner therefore retains those risks—or buys separate flood insurance.

Expected Monetary Value (EMV) The sum of the probability times the impact for each possible outcome, used as a basis for comparison and decision-making among alternatives with risk. For example, if an investment is 70% likely to produce a $25,000 gain, and 30% likely to produce a $10,000 loss, the EMV is (0.7 × $25,000) + (0.3 × -$10,000), or $17,500 + (-$3,000), which reduces to $14,500.

Exploitation A risk management strategy that involves using an opportunity to improve the timeliness, cost, or quality of a project.

Facultative insurance See reinsurance.

Filtering A process for analyzing risks, performed as an initial sorting process during qualitative risk analysis. See also risk triage.

Fishbone diagram See cause-and-effect diagram.

Float Extra time to accomplish certain tasks before the accumulated lateness threatens the expected project completion date. Free float is extra time before the next task begins, whether the subsequent task is on the critical path or not. Also known as slack.

Forward and backward pass A technique for calculating the critical path on a network diagram.

Gantt chart A bar graph drawn over a calendar grid, showing when specific tasks will be accomplished in the schedule.

Initiation The process of starting a project.

Insurable risk See pure risk.

Ishikawa diagram See cause-and-effect diagram.

Joint probability The probability that both Event A and Event B will happen; the product of the individual probabilities.

Law of Large Numbers (LLN) A principle of probability theory that argues that the larger the sample population or number of trials, the more likely that the actual probability will converge with the theoretical one.

Lessons learned The process of evaluating a project’s performance for future improvement.

Mean The average of a group of numbers.

Measures of Central Tendency The mean, median, and mode of numbers in a distribution.

Median The central number in a range of numbers; half the cases are above and half below the median.

Mitigation A risk management strategy for lowering a combination of the likelihood or impact of a risk.

Mode The number in a distribution that occurs most often.

Monte Carlo simulation A probability simulation technique. In project management, a Monte Carlo simulation is a specialized computer program that usually works as an add-on to popular project management software packages. Instead of entering a single number as an estimate of a task’s duration, the project manager enters a range of numbers (optimistic, pessimistic, and most likely) for each task. The program simulates the course of the project hundreds or thousands of times, selecting a weighted random number from the range for the duration of each task, and records the finish date. By analyzing the number of times the project finishes on any given date, you can calculate a confidence level, or probability you will meet that date.

Negative brainstorming A brainstorming technique that focuses on reasons something might fail rather than on ways to make it succeed; useful in the process of risk identification.

Network diagram A flow chart picture of the work of the project that shows interdependencies and connections. There are two types of network diagrams. The Precedence Diagramming Method (PDM) has largely replaced an older technique, the Arrow Diagramming Method (ADM).

Normal distribution A “bell curve” distribution in which most values tend toward the mean and few values are found at the extremes. The most common kind of distribution, although it’s never wise to assume a distribution will automatically follow the normal shape without evidence.

Odds The number of favorable outcomes divided by the number of unfavorable ones.

Opportunity A term for upside risk, the chance of experiencing a positive outcome from a risk event.

Path duration risk See schedule risk.

PERT analysis See Program Evaluation and Review Technique (PERT).

Precedence Diagramming Method (PDM) See network diagram.

Program Evaluation and Review Technique (PERT) Invented by the U.S. Navy and Booz Allen Hamilton to manage the Polaris nuclear submarine project in the late 1950s, the PERT method is considered one of the major breakthroughs in project management practice. In the area of risk management, PERT pioneered the use of the three-point estimating technique.

Probabilistic costs Costs that are subject to change depending on circumstances. Labor costs, for example, increase if the schedule slips, so the final price for labor on the project may be greater or less depending on how quickly the project goes. The labor estimate is a probabilistic cost in your budget because the final actual price is unknown and variable. Compare with deterministic costs.

Probability The number of desired outcomes divided by the number of possible outcomes.

Project A temporary endeavor undertaken to create a unique product, service, or result. Projects have a definite beginning and end.

Project management The application of knowledge, skills, tools, and techniques to project activities to meet the project requirements.

Pure risk A risk situation that only has a negative outcome (also known as insurable risk).

Qualitative risk analysis The process of sorting and prioritizing risks. Risks can be sorted according to characteristics such as probability, impact, category, ownership, actionability, and acceptability. Risks deemed significant can be prioritized for further risk analysis and for risk response planning.

Quantitative risk analysis The process of using measurable and objective data to value risks, such as Earned Monetary Value (EMV) and other statistical and financial techniques.

Reinsurance A type of insurance purchased by insurance companies to offset excess risk by transferring it to a larger entity. Two types of reinsurance are treaty insurance, in which a large risk is apportioned among different payers, and facultative insurance, in which a single large entity assumes the risk.

Reserve See contingency reserve.

Residual risk Risk left over after you have taken action on the primary risk.

Risk An uncertain event or condition that if it occurs will have a significant impact, whether negative (threat, or downside risk) or positive (opportunity, or upside risk).

Risk analysis The process of studying the risks of a particular project, operation, or organization in order to define their probability, impact, and other characteristics. The results of risk analysis help us decide which risks should be addressed, which risks should be accepted, and which strategies are likely to be most cost-effective in managing them. Two types of risk analysis are qualitative risk analysis and quantitative risk analysis.

Risk cost analysis The process of analyzing the range of potential costs and benefits of particular risks, and using the analysis to calculate a value for that risk.

Risk identification The process of identifying and describing the risks associated with the project.

Risk management The process of identifying, analyzing, responding to, and managing threats and opportunities.

Risk management plan A document that is part of the project plan and that identifies and describes the risks, rates their relative seriousness by considering their probability and impact, lists any planned responses or actions intended to reduce downside risks or improve upside risks, and explains how the project team will monitor risks and responses for effectiveness.

Risk management policy A document that applies to an entire organization or category of projects. It describes how the organization wants risk management to be performed, which projects and activities are covered by the policy, the definitions and steps involved in the process, the types of reports and documents that need to be prepared and disseminated, who must be consulted or who must approve risk responses, and similar matters.

Risk mitigation cost The amount you would need to spend to reduce the risk to an acceptable level.

Risk monitoring and control Activities involved in executing the risk management plan and making adjustments based on actual experience.

Risk premium The difference between the cost of responding to a risk and the underlying value of the risk itself.

Risk register A list of all the project’s identified risks, often in a spreadsheet format, with information and analysis about the risk—along with a summary of planned responses.

Risk response planning The process of deciding what action (if any) to take in response to a specific risk or category of risk, both threats and opportunities. Basic strategies for threats are avoidance, transfer, and mitigation. Basic strategies for opportunities are exploitation, sharing, and enhancement. The remaining strategies, acceptance and contingency planning, apply to both threats and opportunities. In addition, some risk responses are multi-staged; that is, they use more than one risk response, sometimes together or sometimes the additional strategy is used as a contingency response. Finally, some risk responses are “wait and see” measures, in which a final decision or action is postponed until a triggering event causes reevaluation.

Risk triage The process of prioritizing risks for further analysis and response. Often associated with filtering, and a process used in risk analysis.

Risk trigger An event or point in time that determines whether to execute a particular risk response or contingency plan. If the risk response to running out of gas is to fill up the tank, you might establish a mental risk trigger that you should find a gas station as soon as the fuel gage drops below an eighth of a tank.

Schedule risk The risk that the actual schedule of a project will differ from the planned schedule. There are three kinds of schedule risk: task duration risk (the risk that a specific task or work package will take more or less time than expected), path duration risk (the risk that a sequence of tasks or work packages will take more or less time than expected), and convergence risk (the risk that when a task has multiple predecessors that at least one of the predecessors will be late in finishing).

Secondary risk A risk that comes into existence as a result of your attempt to solve the primary (original) risk. If you rent a tent to mitigate the risk it will rain on your picnic, the risk that the tent will be damaged and you will have to pay for it is a secondary risk. A secondary risk may be minor enough to ignore, it may be serious enough to cause you to find a different solution, or the secondary risk itself can be lowered through additional risk response planning.

Sensitivity analysis An analysis to determine the effect on a mathematical model if you change one of the variables. If the model is robust, small changes in variables have correspondingly small impact on the output. If the model is highly sensitive, small changes in variables (the difference between 2% growth and 2.2% growth, for example) can have a disproportionate effect on the output.

Sharing A risk management strategy that involves transferring the value of an opportunity elsewhere.

Slack See float.

Standard deviation A mathematical measurement of the variance in a given normal distribution, calculated by the formula:

Statistical significance In statistics, a statistically significant result is one that is unlikely to have occurred by chance. In risk, statistical significance is often described as a function of the standard deviation.

SWOT Analysis A structured brainstorming tool that identifies the strengths (S), weaknesses (W), opportunities (O), and threats (T) of an actual or potential event or situation to aid in analysis and response planning.

Task duration risk See schedule risk.

Threat A term for downside risk, the chance of experiencing a negative outcome from a risk event.

Three-point estimate When the estimated time or cost of a given work packages is variable, a three-point estimate identifies the optimistic (best case with a probability of at least 1%), the pessimistic (worst case with a probability of at least 1%), and the most likely (mode) values. Three-point estimates are used in both PERT analysis and the Monte Carlo simulation.

Tradeoffs Choices among different priorities. A project may take longer or cost more if we set a higher performance target. Tradeoffs can be within a project or among multiple projects (when more for Project A means less for Project B).

Transfer A risk management strategy that involves moving the ownership of the risk to some other entity. Insurance is a common form of risk transfer.

Treaty insurance A type of reinsurance.

Triangular distribution A type of distribution that resembles a triangle. It is typically used as a subjective description of a population for which there is only a limited amount of information or sample size. A three-point estimate, used in many simulation techniques, is in effect a triangular distribution of the range of possible outcomes.

Triple constraints The three common boundaries of all projects: the time constraint, the cost (resources) constraint, and the performance standard.

Union The probability that Event A or Event B will happen; the sum of the individual probabilities.

Upside risk See opportunity.

WBS See Work Breakdown Structure (WBS) dictionary.

Work Breakdown Structure (WBS) dictionary A form or template for each WBS component that briefly defines the scope or statement of the work, defines deliverables, contains a list of associated activities, and provides a list of recognized milestones to gauge progress.