Risk Management and Budget Decisions - Assignment Example

Assignment 2 A2 Project Risk Management Semester 2, 2016 Curtin University Sydney Lecturer: ---------------------- Title BUDGET REPORT Name: --------------------- Student Number: 15114682 Email Address: ----------------------- Date Submitted: ------------------------ Table of Contents Table of Contents 2 Executive Summary 3 Project Scope 4 Recommended baseline budget 5 Risk events 7 Contingency 8 Sensitivity analysis 10 Organizational policy 14 Reference 15 APPENDIX 16 Executive Summary The main aim of report is to prepare is budget estimates for staff seminar that will be held for three days. Ten staff members will attend and it will be 10km from the offices. It will held in a hotel and they will use hired tour van. In analyzing the risk of the budget plan for the sponsor, @risk software has been used to carry out Monte Carlo Simulation. From the simulation the baseline budget was $16,600.00 while contingency value was $1313. The report has included the contingency fund that ensures there continuity of project in case there is changes in prices of the costs or there is uncertain occurrences of an event. Project Scope The main aim of the report is to prepare a budget that will enable a sponsor support 10 members of staff attend a seminar beginning 11/12/2016 and 14/12/2016. The seminar will be held 10km from the offices; they will be picked up by a hired tour van from the offices. The sponsor to implement seminar by incurring a cost of $15,550.00 for 10 employees however this may exceed or reduce if the attendances changes. From the simulation of the seminar expenses, most it will be incurred through accommodation and food. This is also the highest budget risk for implementing seminar. Some of the costs will be incurred through an occurrences of an event such as sickness or loss of employee laptop. This will be part of the expenses of the sponsor if carelessness is not proven as part of the employees. An employees fall sick which is beyond the control of the sponsor during the seminar. The scope of this budget could be summed as shown below, they are Cost elements Accommodation food snacks travelling insurance transport communication expenses equipment sickness property loss car hire expenses stationary other expenses Budget allocations for above expenses have been done according available records from previous similar meetings. Accommodation, food and property loss will take a huge chunk of the seminar costs. For property loss which is a contingency cost, it is estimated that it will cost roughly 18-10% of the total project budget due to usage of laptops during the seminar. Accommodation expense will entail two- night hotel boarding services for ten people while food is for 3 days. Travelling insurance will cover all the ten members of staff attending the seminar. The act of budgeting involves the analysis of the costs in terms of their variability to include possible price changes. The element of seminar management is included in the costing which includes accommodation, food and other expenses. The expenses relating to employees falling sick and loss of property caters for lees than 20% of the project total. Recommended baseline budget The main purpose of this report is to recommend a suitable budget to be implemented by sponsor of the seminar. This includes the provision of the nature and amount of costs. The seminar attracts a certain selected employees to attend. The sponsors can find the ways to do financial support to the seminar then use the numbers of people to pay for services. The table below shows detailed costs for the budget. No. Cost Variable Quantity Rate Cost 1. Accommodation 10 $620 6200 2. Food 10 $200 2000 3. snacks 10 $40 400 4 Car hire expenses 1 $1000 1000 5 Traveling insurance 10 $80 800 6 communication expenses 10 $60 600 7 Transport 10 $70 700 8 Equipment 2 $ 500 1000 9 sickness 0 1000 10 Property loss 0 1500 11 stationary 10 $10 400 12 Other expenses 1000 Total cost $16,600.0 Table 1: Budget Accommodation expenses – this entails two nights for all the ten staff members in a three star single room hotel at accost of is $620 per person per day Food - there will be three meals per day for participants of the seminar, this will cost $200 per person Transport expenses – this is a cost associated with transporting members within the area during seminar off time for site seeing as a recreational activity. Communication expenses – this entails the cost data bundles and air time for participants. Members are provided this at cost of minimum cost is $60 per participant. The chart below shows the baseline for total cost Figure 1 : total, baseline budget I would like to restate the need of the staff training requires adequate budget allotment so that the staff can get necessary stationary and equipment which are all beneficial to the success of the seminar. Risk events There are two risk events which are sickness and property loss. Sickness entails a chance of a participant falling sick during the travelling or at the seminar. However the change of this occurring is minimal due to proximity of the seminar venue and the office. However, possibility of sickness will not be ruled out thus accounted for in the budget The other risk is loss of property - Members are using laptops which can be stolen or misplaced and all this is unexpected property loss which needs to cater for. The most likely result of a threat event is loss of laptop. This chart shows risk analysis of the project expenditure. Contingency Any project will require a plan to shield it against adverse changes to the costs or the project events. This plan is called contingency plan. All projects require this plans because of fluctuation of prices of go goods and services. The contingency plan is drawn after considering all possible failures of project and plans are made for them.. The most important aspect from the point of view of project management is to keep track of all risks, possible risk identification and risk analysis. Data for failure of the project is usually obtained from similar past projects or consideration of the existing financial conditions. Therefore contingency fund is required to cushion against risks and this is added to the budget schedule in allowance range. Figure 2 : total, baseline budget In case the project fails time and money will be lost thus contingency funds ensures success of project. Normally accepted contingency percentage are P50 (50%) and P90 (90%), that is if the historical data have margin error of between 25% and 40%, the contingency value should be s P90 or 10%, and the margin error is between 10% and 15%, contingency percentage is P50. This is broken down as shown below; P90 Total Cost - Baseline Budget = Project Contingency $17257 - $15944 = $1,313 Table 2: baseline budget Accommodation was the main expense as it has more than 30% of the budget and this is a variable cost which will vary according to the number of participants. The cost contributes to large extend the expected contingency value of $1313 added on. However, the margin of error of error is error is between 25% and 40%, thus having a contingency of P90 which is 10%. This is shown in the chart below; Figure 3: Chart 1 Sensitivity analysis Sensitivity analysis considers possible changes in variables values and asks what is question and provides scenario cases. This projects there is the scenarios of likely and most likely. Cost variable sensitivity management Cost factors that affect both input and output are taken into account, this is due their variability. The variability of these costs affects predictability of project cost thus increasing risk. In measuring the sensitivity of the analysis in the context of the variation procedure, it is possible to deploy varied specifications. The simplest specifications pertain to the conventional Tornado charts whereby the costs have constant correlation coefficients. This process is ingrained in the model by assuming the matrix in different cases to be zero. Such comparisons allow the stability checking of the information likelihood systems in the case of models. The use of this Tornado is to show significant risk variables on completion of the seminar, from the chart it will be noted that the long bar have the highest value. This means that the higher the value the important the item is.. This is done and produced below Figure 4: correlation From the chart above it will be noted that accommodation 0.88, food 0.26, property loss 0.21 and car hire 0.20 were the first four riskiest expenses with their respective costs. However communication expenses had 0.04 correlation coefficient and snacks 0.05 which makes them less risk expenses. All this variables depends on the number of participants since they are variables. The reason why accommodation is more risk is because it has large amount per unit. This mean an introduction of one participant will trigger a large figure change it depends on the number of participators, if the number is reduced the cost will come down. This will change the baseline budget significantly. Beside, change in number of participants will have a major change in costs of food, snacks, communication, transportation fees and stationary, therefore, to have certain expenses the sponsor ought to maintain participants at 10 people or less. Tornado chart below shows the low and high inputs for each expenses Chart 2 In order to have adequate number of people for event only ten staff selected on merit will attend. Risk event sensitivity management Using risk event sensitivity management we will able to reduce operating costs for risk event, expose inappropriate forecasts, indicate critical variables, and promote better understanding of projects before proceeding with the event. By reducing operating costs, the management will promote the good performance by increasing its income and profits, creating a competitive advantage against its rivals. In this regard, sensitivity analysis will increase the company’s competitiveness by enabling the management to avoid unnecessary expenditure. Sensitivity analysis will also enable the management to uncover inappropriate forecasts about potential projects. By so doing, the management will be able to make accurate decisions regarding the most attractive event. Sensitivity analysis provides information on the critical variables associated with the project under consideration. Apart from highlighting the high-priority variables, this analysis encourages the management to gather more information about them, thus reducing cases of misinformed decisions. As such, sensitivity analysis ensures that the management is always concentrating on the relevant details regarding potential projects. In this regard, sensitivity analysis promotes a better understanding of a project as whole. The analysis ensures that the management does not waste resources on unnecessary variables at the expense of the critical variables, and that all necessary information regarding the critical variables is supplied. This results in a better understanding of the entire project, consequently promoting the making of informed capital investment decisions. The most sensitive risk event could be loss of property, and all the unexpected property loss will be paid by insurance company. Organizational policy The eventual conclusion about Monte Carlo simulation relates capturing all possible scenarios of the events and possible outcomes in terms of finance and budgets. It has captured both negative and positive occurring in budget making process. The model has budget baseline that is always 10% lower of the actual estimates and this has been taken into account. But from a positive perspective, Monte Carlo simulation budget baseline lies in the confidence interval of the of 10%. According Monte Carlo simulation results the acceptable confidence interval of the of baseline budget is 95% that is -5% and +5% range is defined as risky, this is shown in the chart below; Budget decisions are aimed at allocating necessary resources for the implementation of strategies and plans in an organization. Through proper resource allocation, the budget will enable sponsor to achieve proper training for staff, thus promoting their capabilities. In this regard, the impact of budget decisions is felt through the provision of resources and facilitation of the accomplishment of set targets, goals, and objectives. Reference Lecture notes topic 8, Quantitative Risk Analysis - Introduction to statistics. Risk Management 641 Lecture notes topic 11, QUANTITATIVE RISK ANALYSIS MONTE CARLO SIMULATION. Risk Management 641 Lecture notes topic 12 contingency. Risk Management 641 APPENDIX Appendix 1-Quick Output Report @RISK Sensitivity Analysis         Performed By: user         Date: Tuesday, October 11, 2016 8:08:30 AM         Rank For J17 Cell Name Description Model!J17 Total Project Cost (Sim#1) Range of Mean Model!J17 Total Project Cost (Sim#2) Range of Mean   #1 J3 accomodation / Sampled RiskPert(G3,H3,I3) 1,200.72 1,200.72   #2 J4 food / Sampled RiskPert(G4,H4,I4) 375.37 375.37   #3 J11 property loss / Sampled RiskPert(G11,H11,I11) 308.98 308.98   #4 J9 equipment / Sampled RiskPert(G9,H9,I9) 203.81 203.81   #5 J14 other expenses / Sampled RiskPert(G14,H14,I14) 201.98 201.98   #6 J10 sickness / Sampled RiskPert(G10,H10,I10) 194.25 194.25   #7 J12 car hire expenses / Sampled RiskPert(G12,H12,I12) 177.60 177.60   #8 J8 communication expenses / Sampled RiskPert(G8,H8,I8) 160.73 160.73   #9 J6 travelling insurance / Sampled RiskPert(G6,H6,I6) 133.69 133.69   #10 J13 stationary / Sampled RiskPert(G13,H13,I13) 126.75 126.75   #11 J7 transport / Sampled RiskPert(G7,H7,I7) 121.83 121.83   #12 J5 snacks / Sampled RiskPert(G5,H5,I5) 119.64 119.64   Appendix 2 The sponsor wants to understand MCS. To facilitate this, the sponsor has asked: Appendix 2-input variable selected values Food expense This expense is variable and depends on the number of participants to the seminar. The cost per unit is $200 thus for any number of participants the cost will be employees * unit price. The following chart shows probability distributions with the minimum value, maximum value and the most likely value. The chart shows that the minimum value is $0 that is there is no seminar at all while the maximum is $2000 that is if the maxim number of participants attend that is 10 employees. The most likely event is shown to have $760 which is average. However it should be noted that the price of food will change any thus the budget is flexible. Risk Event One of selected cost variables for the sponsor property loss expenses. This expense has chance of occurring or not occurring. The following chart shows probability distributions with the minimum value, maximum value and the most likely value. The chart shows that the minimum value is $0 which probability of a not occurring while the maximum is $1500 that is if there is an occurrence. The most likely event is shown to have $12900 which is average.. Chart 6 Appendix 3-Correlation The positive correlation between accommodation and food confirms that results depend on number of participants. The Monte Carlo simulation has been used to carry out correlation for two items that is accommodation and food. The finding through the scatter diagram is further reinforced by the value of the correlation coefficient between the two variables under consideration. The negative sign of the coefficient indicates a negative relationship while the very high absolute value of the coefficient, 0.98, simply implies a very close association between Accommodation and food. This It implies that if accommodation is increases by 1 unit, the food expense will increase by 0.98. Accommodation food Accommodation 10 +0.98 food +0.98 10 The forecasts they achieved were evaluated by making use of varied measures was not possible to be treated as the correct means to ascertain the assessment of the forecast and performance of varied models for the conditional variation. The benefit of making use of several forecasting options relates to the robustness in deciding for any predictor models. Read More