Introduction: What is project risk
Projects operate within an uncertain environment, facing risks related to funding, resource
availability, evolving client needs, and technical challenges.
Risk management involves identifying, analyzing, and responding to these uncertainties to
safeguard project objectives.
Success isn't about avoiding problems but lies in the plans made to address them when they
arise.
The Project Management Institute defines project risk as uncertain events or conditions that can
impact project objectives positively or negatively.
Modern risk management views uncertainty as a source of both opportunities and threats,
challenging past assumptions that risk solely led to negative outcomes.
Acknowledging the potential for positive or negative impacts from the same risk event is crucial
for project managers, as various factors, both within and beyond an organization's control, can
influence project success.
Risk Management Basics: It's about foreseeing unexpected situations at the project's start that
could disrupt its success. These are situations beyond the manager's control.
Key Questions in Risk Management:
Probability and impact assessment: What might happen and how severe could it be?
Minimizing impact: What can be done to reduce the chance of these events or their impact?
Recognizing cues: What signs should I watch for that signal the need for action?
Predicting outcomes: What might happen if these issues occur, and how would I respond?
Understanding Risk Equation: Risk calculation involves two elements:
Probability of an event occurring.
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Consequences or effects if it happens.
Risk and Opportunity Dynamics: Understanding how risks and opportunities evolve over the
project's life cycle.
Early Project Phases: High uncertainty exists with high risks and opportunities, but the potential
negative consequences are minimal due to low resource commitments.
Later Project Phases: Risks diminish as the project becomes clearer, yet potential negative
consequences increase significantly with higher resource investments.
Critical Project Stages: During execution and completion, uncertainty remains high, and the
investment in the project is at its peak, posing a high potential for negative consequences.
Goal of Risk Management: To reduce the company’s exposure to uncertainty and potential
negative outcomes, especially during critical project stages.
Risk Management: A four stage process
Risk identification—the process of determining the specific risk factors that can reasonably be
expected to affect your project.
• Analysis of probability and consequences—the potential impact of these risk factors,
determined by how likely they are to occur and the effect they would have on the project if they
did occur.
• Risk mitigation strategies—steps taken to minimize the potential impact of those risk factors
deemed sufficiently threatening to the project.
• Control and documentation—creating a knowledge base for future projects based on lessons
learned
Risk Identification
Financial Risk: ex. Involves financial exposure due to large upfront investments without
guaranteed buyers, like in speculative construction projects or aircraft development. Or just
having a large capital investment from the begining in general
Technical Risk: Associated with unproven or unique technical aspects of a project. If making a
slight modifcation then not much risk, if you're creating a whole new thing then it will be a lot of
risk
Commercial risk: For projects that have been developed for a definite commercial intent
(profitability), a constant unknown is their degree of commercial success once they have been
introduced into the marketplace
Execution risk: orExecution risk is a broad category that seeks to assess any unique
circumstances or uncertainties that could have a negative impact on execution of the plan.
Identifying unknowns in carrying out the project plan.
Contractual or legal risk:
Contractual or Legal Risk: Common in projects with strict terms and conditions outlined
beforehand.
Types of Contracted Terms: Such as cost-plus terms, fixed cost, or liquidated damages, leading
to considerable project risk. Risks in the contract basically
Other more simple and common risks
Absenteeism • Resignation • Staff being pulled away by management • Additional staff/skills not
available • Training not as effective as desired • Initial specifications poor or incomplete • Work
or change orders multiplying due to various problems • Enhancements taking longer than
expected
Brainstorming meetings: Gather project team, top management, and client input without criticism
or pressure, fostering a safe environment for idea sharing.
Expert opinion
Expert Opinion: Utilize expert judgment in two ways:
Delphi Approach: Collect and synthesize anonymous expert judgments for decision-making,
requiring preliminary screening.
Experience-Based: Leverage experience within the organization, consulting individuals who
have encountered similar risks.
History
Past experiences reveal patterns and precedents in encountering risks in projects.
Historical data helps identify risk factors and the indicators that preceded past issues.
Challenges exist in solely relying on historical data as market conditions and project
methodologies evolve.
Team Based Assessments
Single-case perspectives may have biases and limitations in identifying project risks.
No individual possesses a comprehensive understanding of all project threats.
A team-based approach promotes a more diverse and comprehensive identification of potential
risks.
It encourages collaboration and support among team members toward project goals.
Risk Breakdown structures
Risk Breakdown Structure (RBS):
Definition: Organizes and defines project risks hierarchically, akin to the Work Breakdown
Structure (WBS) for project scope.
Hierarchical Representation:
Higher Levels: Divides risks into broader categories (e.g., external and internal risks).
Second Level: Further breakdown into specific categories like "Market risks," "Technical risks,"
etc.
Detailed Classification:
Specific Risks: Each category further subdivided into specific risks (e.g., "Customer acceptance"
under "Market Risks," "Pollution risks" under "Environmental Impact").
Advantages of RBS:
Visual Representation: Provides a visual map of critical risks and their components.
Helps Analysis: Aids in analyzing the probability and consequences associated with each
identified risk.
Analysis of probrability
Find the probrability and impact of each risk to the r the project, the project team, or the
sponsoring organization should the worst come to pass.
-has all of them in it
Analyzing Risk Events:
Consider opportunities arising from uncertainty alongside negative consequences.
Brainstorming Sessions: Determine if risks can be transformed into innovative solutions.
Quantitative Analysis - Software Development Scenario:
Probability of Failure:
Identifying factors affecting successful project completion.
Factors include software design maturity and project complexity.
Consequences of Failure:
Assessing the potential impact if the project fails.
Consequences involve fi
Assess Probability of Failure:
Evaluate each identified risk factor concerning its likelihood to influence project success.
Rate or score these factors individually based on their potential impact on successful project
completion.
Evaluate Consequences of Failure:
Assess the consequences or effects of these risk factors on the project if they were to
materialize.
Assign scores or values to each consequence based on its severity or impact on the project's
outcomes.
Calculate Risk Scores:
Sum up the scores obtained for probability of failure factors.
Sum up the scores for the consequences of failure factors.
Divide each sum by the total number of factors assessed within its dimension to derive an
average score.
Determine Overall Risk Factor:
Combine the average probability of failure score and the average consequence of failure score
to calculate the overall risk factor.
Apply the risk factor to the risk classification scale (e.g., below .30 for "Low Risk," between .30
and .70 for "Medium Risk," and over .70 for "High Risk") to categorize the project's risk level.
Risk Mitigation Stragies
Accept Risk
Minor risks in a project may exist but might not warrant action due to their low probability or
minimal impact.
Decision to "do nothing" with minor risks is a calculated choice, not negligence.
Minimize risk
Strategies to minimize risk
Ex.
Continuous Contact: Significant vendors are required to maintain constant direct contact with
Boeing's quality assessment teams.
Intervention Rights: Boeing insists on the right to intervene in vendor production processes to
ensure adherence to quality standards.
Share risk:
Pooling Resources: Multiple countries in the European Union partner to develop projects like the
Ariane rocket or new airframes, sharing resources and risks.
Contractual Risk Sharing:
Supplier-Customer Contracts: Contracts with suppliers and customers can legally enforce
risk-sharing among project participants.
Industrial Construction Projects: Host countries for large projects (e.g., petrochemical plants)
insist on "Build-Own-Operate-Transfer" contracts, where the project firm initially owns and
operates the plant, transferring ownership after successful operation. This approach spreads
financial risk jointly between the firm and the host country until the project's completion.
Transfer Risk
Transferring Project Risks:
Nature of Risk:
Elimination or Minimization: If risks can't be altered, shifting them to another party might be a
solution.
Methods of Risk Transfer:
Fixed-Price Contracts: Establishing a fixed project cost upfront, where any budget overruns are
borne by the project organization.
Liquidated Damages: Agreement on penalty clauses triggering compensation if agreed-upon
project milestones aren't met, ensuring project functionality.
Insurance: Commonly used in industries like construction to transfer financial obligations to an
insuring agency, mitigating risk.
Use of contingency reserves
Contingency reserves are safety nets for unexpected project costs or issues. They set aside
money, usually 10% to 15% of the project budget, to cover surprise expenses in construction or
other projects.
Task contingency
which is used to offset budget cutbacks, schedule overruns, or other unforeseen circumstances
accruing to individual tasks or project work packages
Hence, task contingency becomes extremely important as a method for offsetting the project
team’s inability to make an accurate budget estimate.
Managerial contingency
Additional safety buffer applied at the project level. Reserve of funfs for drastic changes to the
scope or natural dissasters.
Inssurance
Insurance is a vital risk reduction tool, especially in fields like construction where risks involve
health, safety, and financial aspects.
Occupational safety standards vary globally, with some regions having lax enforcement, leading
to potential hazards for workers, like the absence of safety harnesses in high-rise construction
in certain countries.
Contractors obtain insurance to cover various project risks, including material loss, workers'
compensation, and liability.
Project managers play a key role in ensuring compliance by maintaining updated certificates
and securing necessary insurance throughout the project to mitigate potential risks effectively.
Workarounds
A workaround is an unplanned or ineffective response to a threat that has occurred during a
project.
Workarounds emerge when the original approach faces unforeseen errors or problems,
hindering the intended outcome.
For instance, if a hospital's software for drug ordering is faulty and slows down critical deliveries,
employees might find inventive ways, like alternative ordering methods or IT system shortcuts,
to expedite the process.
Workarounds creatively address unforeseen threats in projects by devising alternative solutions
to problems that arise unexpectedly.
Other mitgation strategies
mentoring: junior or inexperienced project peronslel are paired with senior managers to help
them learn best practices
Cross training: cross trianing project team perosnell so that they can fill in for each other in case
of unfroseen circumstances
Control and documentation
Establishing a reporting and documentation system post-risk analysis is crucial for future
reference and classification of risks, responses, and outcomes
A comprehensive risk management report should detail the problem, mitigation plan,
responsible team member, target date, and expected outcome, serving as a coherent and
informative control document.
Establishing change management as part of risk mitigation strategies also requires a useful
documentation system that all partners in the project can access. Fill out the form to do so
Also have a contigency analysis document for future referene as well
What
WHO
When
Why
How
Project Risk Management: An integrated Approach
PRAM Overview: Developed by the European Association for Project Management, PRAM
(Project Risk Analysis and Management) is an integrated risk management program extending
across a project's life cycle, offering a systematic approach to risk assessment.
Life Cycle Integration: Recognizes risk management as its own life cycle, integrating it
throughout the entire project life cycle.
Tailored Strategies: Applies different risk management strategies at various stages of the
project, tailoring methods to specific life cycle points.
Integrated Approaches: Synthesizes various risk management tools into a coherent approach,
advocating for the use of relevant tools when needed.
Define: Clearly outline the project, encompassing all deliverables, the scope of work, and project
objectives.
Focus: Initiate risk management planning as its own project, tailoring methods to address
specific project risks.
Identify: Assess and recognize the sources of risk at the project's outset, creating suitable
responses and classifying these risks for prioritization.
Structure: Refine risk classification, identify commonalities among risks, and establish a
prioritization scheme for addressing them.
Clarify Ownership: Determine which risks the project organization will handle and those the
client must accept, allocating responsibility for risk management.
Estimate: Predict the impacts of identified risks and proposed solutions, evaluating potential
scenarios and their associated costs.
Evaluate: Critically assess estimates to devise the most plausible plan for mitigating potential
risks, prioritizing them and the team's responses.
Plan: Formulate a comprehensive project risk management plan, proactively providing
strategies for risk mitigation.
Manage: Monitor actual project progress and related risk management plans, adjusting plans for
future development in response to any deviations.
