The identification and analysis of project risk is a necessary condition for effective risk management. You can’t manage risks without knowing their characteristics, what they are, how likely they are, and what impact they might have.
Inadequate or untimely descriptions of risks can have a number of consequences, all of which are detrimental to the project:
▪ May unnecessarily spend time and money preparing for risks that are practically negligible.
▪ The need for emergency allowances can be exaggerated, tying up owners’ funds, preventing other critical projects from being funded (opportunity cost) (Mak and Picken, 2000), and contributing to increased project costs as additional emergency expenses are usually disbursed rather than returned to the project sponsor.
▪ Emergency funds can be underestimated, resulting in budget or schedule overruns, and often performance and quality shortfalls as quality and scope are reduced to keep costs within budget.
▪ Actual significant risks may be missed, resulting in cost overruns for project managers and owners, delays in completion, loss or even cancellation of the functionality that the project is supposed to provide.
Project Risk Type
Performance, scope, quality or technical risks. These risks include not performing as expected when the project is completed, or not meeting the task or business requirements that generated the justification for the project. If technical issues increase the duration and cost of the project, performance risks also lead to schedule and cost risks.
Environmental, safety and health risks. These risks include the risk that the project may have an adverse impact on the environment or that hidden dangers may be discovered during the project execution. Serious accidents can have a serious impact on schedule and cost.
Schedule risk. This is the risk of a project taking longer than planned. Schedule risk can also lead to cost risk, because the longer the project, the higher the cost; There is a performance risk if the project is completed too late to fully perform the intended tasks. Even if the cost increase is not significant, delays in project completion can reduce the value of the project to the owner.
Cost risk. This is the risk of project costs exceeding budget. Cost risks may lead to performance risks. If cost overruns result in a reduction in scope or quality, try to stay within the baseline budget. Cost risk can also lead to schedule risk if schedule is extended because there is not enough money to complete the project on time.
Losing support. Loss of public or stakeholder support for project goals and objectives may ultimately lead to a reduction in project scope and funding, resulting in a decline in project performance.
While the above types of risk may be encountered in almost infinite forms and intensities, it is most useful to consider two types:
The incremental risk
These risks are not important in themselves, but can add up to significant risks. For example, cost overruns in a single subcontract may not pose a risk to the project budget by themselves, but may pose a serious risk to the project budget if multiple subcontracts are overrun due to random causes or common causes that affect all subcontracts (i.e., common mode failures).
While these risks may not be significant in isolation, the problem lies in their combination and the lack of recognition that the cumulative effect is a significant project risk. An obvious example of increased construction risk is weather-related delays, which are usually not the main problem per ses, but long periods of severe weather that hamper the progress of a project can pose serious challenges to schedule and budget.
Catastrophic risk
These risks include significant threats to project performance, environment and health, cost or schedule. Their probability may be low, but the impact can be large. Examples of such risks include reliance on key technologies that may or may not be effective, the extension of test-bed level technology to full-scale operations, the discovery of unanticipated or underdescribed wastes or contamination, and reliance on a single supplier or source of critical equipment.
Consequences of increased project uncertainty
Studies on projects with high and low levels of uncertainty (e.g., Shenhar, 2001) show that as uncertainty increases, so does the likelihood of the following:
▪ Increased project budgets, ▪ Increased project time, ▪ Increased planning workload, ▪ Increased activity in the planning network, ▪ Increased design cycles, ▪ Increased number of design reviews ▪ Delays in final design, ▪ Increased need to exchange information outside of formal meetings and documents, ▪ Increase management attention and energy (probabilistic risk assessment, risk mitigation), ▪ Increase systems engineering workload ▪ Increase quality management efforts.
When low uncertainty projects are applied to appropriate technologies and skills, applying them to high uncertainty projects may lead to poor results, so flexible decision methods for risk management may be more successful. The owner can determine whether the project has very low risk or significant risk by performing a risk assessment, which starts with a risk description.
Risk Management Strategy
The effectiveness of risk management strategies varies from project to project risk. Here are two examples of the applicability of different policies:
For relatively certain projects, rapid decision making minimizes uncertainty caused by delays due to regulatory, political, or economic changes.
For projects with a high degree of uncertainty, purposefully deferring some decisions or commitments can reduce risk by obtaining more or better information, leading to better decisions. This includes keeping options open for as long as possible, but explicitly does not include management procrastination in the hope of miracles.
Therefore, the risk management strategy is not one-size-fits-all, but needs to match the risk profile and objectives of the project and the owner’s overall project portfolio. The project manager needs to understand the project risk management tools in order to develop a comprehensive risk management plan before the project approves design or construction funding.
The main steps in determining an appropriate risk management strategy include:
▪ Risk awareness development, ▪ Project risk identification, ▪ Qualitative risk assessment, ▪ Quantitative risk assessment, ▪ Risk prioritization, ▪ Risk mitigation ▪ Active and continuous risk management.
Project risk management begins with the development of risk awareness among all project personnel, suppliers, and contractors. The development of risk awareness is similar to the development of safety awareness on construction sites and requires the unrelenting attention of owner management and the use of every opportunity to demonstrate management’s commitment to this issue.
People working on construction sites may initially think that safety is the responsibility of the safety engineer, but a consistent message is everyone’s responsibility. Safety awareness is formed when all personnel realize that they cannot ignore any unsafe situation. Similarly, risk awareness is achieved when everyone on the project knows that he or she cannot ignore any potential risk conditions and believes that risk management is someone else’s responsibility.
That is, certain aspects of project risk management are the responsibility of specific people. Risk identification and analysis should be carried out by qualified personnel with in-depth knowledge of the project. Technical risk assessments can be carried out by external consultants with specialized knowledge. Whoever prepares a risk assessment, it should be done separately by an independent, qualified person and a “reality check” by management of the soundness of assumptions, results, quality, and process integrity. If defects are found, a corrective action plan shall be developed and implemented.
Project risks and risk management responses need to be re-evaluated and revised throughout the project life cycle. The risk assessment and risk management plan should be part of the document for each key decision point that needs to be reviewed, criticized, and reworked so that management can allow the project to move to the next phase and be confident that the project risks are acceptable and are being properly managed.
To gain more control over project risk, you need to use project management software. 8Manage PM has a number of tools that allow you to address risk at every stage of a project.
8Manage PM automatically detects project systemic risks and their impact, including project plan, cost, resource, and quality risks, and automatically extrapolates the ultimate impact from the existing impact. Project personnel can clearly understand the severity of these risks if they are not properly and timely managed.
If the project is in a more agile environment, you can use the 8Manage Kanban to sort and prioritize risks. You can use custom tags to identify tasks as risks in the project, so you can quickly see how to resolve urgent risks.
8Manage PM is a dynamic business management platform that fosters the collaborative environment you need to address risks and provides real-time information so you can always make decisions based on accurate data.