PROJECT RISK MANAGMENT
Chapter one
Introduction
KURABACHEW M.(PhD)
Contents
1. Definition and Concepts
2. Importance of Project Risk Management
3. Building Risk Management Culture
4. Project Risk Management Process
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1. Project Risk/Risk
What is Risk?
A risk is the product of the probability of an event happening, and its
consequences.
The impact can be either positive or negative.
Project risk:
An uncertain future event that will affect the project from
achieving its goals and objectives within cost, schedule and
performance constraints
or more simply, the effect of uncertainty on achievement of objectives
In general it is an uncertain event or condition that, if it occurs, has an effect
on at least one project objective.
1. Project Risk/Risk
Objectives can include :
1. scope,
2. schedule,
3. cost,
4. quality and
5. client satisfaction
A risk may have one or more causes and, if it occurs, it may have one
or more impacts.
A cause may be a requirement, assumption, constraint, or
condition that creates the possibility of negative or positive
outcome.
[Link] Risk/Risk
Risk can be Positive Or Negative
Negative risk identification involves understanding potential problems
that might occur in the project and how they might impede project
success
Negative risk management is like a form of insurance; it is an
investment
Example:
Unproven technology impacting project schedule
Loosing critical resources from Project
[Link] Risk/Risk
Positive risks are risks that result in good things happening;
sometimes called opportunities
Examples:
Emergence of new tool to increase productivity
New resource replacing the lost resource which is better one
Negative risks are threats to the project while the
positive once are opportunities.
2. Project Risk/Risk Management
Risk management is applying:
Principles and processes that help minimize the negative impacts of risks and
maximize the positive impacts.
It is the art and science of identifying, assigning, and responding to risk
throughout the life of a project and in the best interests of meeting
project objectives.
The goal of risk management is to minimize potential negative
risks while maximizing potential positive risks.
2. Project Risk/Risk Management
Project risk management uses the two fundamental parameters of
risk
Likelihood: “probability” estimated in several ways for project events
(though often by guessing)
Loss/gain: generally referred to for projects as “impact,” and it is
based on the consequences to the project if the risk does occur.
Measured in time or cost
2. Project Risk/Risk Management
There are no risk-free projects because there is an infinite
number of events that can have a negative effect on the project.
Risk management is not about eliminating risk but about identifying,
assessing, and managing risk..
3. Project Risk Classification
Known vs. unknown or unforeseen Risk
Known risks are events that have been identified and analyzed for
which advanced planning is possible.
Risks that can be anticipated, required on the project. such as exceptionally bad
weather.
Other risks are unknown or unforeseen.
Terrorist Attack
Sudden Family Death
Natural disaster
3. Project Risk Classification
Project risks Vs organizational risks
Organizational Risk:
Possible loss that is associated with the business purpose of
the project
Assumed by the client when deciding to do the project.
For Example:
A copper mine project chartered to design and construct, a drop in price of copper
is an organizational or business risk.
3. Project Risk Classification
Risks versus Issues
Issue:
any event described in the past tense it is an issue to manage and not a risk.
It is something that has already happened and the consequences should be dealt with.
Identify issues and manage the consequences
Risks:
are future events and the focus of risk management is to identify,
plan and execute strategies and plans to prevent them from happening, or mitigate their
impact.
identify risks and manage the root causes
Concern is
Risk Is not
analyzed to
Adequately
identify root
Addressed
cause(s)
CONCERN RISK ISSUE
Uneasy feeling that Occurrence of risk
Likelihood that an
an issue may arise event which will
issue may arise which
which could affect the affect the project’s
could affect the
project’s success. success.
project’s success.
No root cause or firm
Root cause(s) i.e. firm
basis for concern yet
basis/ justification of
identified.
risk is identified
4. Risk utility
Different organizations and people have different tolerances for risk
Risk utility or risk tolerance is the amount of satisfaction or pleasure
received from a potential payoff
Utility rises at a decreasing rate for people who are risk-averse
Those who are risk-seeking have a higher tolerance for risk and
their satisfaction increases when more payoff is at stake
The risk-neutral approach achieves a balance between risk and
payoff
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4. Risk utility
Risk Utility Function and Risk Preference
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Section II:
Importance of Project Risk Management
Importance of Project Risk Management
Project risk management is primarily undertaken to improve
the chances of projects achieving their objectives.
It can help improve project success by helping select good projects,
determining project scope, and developing realistic estimates
Risk management helps a project to have fewer problems to begin with.
Project Risk Management is One of the nine knowledge Areas of
the Project Management
Knowledge areas of project management
1. Project Integration Management
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2. Project Scope Management
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3. Project Time Management
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4. Project Cost Management
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5. Project Quality Management
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6. Project Human Resource Management
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7. Project Communications Management
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8. Project Risk Management
9. Project Procurement Management
Importance of Project Risk Management
Risk analysis can reveal opportunities for improving projects
that can result in increased project value
Adequate risk analysis lowers both the overall cost and the
frustration caused by avoidable problems.
It Helps to get Project Priority and Management Support
Project risk response register is an input for project portfolio
management
Importance of Project Risk Management
Risk analysis uncovers weaknesses in a project plan and
triggers changes, new activities, and resource shifts that
improve the project.
Risk analysis demonstrates the uncertainty of project
outcomes and is useful in justifying reserves for schedule
and/or resources.
Project communication is most effective when there is a solid,
credible risk plan.
Importance of Project Risk Management
Risk assessments also build awareness of project exposures for the
project team, showing when, where, and how painful the problems
might be.
This causes people to work in ways that avoid project difficulties.
Risk data can also be useful in negotiations with project
sponsors.
Section III:
Building a Risk Management Culture
Building a Risk Management Culture
It is the process of developing people in an organization who think
and plan projects effectively, and who are supported by company
systems that encourage them to think and plan effectively.
This involves looking constantly at what could go wrong and
knowing the difference between theoretical risk and practical risk.
Theoretical risk is risk that could happen;
practical risk is risk that is likely to happen.
Experience helps to differentiate the two.
Building a Risk Management Culture
The successful risk management organization has five basic
competencies:
1. Active training and development in risk planning and management
2. Strong linkage between corporate planning and project planning,
3. Deep project experience in its industry
4. Capacity to document project experience and "learn" as an organization
5. A workforce of strong functional managers who address product quality as a
risk reduction issue
Building a Risk Management Culture
The organization must position itself for risk and must empower and
enable its business and project people to address and take
risks, but there must be an open, organization-wide process for
addressing and absorbing risk.
If these conditions don't exist, the project manager is not
"incentivized" to address risk and will avoid risk, often at the expense
of opportunity.
Building a Risk Management Culture
Any organization building a risk-based culture must provide incentives
for integrating risk into the project planning and control process.
The incentive for handling risk is top management support and
resources.
Project managers who manage risks effectively are likely to be more
successful in acquiring additional resources because they tend to
have backup and contingency plans ready when risks occur.
Building a Risk Management Culture
The beginning of
good risk management
is the capacity to know
what the organization
and its people can do
and
what they cannot do.
Widen the open
Quadrant
Johari Window
Risk management process (based on ISO 31000)
Section IV:
Project Risk Management Process
Project Risk Management Process
Project has Five process Groups:-
1. Initiating,
2. Planning,
3. Executing,
4. Monitoring and Controlling, and
5. Closing
Project Risk Management is related to two of these groups:
the Planning and
the Monitoring & Controlling Process Group
Project Risk Management Processes
It is all about planning
1. Planning risk management
2. Identifying risks
3. Performing qualitative risk analysis
4. Performing quantitative risk analysis
5. Planning risk responses
Controlling and Monitoring
6. Controlling risk
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Project Risk Management Process
Project Risk Management Process
1. Risk Management Planning
It is the systematic process of deciding how to approach, plan, and
execute risk management activities throughout the life of a project.
It is intended to maximize the beneficial outcome of the
opportunities and minimize or eliminate the consequences of
adverse risk events.
2. Risk identification
Risk identification involves determining and documenting which risks can affect
the project.
It may be a simple risk assessment organized by the project team, or an outcome
of a formal risk assessment process such as the Cost Estimate Validation Process.
Risk identification tools and techniques include
Brainstorming
The Delphi technique
Interviewing
SWOT analysis
3. Qualitative risk analysis
Qualitative risk analysis involves Project teams assessing identified risks for probability of
occurrence and impact on project objectives.
Teams may elicit assistance from subject matter experts or functional units to assess the risks in
their respective fields.
Risks are measured by their “quality” in words rather than quantified in numbers.
Risk quantification tools and techniques include:
Probability/impact matrixes
The Top Ten Risk Item Tracking
Expert judgment
4. Quantitative risk analysis
Quantitative risk analysis is a way of numerically estimating the probability
that a project will meet its cost and time objectives.
Quantitative analysis is based on a simultaneous evaluation of the impacts of
all identified and quantified risks.
Main techniques include:
• Decision tree analysis
• Simulation
• Sensitivity analysis
5. Risk Response
Risk response involves developing options and determining actions to reduce
threats or enhance opportunities to project objectives.
Actions are identified and assigned to parties that take responsibility for the risk
response.
This process ensures each risk requiring a response has an “owner.”
The Project Manager and the project team identify a strategy that is best for
each risk, and then select specific actions to implement that strategy.
5. Risk Response
Four main response strategies for negative risks:
• Risk avoidance
• Risk acceptance
• Risk transference
• Risk mitigation
§Response Strategies for Positive Risks
Risk exploitation
Risk sharing
Risk enhancement
Risk acceptance
6. Risk Monitoring & Control
Risk monitoring and control tracks identified risks, monitors residual risks, and
identifies new risks—ensuring the execution of risk plans and evaluating their
effectiveness in reducing risk.
Residual risks are risks that remain after all of the response strategies have been
implemented
Risk monitoring and control is an ongoing process for the life of the project.
Project Risk Monitoring Process
Project Risk and the Project Complexity Profile
There is a positive correlation between the complexity of a project and the risk.
Increased levels of complexity imply
more people, newer technologies, and increased internal and external
unknown factors.
High scores for external complexity imply high risks to
the schedule, budget, and quality due to unknown factors and limited
resources.
Project Risk and the Project Complexity Profile
High scores for internal complexity imply high risks to
the budget, schedule, and quality due to organizational complexity and changes of scope due to lack of clarity in
project and scope statements.
High scores for technological complexity imply high risks to the
budget, schedule, and quality due to unknown flaws in the technology and lack of familiarity with it.
Environmental complexity includes legal, cultural, political, and ecological issues.
High scores for complexity in this category imply high risks for delay and expensive resolution
to lawsuits, public opposition, changes for political considerations, and unforeseen ecological
impacts.
END OF CHAPTER
