The identification and analysis of project risk is a necessary condition for effective risk management. risk cannot be managed without understanding the characteristics of risk, what they are, how likely they are, and the impact they may have.
Inadequate or undue description 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 can actually be ignored
- The need for contingency allowances may be exaggerated, taking up the owner's funds, preventing other important projects from receiving funding (opportunity cost) (Mak and Picken, 2000) and increasing project costs, as additional contingency costs are usually incurred rather than returned to the project sponsor.
- Contingency reserves may be underestimated, resulting in budget or schedule overruns, and often performance and quality deficiencies, as quality and scope are reduced in order to keep costs within budget.
- Actual significant risks may be missed, resulting in cost overruns, delays in completion, loss of functionality that the project should have provided, or even cancellation.
The type of project risk
Performance, scope, quality, or technical risk. these risks include that when the project is completed, the project does not perform as expected, or does not meet the task or business requirements that justify the project's build. performance risk can also lead to schedule and cost risk if technical issues increase the duration and cost of the project.
Environmental, safety and health risks. these risks include the risk that the project may adversely affect the environment, or the potential vulnerabilities that may be identified during the execution of the project. serious accidents can have a serious impact on schedule and cost.
Progress risk. this is the risk that the project will take longer than planned. progress 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 expected tasks. even if the cost increase is not significant, the delay in completing the project will reduce the value of the project to the owner.
Cost risk. this is the risk that the project cost exceeds the budget. cost risk can lead to performance risk if cost overruns lead to a reduction in scope or quality, trying to stay within the baseline budget. cost risk can also lead to schedule risk if progress is extended because there is not enough money to complete the project on time.
Loss of support. loss of public or stakeholder support for project objectives and objectives may eventually lead to a reduction in the scope of the project and a reduction in funding, resulting in a decline in project performance.
While these types of risks may be encountered in almost infinite form and intensity, it is most useful to consider two types:
Incremental risk
These risks are not important in themselves, but can accumulate to pose significant risks. for example, cost overruns in a subcontract may not in themselves pose a risk to the project budget, but they may pose a serious risk to the project budget if multiple subcontracts are overspent for random reasons or common causes that affect all subcontracts (i.e., common mode failures).
While these risks may not be serious on their own, the problem is their combination and lack of understanding that cumulative effects are significant project risks. a clear example of increased construction risk is weather-related delays, which are not usually the main problem per se, but long-term adverse weather hampers the progress of the project and can pose serious challenges to progress and budgets.
Catastrophic risk
These risks include significant threats to project performance, environment and health, cost, or schedule. their likelihood may be low, but the impact may be significant. examples of such risks include reliance on key technologies that may or may not be effective, extending test bench-level technologies to full operation, discovering unannourished or under-described waste or contamination, and relying on a single supplier or source of critical equipment.
Consequences of increased project uncertainty
Studies of projects with higher levels of uncertainty and low levels (e.g., Shenhar, 2001) indicate that, as uncertainty increases, so does the likelihood of:
- Increase the project budget,
- Increase project time,
- Increase the planning workload,
- The increase in activities in the planning network, the increase in the design cycle, the increase in the number of
- Design reviews
- The final design delay,
- Increased demand for information exchange outside of formal meetings and documents
- Increase management's attention and effort (probability risk assessment, risk mitigation),
- Increase the workload of system engineering
- Increase quality management efforts.
When low-uncertainty projects are applied to the right technology and skills, applying them to high-uncertainty projects can lead to poor results, so flexible decision-making approaches to risk management may be more successful. the owner can perform a risk assessment to determine whether the project is extremely low risk or a significant risk, starting with a risk description.
Risk management strategy
The effectiveness of risk management strategies varies depending on the project risk. here are two examples of the applicability of different policies:
For relatively identifiable projects, rapid decision-making minimizes the uncertainty caused by delays due to regulatory, political, or economic changes.
For projects with high levels of uncertainty, purposefully delaying some decisions or promising to reduce risk by obtaining more or better information leads to better decisions. this includes retaining options for as long as possible, but clearly does not include management delays that would like miracles to occur.
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 portfolio. the project manager needs to understand the project risk management tools to develop a comprehensive risk management plan before the project approves the design or construction funds.
The main steps in determining an appropriate risk management strategy include:
- Risk awareness,
- Project risk identification,
- Qualitative risk assessment,
- Quantitative risk assessment,
- Risk priorities,
- Risk mitigation
- Active and ongoing 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 tireless attention of the owner management and uses every opportunity to demonstrate the management's commitment to this issue.
The people who work on construction sites may initially consider safety to be the responsibility of safety engineers, but consistent information is everyone's responsibility.
Security awareness is created when all personnel realize that they cannot ignore any unsafe situation. similarly, risk awareness is realized when everyone in the project knows that he or she cannot ignore any potential risk conditions and believes that risk management is the responsibility of others.
That is, some aspects of project risk management are the responsibility of specific people. qualified personnel with in-depth knowledge of the project should conduct risk identification and analysis.
Technical risk assessments can be conducted by external consultants with expertise. whoever prepares the risk assessment should be assessed separately by independent qualified personnel and "realistically checked" by management for the reasonableness of assumptions, results, quality and process integrity. if defects are found, a corrective action plan should be developed and implemented.
The project risk and risk management responses need to be re-evaluated and revised throughout the project life cycle. risk assessment and risk management plans should be part of each key decision point document that needs to be reviewed, criticized, and re-worked so that management can allow the project to move on to the next phase and be confident that project risk is acceptable and being properly managed.
To gain more control over project risk, you need to use project management software. Innovative Techniques PM has many tools that allow you to address the risks at each stage of your project.
Innovative Techniques PM automatically detects the project's various systemic risks and their impacts, including project plans, costs, resources, and quality risks, and automatically speculates on the final impact based on existing impacts, making it clear to project personnel that the severity of these risks is not managed properly and in a timely manner.
If your project is in a more agile environment, you can use the Innovative Techniques Kanban to sort and prioritize risks. You can use custom tags to identify tasks as risks in your project, so you can quickly see how to address emergency risks.
Innovative Techniques PM is a dynamic business management platform that fosters the collaboration environment you need to address risk and provides real-time information so you can always make decisions based on accurate data.
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