Chapter 6 PROJECT , RISK & PROJECT RISK MANAGEMENT

Project
 A project is a one-off, non-repeated activity , which achieves clearly stated
objectives within a limited time

 Maylor (1996) suggests that most projects have the following common
characteristics.
 They are goal oriented.
 They have clear beginnings and ends.
 They have set of constraints that limit and define the process.
 Their output can be measured in terms of performance against agreed
indicators.
Project Risk

 Risk in projects may be defined as ‘an event or situation which can

endanger all part of the project objectives ( Nickson and Siddons, 1997).

 Project risks are uncertainties which, if they occur, would affect the
project objectives either negatively (threats) or positively (opportunities)

Threat: A condition or situation unfavorable to the project, a negative set

of circumstances, a negative set of events.

Opportunity: A condition or situation favorable to the project, a

positive set of circumstances, a positive set of events.
 In any given decision situation both threats and opportunities are
usually involved, they are seldom independent and both should be
managed.

Example
◦ The possibility that planned productivity targets might not be met.
◦ Interest or exchange rates might fluctuate.
◦ The chance that client expectations may be misunderstood.
◦ Whether a contractor might deliver earlier than planned.
 Project Risk Management
 The goal of project risk management is to minimize potential threats while
maximizing potential opportunities.
 Project risk management is proactive.
 Project risk management plays a key role throughout the life of a project
( from initiation to closing).
 Project Risk Management cannot take place in isolation. Success relies
heavily on communication throughout the process
 Project risk cannot be separated from business planning, project selection,
planning and control.
 Base plans include target scenarios that provide a bases for project
preparation, execution, and control.
 Contingency plans are a second level plan that include predefined actions to
be taken in the event of any of the most likely risks occurring.
 There are three keys to managing project and procurement risk
effectively:
• identifying, analyzing and assessing risks early and
systematically, and developing plans for handling them;
•allocating responsibility to the party best placed to manage
risks, which may involve implementing new practices,
procedures or systems or negotiating suitable contractual
arrangements; and
• ensuring that the costs incurred in reducing risks are
commensurate with the importance of the project and the risks
involved.
 Risk- benefit analysis

 Risk-benefit analysis involves the comparison of the risk

of a situation to its related benefits.

 This analysis is used to establish whether it

is worth assuming some risks comparing
the resulting benefits.

 High risk, low benefit

 High risk, high benefit
 Low risk, low benefit
 Low risk, high benefit

 Can be very dependent on the individual doing the analysis.

 Good project risk management within an organization has the
following characteristics:
 project risk management activities commence at the initiation
of the project, risk management plans are developed and risk
management continues throughout the project life cycle;

 project risk management is not a discrete stand-alone

process, but is integrated with other project management
functions; and
 the implementation of project risk management is the
responsibility of all project stakeholders and they participate
actively in the process.
Critical Success Factors for Project Risk Management
 PROJECT MANAGER’S ROLE
The role of the project manager may include:
 Encouraging senior management support for Project Risk Management

activities.
 Determining the acceptable levels of risk for the project in consultation

with stakeholders.
 Developing and approving the risk management plan.

 Promoting the Project Risk Management process for the project.

 Facilitating open and honest communication about risk within the project

team and with management and other stakeholders.

 Approving risk responses and associated actions prior to implementation.
 Applying project contingency funds to deal with identified risks that
occur during the project.
 Overseeing risk management by subcontractors and suppliers.
 Regularly reporting risk status to key stakeholders, with
recommendations for appropriate strategic decisions and actions to
maintain acceptable risk exposure.
 Escalating identified risks to senior management,
 Monitoring the efficiency and effectiveness of the Project Risk
Management process.
 Auditing risk responses for their effectiveness and documenting lessons
learned.
 The Nature of Projects and Complexity

 All projects are different. The level of complexity differs and the context in
which a project exist will affect it.

 Project complexity can be defined as consisting of many varied interrelated

parts and can be operationalized(measured) in terms of differentiation and
interdependency (Baccarini, 1996).
 Differentiation - the number of varied elements, e.g. tasks, technologies,
resources, specialists, component.
 Interdependence or connectivity-the degree of interrelatedness between
these elements. There are three types, pooled, sequential, and reciprocal.
This definition can be applied to any project dimension relevant to
the project management process, such as organization, technology,
environment, information, decision making and systems.

Complexity affects highly the project objectives of time, cost and

quality. Broadly, the higher the project complexity the greater the
time and cost.

Dealing with large complex projects is to split them up into

smaller, more manageable parts.

Comparisons of complexity of a project may not be practical or

desirable on an absolute, quantitative basis, and the relative
complexity of projects involves subjective assessment that is
susceptible to all the errors and biases of human judgment.

Comparing project risk maps with alternative or completed

projects enables to see how risky the project is, which in turn
enables to compare the relative complexity of a project.
 Why are Projects Risky?
Common characteristics: Factors found in all projects which make them
inherently risky include:

 Uniqueness. Every project involves at least some elements that have not
been done before, and naturally there is uncertainty associated with these
elements.
 Assumptions and constraints. Assumptions and constraints may turn out
to be wrong, and it is also likely that some will remain hidden or
undisclosed, so they are a source of uncertainty in most projects.
 Stakeholders. These are a particular group of people who impose
requirements, expectations and objectives on the project.
 Performance/quality standards. The higher the standard of performance
or quality required in a project the risker the project.
 Financial risk. Large capital outlays , unbalanced cash flows etc.
External environmental factors which introduce risk into
projects such as
 market volatility
 competitor actions
 emergent requirements
 client organizational changes
 PESTLIED (political, economic, social,
technological, legal, international, environmental,
demographic) factors.
Risk Utility
Risk utility 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
 Risk-neutral approach achieves a balance between risk and payoff
 Project Risk Management Processes
(PMBOK)
 Planning risk management: deciding how to approach and plan the risk
management activities for the project
 Identifying risks: determining which risks are likely to affect a project
and documenting the characteristics of each
 Performing qualitative risk analysis: prioritizing risks based on their
probability and impact of occurrence
 Performing quantitative risk analysis: numerically estimating the effects
of risks on project objectives
 Planning risk responses: taking steps to enhance opportunities and reduce
threats to meeting project objectives and implementing.
 Monitoring risk: monitoring identified and residual risks, identifying new
risks, carrying out risk response plans, and evaluating the effectiveness of
risk strategies throughout the life of the project
Plan Risk management
 Risk management Plan is the process of defining how to conduct risk
management activities for a project
 Defines the scope and objectives of the PRM process, and ensures that the
risk process is fully integrated into wider project management.
 Depending upon the size and complexity of the project the following
elements will be present in a risk management plan.

 Methodology
 Roles, Responsibilities and Authority.
 Budgeting
 Timing
 Risk categories
 Scoring and interpretation
 Revised stakeholder risk tolerance
 Tracking
 Risk documentation
Topic Questions to Answer
Methodology How will risk management be performed on this project? What tools
and data sources are available and applicable?
Roles and Which people are responsible for implementing specific tasks and
responsibilities providing deliverables related to risk management?
Budget and schedule What are the estimated costs and schedules for performing risk-
related activities?
Risk categories What are the main categories of risks that should be addressed on this
project?
Risk probability and How will the probabilities and impacts of risk items be assessed?
impact What scoring and interpretation methods will be used for the
qualitative and quantitative analysis of risks?

Revised stakeholders’ Have stakeholders’ tolerances for risk changed? How will those
tolerances changes affect the project?

Tracking How will the team track risk management activities? How will
lessons learned be documented and shared? How will risk
management processes be audited?
Risk documentation What reporting formats and processes will be used for risk
management activities?
 STAKEHOLDER MANAGEMENT
 Stakeholders are those who have a stake or an interest in a project who wish
to influence or will be influenced by the project.

 Stakeholders are important influential resources and as such should be

treated as potential sources of treat and opportunity within the project.

 Risk management is informed by the objectives of the project and the

objectives of the participating stakeholder.

 A stakeholder risk analysis is essential so that each stakeholder – be it an

individual or organization – is aware of the risk perception.

 Stakeholder risk analysis means identifying the stakeholders, types of risks,

extent of risks, levels of stakeholder commitment, and degree of influence.

 .