UNDERSTANDING

PROJECT RISK MANAGEMENT

Chapter ONE

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 Understanding Project Risk Management

– Risk and project risk management

– Nature of risk management
– Benefits of risk management
– Risk management objectives

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 I keep six honest serving men, they taught me all I
knew; their names are what and why and when and
how and where and who. I send them over land and
sea, I send them east and west; But after they have
worked for me, I give them all a rest.—Rudyard
Kipling

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 Questions addressed in project risk
management

 What are the project's top risks, how severe is

their impact and how likely will they occur, what
are the risk mitigation deliverables?
 Who are the individuals responsible for
implementing the risk management plan?
 How much resources is required to manage the
risk?
 When will the milestones associated with the
mitigation approach occur?
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 Overview of project risk management

 Purpose: the purpose of project risk management is to obtain

better project outcomes, in terms of schedule, cost and
operations performance.
 Rationale: the project risk management process is needed to
ensure that:
– All risks significant to the success of the project are
identified;

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 Overview…

 Rationale…
– Assessment is undertaken to support priority setting and
resource allocation;
– Strategies for treating risks take account of opportunities
to address more than one risk;
– The process itself and the risk treatment strategies are
implemented cost-effectively.

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– Monitor and review risks and report on their management
 Overview…

 Method
– The application of those processes to projects requires
integration of risk management with project management
processes and activities.

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 Overview…

Managing risk is an integral part of good management, and

fundamental to achieving good project outcomes.
– Better management of risk and more successful activities are
the outcomes.
– From this perspective it can be a natural step to regard risk
management as essentially about removing or reducing the
possibility of underperformance.

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 What is risk management?

 In project management, risk management is the practice of

identifying, evaluating, and preventing or mitigating risks
to a project that have the potential to impact the desired
outcomes.
 By mitigating risks, you ensure that the impact of a risk is
reduced. A project risk is an uncertain event that may or
may not occur during a project.
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 What is risk management?

 It’s a process to:

– Identify, analyze, prioritize, and respond to all relevant risk
events
– Integration of risk management activities into your other
project management functions
– Developing responses to risk to meet your project objectives
– Project risk management is PROACTIVE.
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 Project risk management…

 The risk management process involves a systematic application

of management policies, processes and procedures to the tasks
of establishing the context, identifying, analysing, assessing,
treating, monitoring and communicating risk.
– Risk identification is the process of determining what, how
and why things may happen.
– Risk analysis is the systematic use of available information
to determine how often specified events may occur and the
11 magnitude of their consequences.
 Project risk management…

 The risk management process involves

– Risk evaluation determines whether the risk is tolerable or
not and identifies the risks that should be accorded the
highest priority in developing responses for risk treatment.
– Risk treatment establishes and implements management
responses for dealing with risks, in ways appropriate to the
significance of the risk and the project.

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Project risk management…

When is project risk management used?

–Risks arise because of uncertainty about the future. Risk
exposure may arise from the possibility of economic, financial or
social loss or gain, physical damage or injury, or delay.
–It may also be caused by changes in the relationships between
the parties involved in the supply, ownership, operation and
maintenance of assets for public or private purposes.
Project risk management…

When is project risk management used?

–So, risk management provides a structured way of assessing and
dealing with future risk and uncertainty.
–Traditionally, it has been concerned with the implications of
events and changes in the future physical, social and economic
environment.
–Nowadays the term ‘risk management’ implies risks are to be
treated in an ordered fashion, rather than in a random way.
 Project risk management…

Risk Management – why do we need it?

– Promotes good management
– May be a legal requirement depending upon industry or
sector
– Resources available are limited – therefore a focused
response to Risk Management is needed

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 Project risk management…

 The broad objectives of the project risk management are to:

– enhance the capability of the organization;
– extend the organization’s overall risk management
processes to projects, and apply them in a consistent way;
– enhance the management of projects across the
organization; and obtain better project outcomes, in terms
of schedule, cost and operations performance, by reducing
risks and capturing opportunities.
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 Project risk management…

 Characteristics of good project risk management:

– project risk management activities begin 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;
– the implementation of project risk management is the
responsibility of all project stakeholders and they participate
17 actively in the process.
 Project risk management…

How do you understand project

risk?

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Risk and their management
What is a risk?
The Project Management Institute (PMI) defines project risk as
‘‘an event or condition that, if it occurs, has a positive or
negative effect on at least one project objective, such as time,
cost, scope, or quality.
Note: Not all risks are bad, some level of risk must be taken in
order to progress / prevent stagnation.
 Risk and their management…

 A risk may prevent or delay the achievement of a projects ’s

objectives or goals. Risk assessment models focus on the
likelihoods of the scene in future adverse or fortune incidents.

VENTURE OUTCOME
(Project) (Products)

FAVORABLE
Occurrence
(Opportunity)
of Risk
UNFAVORABLE
(Threats)
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 Risk and their management…

 Categories of Risks
– There are multiple ways into which risks can be categorized
– Final categories used will depend upon each project’s
circumstances
– Goal is to cluster risks into standard, meaningful and
actionable groupings
– What follows is one example of a type of project

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 Risk and their management…

1) Financial risk: e.g. interest rate rise on your business loan or a

non-paying customer.
 Reduction in funding
 Failure to safeguard assets
 Poor cash flow management
 Lack of value for money
 Fraud / theft
 Poor budgeting
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 Risk and their management…

2) Operational risk: these risks result from failed or inappropriate

policies, procedures, systems or activities e.g.
 Failure of an IT system
 Poor quality of services delivered
 Lack of succession planning
 Health & Safety risks
 Staff skill levels

23  No process to track contractual commitments

 Risk and their management…

3) Reputational risk..
 Organization engages in activities that could threaten
it’s good name
– Through association with other bodies
– Staff members acting in a criminal or unethical
way
 Poor stakeholder relations
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 Risk and their management…

4) Governance and Compliance

 Lack of oversight by Board e.g. introduction of new
rules or legislation.
 Compliance with applicable legislation
– Safeguarding of vulnerable individuals, Taxation
Law, Data Protection, and Health and Safety Law

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 Risk and their management…

5) Strategic
 E.g. a competitor coming on to the market.
 Engages in activity at variance with its stated
objectives
 Fails to engage in an activity that would support its
stated objectives

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 Risk and their management…

Benefits of Risk Management

– Enables firm to attain its pre-loss and post-loss objectives more easily
– A risk management program can reduce a firm’s cost of risk
– Reduction in pure loss exposures allows a firm to enact an enterprise
risk management program to treat both pure and speculative loss
exposures
– Society benefits because both direct and indirect losses are reduced.

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 Risk vs. Uncertainty in Project Management

Many professionals commonly use risk interchangeably with

uncertainty in project management or more specifically in risk
management. Although there is a big difference between risk and
uncertainty, many people often ignore it and think they are the
same.

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 Risk vs. Uncertainty…

Risk
– A risk is an event, which if it occurs, it may affect any of your
project objectives.
– The risk is positive if it affects your project positively, and a
negative risk if it affects the project negatively.
– There are separate risk response strategies for negative and
positive risks.
– The objective of a negative risk response strategy is to minimize
the impact of negative risks while the objective of a positive risk
response strategy is to maximize the chance of positive risks
happening.

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 Risk vs. Uncertainty…

Uncertainty
– Uncertainty is a lack of complete certainty.
– In uncertainty, the outcome of any event is entirely unknown,
and it cannot be measured or guessed; you don’t have any
background information on the event.
– A contingency plan is made for risks, and you will use the
contingency reserve to manage these risks.
– On the other hand, uncertainties are managed through
a workaround, and the management reserve is used to manage
uncertainties.

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 Risk vs. Uncertainty…

 The following are a few differences between risk and

uncertainty:
– In risk, you can predict the possibility of a future outcome
while in uncertainty you cannot predict the possibility of a
future outcome.
– Risk can be managed while uncertainty is uncontrollable.
– Risks can be measured and quantified while uncertainty
cannot.
– You can assign a probability to risks events, while with
uncertainty you can’t.

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 Risk vs. Uncertainty…

 Management Reserve (MR) is the amount of the Total Allocated

Budget (TAB) withheld for management control purposes, rather
than designated for the accomplishment of a specific task or set
of tasks.
 The Difference Between Contingency Reserve and Management
Reserve. ...
– The contingency reserve is used to manage identified risks,
while the management reserve is used for unidentified risks.
– The contingency reserve is an estimated figure, while
the management reserve is a percentage of the cost or
duration of the project.

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 Reading paper:
The Effectiveness of Risk Management_ An Analysis of
Project Risk Planning Across Industries and Countries

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