Project Risk Management

MPM622

Queens College
School of postgraduate
studies

Tsegaye A, Ph.D. Cand.

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 Chapter One
Overview of Risk Management

Uncertainty, risk, and

their management

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 Project Risk Management

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 Sections

 Overview of project risk management

 Uncertainty, risk, and their management
– Risk management purpose
– Risk and uncertainty
– Nature of risk management
– Benefits of risk management
– Risk management objectives

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 Overview of project risk management

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:

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 Overview of project risk management

 The project risk management process is needed to

ensure that:
– All significant risks to the success of the project are identified;
Identified risks are understood, with both the range of potential
consequences they represent and the likelihood of values in that
range being determined as far as is necessary for decision-making;
– Assessment is undertaken of individual risks relative to the other
risks to support priority setting and resource allocation;
– Strategies for treating the 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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 Overview of project risk management

 Method
– The recommended approach to project risk management is
consistent with the approach adopted for a wide range of other
risk management processes.
– The application of those processes to projects requires
integration of risk management with project management
processes and activities.

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 Overview of project risk management

Managing risk is an integral part of good management, and

fundamental to achieving good business/project outcomes.
– Although many managers do not use the term ‘risk’
when they undertake these activities, the concept of risk
is central to what they are doing. Better management of
risk and more successful activities are the outcomes.
– The need to manage risk/uncertainty is inherent in most
projects that require formal project management, using
‘uncertainty’ in the plain English ‘lack of certainty sense’.

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 Overview of project risk management

 What Do We Mean by “a Project”?

– The Project Management Institute's (PMI) defines a
project as:"....a temporary endeavor undertaken to
create a unique product or service.
– It is specific, timely, usually multi-disciplinary, and
always conflict ridden.
– Projects are parts of over all programs and may be
broken down into tasks, subtasks, and further if desired.

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 Overview of project risk management

 What Do We Mean by “a Project”?

– The Project Management Institute's (PMI) defines a
project as:"....a temporary endeavor undertaken to
create a unique product or service.
– It is specific, timely, usually multi-disciplinary, and
always conflict ridden.
– Projects are parts of over all programs and may be
broken down into tasks, subtasks, and further if desired.

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 Overview of project risk management

 A simplistic focus on project success and uncertainty about

achieving it can lead to uncertainty and risk being defined in
terms of ‘threats to success’ in a purely negative sense.
 For example, suppose success for a project is measured
solely in terms of realized cost relative to some target or
commitment.
 Then both ‘uncertainty’ and ‘risk’ might be defined in terms
of the threat to success posed by a given plan in terms of
the size of possible cost overruns and their likelihood.
 From this perspective it can be a natural step to regard risk
management as essentially about removing or reducing the
11 possibility of underperformance.
  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.
Project managers are typically responsible for
overseeing the risk management process
throughout the duration of a given project.

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 Overview of project risk management

 What is risk management?

– Identifying, analyzing, prioritizing, and responding 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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 Overview of project risk management

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 Overview of project risk management
 The risk management process involves the 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 magnitude of their consequences. It
may use any of a wide variety of mathematical and other models and
techniques.
– 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
15 project.
Overview of project risk management

• Components of the Risk Management Plan

– Methodology
– Roles and responsibilities
– Budgeting
– Timing
– Risk categories
– Definitions of risk probability and impact
– Probability and impact matrix
– Stakeholder’s tolerances
– Reports
– Tracking
Overview of 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.
–Risk management provides a structured way of assessing and dealing
with future uncertainty.
–Traditionally, it has been concerned with the implications of events
and changes in the future physical, social and economic environment.
The term ‘management’ implies that risks are to be treated in an
ordered fashion, rather than in a haphazard way.
 Overview of project risk management

Risk Management – why do we need it?

Purpose
– 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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 Overview of project risk management

 The broad objectives of the project risk management

process 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;
and
– 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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 Overview of project risk management

 Characteristics of good project risk management within an

organization :
– 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
20 process.
Uncertainty, risk, and their management

What is a risk?

– Risk is exposure to the consequences of uncertainty.

– A risk is an uncertain event which may occur in the future.
– A risk may prevent or delay the achievement of an
organization’s or units objectives or goals .
– A risk is not certain – Its likelihood can only be estimated.
Note: Not all risk is bad, some level of risk must be
taken in order to progress / prevent stagnation.
 Uncertainty, risk, and their management

 Risk:
– An uncertain event or condition that, if it occurs, has a
negative or positive effect on a project’s objectives.

VENTURE OUTCOME
(Project) (Products)

FAVORABLE
UNKNOWNS (Opportunity)
(Uncertainty)
UNFAVORABLE
(Risks)

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 Uncertainty, risk, and their management

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 Uncertainty, risk, and their management

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 Uncertainty, risk, and their management

 Risk Management Cycle – Step 1

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 Uncertainty, risk, and their management

 Risk Management Cycle – Step 2 cont.

– Assess the risk’s
 Impact
 Likelihood
– Guidance on both later!
 Prioritize the risks
 Hint: Get input from appropriate individuals

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 Uncertainty, risk, and their management

 Risk Management Cycle – Step 3

– Challenge & Evaluate Controls

 Control: Policy, action, procedure or

process designed to prevent risk or to limit
its impact
 Do they work, are they effective?
 Residual Risk only should be measured

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 Uncertainty, risk, and their management

 Risk Management Cycle – Step 4

– Take Action!
 For serious risks where controls are
A) Weak
B) Absent
 For risks where the Risk Appetite is exceeded
 Examine Cost vs. Benefit

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 Uncertainty, risk, and their management

 Risk Management Cycle – Step 4 cont.

– Types of Action
 Tolerate
 Treat
 Substitute
 Terminate
– (The choice of the above will be decided upon
by your risk appetite)

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 Uncertainty, risk, and their management

 Risk Management Cycle – Step 5

– Monitor & Report
 Use a standard format for capturing risk data e.g. a
“Risk Register”
 Review all risks at least annually
 Serious risks to be reviewed more often depending
on circumstances
 Report on risk to senior management / Board
 Make Risk Register available to stakeholders to
show good governance
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 Uncertainty, risk, and their management

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

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 Uncertainty, risk, and their management

 Categories of Risks
1) Financial
 Reduction in funding
 Failure to safeguard assets
 Poor cash flow management
 Lack of value for money
 Fraud / theft
 Poor budgeting

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 Uncertainty, risk, and their management

 Categories of Risks cont.

2) Operational
–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
 No process to track contractual commitments
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 Uncertainty, risk, and their management

 Categories of Risks cont.

3) Reputational
 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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 Uncertainty, risk, and their management

 Categories of Risks cont.

4) Reputational Governance and Compliance
 Lack of oversight by Board
 Segregation of duties not defined formally
 Ensuring compliance with funders terms and
conditions
 Compliance with applicable legislation
– Safeguarding of vulnerable individuals
– Taxation Law
– Data Protection
– Health & Safety Law
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 Uncertainty, risk, and their management

 Categories of Risk cont.

5) Strategic
 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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 Uncertainty, 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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 Uncertainty, risk, and their management

 Objectives of Risk Management

– Risk management has objectives before and after a loss
occurs
– Pre-loss objectives:
 Prepare for potential losses in the most economical
way
 Reduce anxiety
 Meet any legal obligations

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 Uncertainty, risk, and their management

 Objectives of Risk Management

– Post-loss objectives:
 Survival of the firm
 Continue operating
 Stability of earnings
 Continued growth of the firm
 Minimize the effects that a loss will have on other
persons and on society

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 Uncertainty, risk, and their management

Uncertainty
– Ability to predict outcome of parameters or foresee
events that may impact the project.
– Uncertainties have a defined e range of possible
outcomes described by functions reflecting the
probability for each outcome.
– Uncertainty functions can describe discrete events or
continuous ranges of outcomes.
Opportunity
– Possible positive outcome expressed by probability
multiplied consequence.
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 Uncertainty, risk, and their management

 Uncertainty management
– Uncertainty management in projects is a project
management knowledge area comprising management
and control of risks and opportunities in the project.
– It could be argued that this starting point means we are
talking about ‘risk and uncertainty management’ or just
‘uncertainty management’ (including risk management),
not ‘risk management’.
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 Uncertainty, risk, and their management

Uncertainty Management Process

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 Uncertainty, risk, and their management

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 Uncertainty, risk, and their management

 An alternative Project uncertainty management

approach
– A dual approach using conventional techniques and
planning abstractions
– Planning windows
– Milestone structures
– Interface management system
– Critical success factors and lead indicators

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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 ther
e 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 cont…

 Risk
– A risk is an unplanned 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.
– You might also hear about two more risks terms: known risks and
unknown risks.
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 Risk vs. Uncertainty cont…

 Risk cont..
– Known risks are the risks which you have identified during the
identify risks process and
– Unknown risks are those risks which you couldn’t identify during
the identify risks process.
– A contingency plan is made for known risks, and you will use the
contingency reserve to manage these risks.
– On the other hand, unknown risks are managed through a
workaround, and the management reserve is used to manage
these kinds of risks.

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 Risk vs. Uncertainty cont…

 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.
– You may argue that uncertainty is the same as unknown risks;
however, uncertainty is not an unknown risk.
– In uncertainty, you completely lack the background information of
an event even though it is identified.
– In the case of an unknown risk, although you have the background
information, you miss it during the identify risks process.

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 Risk vs. Uncertainty cont…

 Difference Between Risk and 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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 End.

End of the chapter

Thanks for your attention

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