Risk Management

Risk Management

Project risk management addresses the uncertain events or conditions that, if they occur, have negative or positive effects on the project objectives. A risk event may have one or more causes and one or more effects. Primarily the effects would be on the major vectors of the triple constraints: scope, cost and schedule. The effects also extend to cover corporate image and reputation, safety, environmental issues and the future operability of the project’s product.

Risk management seeks to protect the project, in fulfilling its objectives in an environment outside its control, by developing proactive and reactive action plans (see figure 1.0).

Figure 1.0 Risk Management Environment

Risk management encompasses identifying, analyzing, responding to, and controlling project risks. It aim to minimize the consequences of negative and adverse events and maximize the results of positive events.

The process of determining an acceptable level of negative risk during the pursuit of a project, and managing these during project implementation, is necessary to successfully accomplish project objectives. Risk management must be pursued as an integral part of the project management process. Risks are managed in a concerted effort by the project manager and the project core team members.

Project by definition, are performed in the future, and as a corollary project risks have their origins in the uncertainty and the current levels of the unknowns of the undertaking.

The expected duration of a project presents different time windows of uncertainty, ranging from low and manageable to high and totally speculative. The project manager has to establish an appropriate risk analysis and plan frequency, which correspond to the project’s time frame. The longer the expected duration of the project, the more frequent the cycles of the risk management process.

Assumptions are closely related to uncertainties and unknowns, and clearly play a major role in risk management. They are by definition virtual facts on which plans are made. They have to validate for realism. If too many exist, then the project manager must pause the risk management process to determine if further analysis, where possible, is not required to convert assumptions into real facts.

Risk events may be under the control and influence of the project manager, or they may depend on external factors and be outside of control. Additionally, risk events very in their characteristics. They can be:

1. Recurring, as they can occur at any time during the project, for example, illness or forced stoppage of any resource.
2. Unique, in that they can only exist at a prescribed time window of the project, for example, bad weather in the rainy seasons.
3. Interdependent, causing a cascading effect, for example the defect of a provider’s product may cause delays in installation, which may lead to penalties for late delivery.

The origin of risk events can be internal or external.

Internal risk events may be controlled or influenced by the project team using resource assignments and cost or schedule estimates. For examples of the internal risk, organized by category, include the following:

Technology	New or untested technology Availability of technical expertise Customization (design modifications)
Schedule	Resource availability Schedule constraints Dependencies
Financial	Funding or budget Estimate accuracy
Legal	Patent right
	Data right

External risk events are those beyond the control or influence of the project team, such as customer decisions, market shifts, and governing body actions. For example of external risk, organized by category, include the following:

Unpredictable	Regulatory changes Natural Hazard
Predictable but uncertainty	Market changes Inflation

Terminology

1. Risk events

A risk is the occurrence of a particular set of circumstances and is composed of three basic components which are (1) a definable event-threat or opportunity (2)Probability of occurrence (3) Consequence (impact) of occurrence.

2. Uncertainty

Uncertainty is a representation of the possible range of values associated with either (1) a future outcome or (2) the lack of knowledge of an existing state. Uncertainty can be expressed as a deterministic quantitative value, a qualitative value or a probability distribution.

3. Threat and Opportunities

Threats are risk events that, should they occur, will cause negative effects to the project’s objectives. These are defined during the identification step of the project risk management process. Measures need to be taken to increase their probability and or impact.

4. Probability

Probability is the likelihood that a risk event will occur. This can be expressed qualitatively using an ordinal scale which are high, medium or low or using a cardinal scale as a single value or as a percentage.

5. Impact

The impact is the effect and or consequence on the project if the risk event should occur. This can be expressed qualitatively using an ordinal scale which are high, medium or low. Quantitatively in monetary terms or descriptive of the consequences that can be subsequently estimated and valued in monetary terms.