Project Risk Management
Risk-Defined A situation involving exposure to danger; “The combination of the probability of an event and its consequences” “Effect of uncertainty on objectives” Uncertainties include events (which may or not happen); Uncertainties caused by ambiguity or a lack of information; and Also includes both negative and positive impacts on objectives.
Risk Management Project risk management is the art and science of identifying, assigning, and responding to risk throughout the life of a project and in the best interests of meeting project objectives A proactive attempt to recognize and manage internal events and external threats that affect the likelihood of a project’s success. What can go wrong (risk event). How to minimize the risk event’s impact (consequences). What can be done before an event occurs (anticipation). What to do when an event occurs (contingency plans).
The Risk Management Process
Managing Risk Step 1: Risk Identification Generate a list of possible risks through brainstorming, problem identification and risk profiling. Macro risks first, then specific events Step 2: Risk Assessment Scenario analysis for event probability and impact Risk assessment matrix Failure Mode and Effects Analysis (FMEA) Probability analysis Decision trees, NPV, and PERT Semi quantitative scenario analysis
Managing Risk Step 3: Risk Response Development Mitigating Risk Reducing the likelihood an adverse event will occur. Reducing impact of adverse event. Avoiding Risk Changing the project plan to eliminate the risk or condition. Transferring Risk Paying a premium to pass the risk to another party. Requiring Build-Own-Operate-Transfer (BOOT) provisions. Retaining Risk Making a conscious decision to accept the risk.
Contingency Planning Contingency Plan An alternative plan that will be used if a possible foreseen risk event actually occurs. A plan of actions that will reduce or mitigate the negative impact (consequences) of a risk event. Risks of Not Having a Contingency Plan Having no plan may slow managerial response. Decisions made under pressure can be potentially dangerous and costly.
Managing Risk Step 4: Risk Response Control Risk control Execution of the risk response strategy Monitoring of triggering events Initiating contingency plans Watching for new risks Establishing a Change Management System Monitoring, tracking, and reporting risk Fostering an open organization environment Repeating risk identification/assessment exercises Assigning and documenting responsibility for managing risk
Effective Risk Management
IDENTIFY UNCERTAINTIES Explore the contract and relationship for areas of uncertainty ANALYSE RISKS Specify how each uncertainty can impact performance - duration, cost, meeting requirements PRIORITIZE RISKS Establish risks to be eliminated (too severe), requiring committed management attention, minor in effect MITIGATE RISKS Take advance action to reduce effect. It is better to spend on mitigation than to include contingency. PLAN FOR EMERGENCIES For all significant risks, have an emergency plan in place. MEASURE AND CONTROL Track the effects of the risks identified and manage to a successful conclusion.
What Constitutes Risk in Projects? New technology. Uncommon systems or methods. Uncertain funding. Unusual financing arrangements. Controversial functions are provided by the project. Unrealistic completion dates and/or budgets. Changing customer ownership/control Unusual contracting arrangements Project scope is not clearly defined. Project need and alternatives have not been rigorously evaluated. Large number of approvals are required. Conflict among project participants. Relationship between parent organization's role and the project is not clear
Typical Risk Categories Technical Feasibility Political and External Market Financial and Economic Legal and Contractual Human Behavior Scope and Schedule Project Organization
Technical/Feasibility Risks 13 Organizational lack of familiarity with the technology Relative level of technical complexity Maturity of the technology (new vs. tried and tested) Interconnectivity of technology with existing systems Existing assets are underutilized in this project Obsolete approach for program delivery Customer demand projections incorrect Uncertainty over customer ownership and control
Political/External Risks 14 Marketplace Positioning/competition Regulatory Environment unfavorable Customer Corporate/Organizational changes in priorities Customer Commitment/viability of project Changes in decision makers Natural Hazards Political changes (new laws, tax policies etc.)
Financial/Economic Risks 15 Project costs can exceed budget High inflation or cost increases Customer bankruptcy Cash flow profile unfavorable Funding not approved by customer Excessive price fluctuation on imported components Required investment too high for return
Legal and Contractual Risks 16 Breach of contract/termination's Penalty clauses Excessive warranties Contract claims/failure to perform Contract disputes escalation procedure inadequate Excessive liability Patent/copyright infringement Team unfamiliar with procurement method
Human Behavior Risks 17 Unavailability of Internal technical expertise Unavailability of External technical expertise Lack of staff support for project Delays in customer approvals Delays in documentation Actions by labor unions
Scope and Schedule Risks 18 Unreality of stated deadlines Inadequate project definition Standards incompatible with requirements Design incorporates high maintenance materials Lack of resource availability Lack of product availability Poor coordination of resources Requirement inflexibility
Project Organization Risks 19 Unavailability of key project personnel Change of key customer personnel Unsatisfactory choice of subcontractors Engineering design not kept to schedule Inadequate coordination of partners and subcontractors Staff not trained in time Inadequate contract documentation Inadequate security of site during installation