when talking about managing risk we are refering to what four key factors
Main Body
16. Risk Management Planning
Even the most advisedly planned project tin run into problem. No matter how well you plan, your project can always encounter unexpected problems. Squad members go ill or quit, resource that y'all were depending on turn out to exist unavailable, even the weather can throw you for a loop (eastward.g., a snowstorm). So does that hateful that you're helpless confronting unknown problems? No! Yous tin use risk planning to identify potential problems that could cause trouble for your project, analyze how probable they are to occur, have action to prevent the risks yous can avoid, and minimize the ones that y'all tin't.
A gamble is whatever uncertain event or condition that might affect your projection. Non all risks are negative. Some events (like finding an easier style to do an action) or weather condition (similar lower prices for sure materials) tin can aid your project. When this happens, nosotros telephone call it an opportunity; but it'south nonetheless handled but like a take chances.
In that location are no guarantees on any project. Even the simplest activity can turn into unexpected problems. Anything that might occur to modify the outcome of a project action, we call that a risk. A risk can exist an result (like a snowstorm) or it can be a condition (like an of import part being unavailable). Either way, it's something that may or may not happen …but if it does, and so it will force you lot to change the fashion you and your squad work on the project.
If your project requires that you stand on the edge of a cliff, then there's a risk that you could autumn. If it's very windy out or if the ground is slippery and uneven, and then falling is more than likely (Figure 16.1).
When you're planning your project, risks are nevertheless uncertain: they oasis't happened all the same. But somewhen, some of the risks that you plan for do happen, and that's when yous take to deal with them. There are four basic means to handle a run a risk.
- Avoid: The best thing y'all can do with a adventure is avoid information technology. If you can prevent it from happening, it definitely won't hurt your project. The easiest way to avoid this adventure is to walk away from the cliff, simply that may not exist an option on this project.
- Mitigate: If you can't avoid the risk, you can mitigate it. This means taking some sort of action that will cause it to practise as little damage to your project as possible.
- Transfer: Ane effective way to deal with a gamble is to pay someone else to take it for you. The almost common way to do this is to buy insurance.
- Accept: When you can't avert, mitigate, or transfer a risk, then yous have to have it. But fifty-fifty when you lot take a risk, at least you've looked at the alternatives and you know what volition happen if information technology occurs. If y'all can't avoid the risk, and there's aught you can practice to reduce its impact, then accepting it is your only pick.
By the time a risk actually occurs on your project, it's too late to do anything near it. That's why you need to programme for risks from the kickoff and proceed coming back to exercise more than planning throughout the project.
The risk management plan tells you lot how you're going to handle risk in your project. It documents how you lot'll appraise risk, who is responsible for doing it, and how often you'll do risk planning (since you'll have to come across nigh risk planning with your squad throughout the project).
Some risks are technical, similar a component that might plough out to be difficult to use. Others are external, like changes in the market place or even problems with the conditions.
Information technology's important to come up upwardly with guidelines to help you figure out how large a adventure's potential impact could be. The impact tells you how much harm the hazard would cause to your project. Many projects classify impact on a scale from minimal to severe, or from very low to very high. Your risk management program should give you a scale to assistance effigy out the probability of the take a chance. Some risks are very likely; others aren't.
Risk Management Process
Managing risks on projects is a process that includes risk assessment and a mitigation strategy for those risks. Risk cess includes both the identification of potential risk and the evaluation of the potential impact of the risk. A risk mitigation plan is designed to eliminate or minimize the touch on of the risk events—occurrences that have a negative touch on on the project. Identifying run a risk is both a creative and a disciplined procedure. The creative process includes brainstorming sessions where the team is asked to create a listing of everything that could go wrong. All ideas are welcome at this stage with the evaluation of the ideas coming later.
Take a chance Identification
A more disciplined procedure involves using checklists of potential risks and evaluating the likelihood that those events might happen on the project. Some companies and industries develop risk checklists based on experience from by projects. These checklists tin be helpful to the projection manager and projection team in identifying both specific risks on the checklist and expanding the thinking of the team. The past experience of the project squad, project experience inside the visitor, and experts in the manufacture tin can be valuable resource for identifying potential run a risk on a project.
Identifying the sources of risk past category is another method for exploring potential take chances on a project. Some examples of categories for potential risks include the post-obit:
- Technical
- Cost
- Schedule
- Client
- Contractual
- Weather condition
- Financial
- Political
- Environmental
- People
You lot tin utilise the aforementioned framework equally the piece of work breakdown structure (WBS) for developing a risk breakup structure (RBS). A risk breakdown construction organizes the risks that accept been identified into categories using a tabular array with increasing levels of detail to the right. The people category can be subdivided into different types of risks associated with the people. Examples of people risks include the risk of not finding people with the skills needed to execute the project or the sudden unavailability of key people on the project.
In John's move, John makes a list of things that might become wrong with his project and uses his work breakdown structure every bit a guide. A partial list for the planning portion of the RBS is shown in Table sixteen.i.
| Task | Take chances |
|---|---|
| Contact Dion and Carlita |
|
| Host planning dejeuner |
|
| Develop and distribute schedule |
|
The result is a clearer understanding of where risks are about concentrated. This arroyo helps the project squad identify known risks, but tin can be restrictive and less creative in identifying unknown risks and risks not easily establish inside the WBS.
Risk Evaluation
Afterward the potential risks accept been identified, the project team then evaluates each risk based on the probability that a risk outcome will occur and the potential loss associated with it. Not all risks are equal. Some risk events are more probable to happen than others, and the cost of a risk can vary greatly. Evaluating the chance for probability of occurrence and the severity or the potential loss to the projection is the next step in the risk management process.
Having criteria to determine loftier-affect risks can help narrow the focus on a few disquisitional risks that require mitigation. For case, suppose high-touch on risks are those that could increase the project costs by 5% of the conceptual budget or ii% of the detailed budget. Just a few potential risk events run across these criteria. These are the critical few potential hazard events that the project direction team should focus on when developing a projection risk mitigation or management programme. Risk evaluation is about developing an agreement of which potential risks have the greatest possibility of occurring and can take the greatest negative impact on the projection (Figure 16.two). These become the critical few.
At that place is a positive correlation—both increase or decrease together—betwixt project take a chance and project complication. A project with new and emerging technology will take a high-complexity rating and a correspondingly high run a risk. The projection management team will assign the appropriate resources to the technology managers to ensure the accomplishment of projection goals. The more complex the technology, the more resources the technology managing director typically needs to come across projection goals, and each of those resource could face unexpected issues.
Risk evaluation oftentimes occurs in a workshop setting. Building on the identification of the risks, each risk event is analyzed to determine the likelihood of occurrence and the potential toll if it did occur. The likelihood and touch on are both rated equally high, medium, or low. A risk mitigation plan addresses the items that have high ratings on both factors—likelihood and impact.
A project team analyzed the risk of some important equipment non arriving at the projection on time. The squad identified 3 pieces of equipment that were critical to the project and would significantly increase costs if they were late in arriving. 1 of the vendors, who was selected to deliver an important slice of equipment, had a history of beingness tardily on other projects. The vendor was good and frequently took on more piece of work than it could deliver on time. This risk result (the identified equipment arriving belatedly) was rated equally high likelihood with a high touch on. The other 2 pieces of equipment were potentially a high impact on the project but with a low probability of occurring.
Non all project managers conduct a formal risk assessment on a project. I reason, every bit found by David Parker and Alison Mobey in their phenomenological study of projection managers, was a low understanding of the tools and benefits of a structured analysis of project risks (2004). The lack of formal risk direction tools was likewise seen as a barrier to implementing a risk management programme. Additionally, the project manager's personality and direction style play into risk preparation levels. Some project managers are more proactive and develop elaborate take a chance management programs for their projects. Other managers are reactive and are more confident in their ability to handle unexpected events when they occur. Yet others are risk averse, and prefer to be optimistic and not consider risks or avoid taking risks whenever possible.
On projects with a low-complexity profile, the project manager may informally track items that may be considered risk items. On more than circuitous projects, the project management team may develop a list of items perceived to be higher hazard and rail them during project reviews. On projects of even greater complexity, the process for evaluating take chances is more than formal with a risk assessment meeting or serial of meetings during the life of the project to assess risks at different phases of the projection. On highly complex projects, an outside expert may be included in the risk assessment process, and the risk assessment plan may have a more prominent identify in the projection implementation programme.
On circuitous projects, statistical models are sometimes used to evaluate risk because at that place are too many dissimilar possible combinations of risks to calculate them one at a time. One example of the statistical model used on projects is the Monte Carlo simulation, which simulates a possible range of outcomes past trying many different combinations of risks based on their likelihood. The output from a Monte Carlo simulation provides the project team with the probability of an event occurring within a range and for combinations of events. For example, the typical output from a Monte Carlo simulation may point a 10% chance that i of the three important pieces of equipment will be late and that the weather will too be unusually bad later on the equipment arrives.
Risk Mitigation
After the risk has been identified and evaluated, the project team develops a risk mitigation programme, which is a plan to reduce the impact of an unexpected issue. The projection team mitigates risks in various means:
- Risk avoidance
- Hazard sharing
- Chance reduction
- Risk transfer
Each of these mitigation techniques can be an effective tool in reducing individual risks and the risk profile of the project. The risk mitigation plan captures the risk mitigation approach for each identified chance consequence and the actions the project direction team will take to reduce or eliminate the gamble.
Risk abstention normally involves developing an alternative strategy that has a higher probability of success but usually at a higher cost associated with accomplishing a project task. A common gamble avoidance technique is to use proven and existing technologies rather than prefer new techniques, even though the new techniques may show promise of better performance or lower costs. A project team may choose a vendor with a proven track record over a new vendor that is providing significant toll incentives to avoid the risk of working with a new vendor. The projection team that requires drug testing for team members is practising hazard abstention past avoiding damage done by someone under the influence of drugs.
Risk sharing involves partnering with others to share responsibility for the risky activities. Many organizations that work on international projects will reduce political, legal, labour, and others run a risk types associated with international projects by developing a articulation venture with a visitor located in that country. Partnering with another company to share the risk associated with a portion of the project is advantageous when the other visitor has expertise and experience the projection team does non accept. If a risk event does occur, then the partnering company absorbs some or all of the negative impact of the consequence. The company will likewise derive some of the profit or benefit gained past a successful project.
Take a chance reduction is an investment of funds to reduce the run a risk on a projection. On international projects, companies will often buy the guarantee of a currency rate to reduce the adventure associated with fluctuations in the currency exchange rate. A project manager may hire an expert to review the technical plans or the cost gauge on a project to increase the confidence in that plan and reduce the project risk. Assigning highly skilled project personnel to manage the loftier-risk activities is another risk-reduction method. Experts managing a high-risk activity tin can often predict problems and find solutions that forestall the activities from having a negative impact on the project. Some companies reduce run a risk by forbidding primal executives or engineering science experts to ride on the same plane.
Run a risk transfer is a risk reduction method that shifts the take chances from the project to some other party. The purchase of insurance on certain items is a risk-transfer method. The risk is transferred from the project to the insurance visitor. A structure project in the Caribbean may purchase hurricane insurance that would cover the cost of a hurricane dissentious the structure site. The purchase of insurance is usually in areas outside the control of the project team. Atmospheric condition, political unrest, and labour strikes are examples of events that can significantly impact the project and that are outside the control of the project team.
Contingency Program
The project chance plan balances the investment of the mitigation against the do good for the project. The project team often develops an alternative method for accomplishing a projection goal when a take a chance outcome has been identified that may frustrate the accomplishment of that goal. These plans are chosen contingency plans. The take a chance of a truck drivers' strike may be mitigated with a contingency program that uses a train to transport the needed equipment for the project. If a critical slice of equipment is tardily, the bear on on the schedule can be mitigated by making changes to the schedule to accommodate a belatedly equipment delivery.
Contingency funds are funds set bated past the project team to address unforeseen events that cause the projection costs to increase. Projects with a high-risk profile will typically accept a large contingency budget. Although the amount of contingency allocated in the projection budget is a function of the risks identified in the risk analysis process, contingency is typically managed as one line particular in the project budget.
Some projection managers allocate the contingency upkeep to the items in the upkeep that have high risk rather than developing one line item in the budget for contingencies. This approach allows the project team to rails the use of contingency against the risk plan. This approach also allocates the responsibility to manage the take chances upkeep to the managers responsible for those line items. The availability of contingency funds in the line item budget may besides increase the apply of contingency funds to solve problems rather than finding alternative, less plush solutions. Nigh project managers, peculiarly on more than complex projects, manage contingency funds at the project level, with approval of the projection manager required before contingency funds can be used.
Projection Risk past Phases
Projection risk is dealt with in dissimilar ways depending on the phase of the projection.
Initiation
Risk is associated with things that are unknown. More than things are unknown at the starting time of a projection, but risk must be considered in the initiation phase and weighed against the potential benefit of the project's success in order to decide if the project should be called.
In the initiation phase of his move, John considers the chance of events that could impact the whole projection. Lets presume that John's move is not merely virtually irresolute jobs, simply besides a change of cities. This would certainly incur more risks for the projection. He identifies the following risks during the initiation stage that might have a high bear upon and rates the likelihood of their happening from low to high.
- His new employer might change his listen and take back the job offer after he's given find at his quondam job: Low.
- The current tenants of his flat might not move out in time for him to motion in by the kickoff solar day of work at the new job: Medium.
- The movers might lose his furniture: Low.
- The movers might be more than a week tardily delivering his article of furniture: Medium.
- He might get in an accident driving from Chicago to Atlanta and miss starting his task: Depression.
John considers how to mitigate each of the risks.
- During his job hunt, John had more than i offering, and he is confident that he could get another job, but he might lose deposit coin on the apartment and the mover. He would besides lose wages during the time it took to find the other job. To mitigate the gamble of his new employer changing his listen, John makes sure that he keeps his relationships with his alternate employers cordial and writes to each of them thanking for their consideration in his recent interviews.
- John checks the market in Atlanta to determine the weekly cost and availability of extended-stay motels.
- John checks the mover's contract to confirm that they carry insurance against lost items, only they require the owner to provide a detailed listing with value estimates and they limit the maximum total value. John decides to go through his apartment with his digital camera and take pictures of all of his possessions that will exist shipped by truck and to continue the camera with him during the motility and then he has a visual record and won't have to rely on his memory to make a listing. He seals and numbers the boxes so he can tell if a box is missing.
- If the movers are late, John can utilize his research on extended-stay motels to calculate how much it would cost. He checks the moving company'due south contract to come across if they compensate the owner for belatedly delivery, and he finds that they do not.
- John checks the estimated driving time from Chicago to Atlanta using an Internet mapping service and gets an estimate of xi hours of driving time. He decides that it would be likewise risky to attempt to make the drive past himself in i day, specially if he didn't get out until later the truck was packed. John plans to spend one night on the road in a cabin to reduce the hazard of an blow caused by driving while also tired.
John concludes that the medium-risks can be mitigated and the costs from the mitigation would exist adequate in order to get a new chore.
Planning Phase
Once the projection is approved and it moves into the planning stage, risks are identified with each major grouping of activities. A adventure breakdown structure (RBS) can be used to place increasing levels of detailed gamble analysis.
John decides to ask Dion and Carlita for their assistance during their first planning meeting to identify risks, charge per unit their impact and likelihood, and advise mitigation plans. They concentrate on the packing phase of the move. They fill out a table of risks, as shown in Tabular array sixteen.2.
Legend:
- RA: Risk avoidance
- RS: Adventure sharing
- RR: Gamble reduction
- RT: Adventure transfer
| Task | Risks | Mitigation |
|---|---|---|
| Pack kitchen | Cuts from handling abrupt knives | Purchase modest boxes for packing knives (RR) |
| Cuts from croaky glasses that break while being packed | Discard cracked glasses (RA) | |
| Transporting alcoholic beverages | Give opened bottles to Dion or Carlita (RA) | |
| Packing living room | Damage to antique furniture | Supervise wrapping and loading personally (RR) and crave movers to insure against damage (RT) |
| Lose parts while talking apart the entertainment centre | Buy box of big freezer bags with a marker to pocketbook and label parts (RR) | |
| Break about valuable electronics—TV, DVD, Tuner, Speakers | Purchase boxes of the right size with sufficient bubble wrap (RR) | |
| Pack bedchamber | Break large mirror | Buy or rent a mirror-box with Styrofoam blocks at each corner (RR) |
| Lose prescription drugs or pack them where they cannot be found chop-chop | Separate prescription drugs for transportation in the car (RA) | |
| Pack remaining items | Damage to house plants | Enquire Carlita to care for them and bring them with her in her van when she visits in exchange for half of them (RS) |
| Transportation of flammable liquids from charcoal grill | Give to Dion or Carlita (RA) |
Implementation Phase
Equally the project progresses and more than information becomes available to the project team, the total chance on the project typically reduces, every bit activities are performed without loss. The risk plan needs to be updated with new data and risks checked off that are related to activities that have been performed.
Understanding where the risks occur on the project is important information for managing the contingency budget and managing cash reserves. Most organizations develop a plan for financing the projection from existing organizational resources, including financing the projection through a variety of fiscal instruments. In about cases, there is a cost to the organization to keep these funds available to the project, including the contingency upkeep. As the risks decrease over the length of the project, if the contingency is non used, and so the funds ready aside past the organization tin can exist used for other purposes.
To make up one's mind the amount of contingency that can be released, the project team will comport another risk evaluation and determine the amount of gamble remaining on the projection. If the risk profile is lower, the project team may release contingency funds back to the parent organization. If additional risks are uncovered, a new mitigation programme is developed including the possible add-on of contingency funds.
Closeout Phase
During the closeout phase, agreements for risk sharing and risk transfer need to be ended and the risk breakup structure examined to be sure all the risk events have been avoided or mitigated. The final estimate of loss due to adventure tin can exist fabricated and recorded as office of the project documentation. If a Monte Carlo simulation was washed, the result tin can be compared to the predicted consequence.
To close out the risk mitigation plan for his move, John examines the take a chance breakdown structure and risk mitigation plan for items that need to exist finalized. He makes a checklist to exist sure all the risk mitigation plans are completed, every bit shown in Table 16.three. Risk is not allocated evenly over the life of the projection. On projects with a loftier caste of new applied science, the bulk of the risks may exist in the early phases of the project. On projects with a big equipment budget, the largest amount of risk may be during the procurement of the equipment. On global projects with a large amount of political risk, the highest portion of risk may be toward the cease of the project.
| Risk | Mitigation | Closeout |
|---|---|---|
| Items lost by movers | Mover's insurance plus digital image inventory | Confirm all of the numbered boxes are present and still sealed. |
| Antique furniture damaged | Mover'south insurance plus personal supervision of wrapping and loading | Supervise unloading and unwrapping; visually inspect each slice. |
| House plants | Ask Carlita to bring one-half of them in her van when she visits. | Confirm that the plants are healthy and that Carlita brought about half of them. |
References
Parker, D., & Mobey, A. (2004). Activeness Research to Explore Perceptions of Risk in Project Management. International Periodical of Productivity and Functioning Management 53(i), 18–32.
Attribution
This affiliate of Project Management is a derivative of the following text:
- Project Management for Instructional Designers by Wiley, et al. © CC By-NC-SA (Attribution-NonCommercial-ShareAlike)
Source: https://opentextbc.ca/projectmanagement/chapter/chapter-16-risk-management-planning-project-management/
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