PROJECT MANAGEMENT CYCLE:PROJECT RISK MANAGEMENT

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3. PROJECT RISK MANAGEMENT
Processes

Project risk management involves four processes:

1. Risk identification

2. Risk quantification

3. Risk response development

4. Risk response control

These processes are designed to evaluate the possible risk events that might influence the project and integrate proper measures to handle uncertainty in the project-planning monitoring and control activ- ities.

Description

A risk event is a discrete random occurrence that (if occurring) affects the project. Risk events are identified based on the difficulty to achieve the required project outcome (the characteristics of the product or service), constraints on schedules and budgets, and the availability of resources. The environment in which the project is performed is also a potential source of risk. Historical information is an important input in the risk-identification process—knowledge gaps are a common source of risk in projects. Risks are generated by different sources, such as technology—an effort to develop, use, or integrate new technologies in a project creates a knowledge gap and consequently risks. External risks such as new laws or a strike in government agencies may generate project risks. Internal sources within the project or its stakeholders may also do so. The probability of risk events and the magnitude of their affect on the project success are estimated during the risk-quantification process. This process is aimed at an effort to rank risks in order of the probability of occurrence and the level of impact on the project. Thus, a high risk is an event that is highly probable and may cause substantial damage to the project.

Based on the magnitude of risk associated with each risk event, a risk response is developed. Several responses are used in project management, including:

• Risk elimination: In some projects it is possible to eliminate some risks altogether by using a different technology, a different supplier, etc.

• Risk reduction: If risk elimination is too expensive or impossible, risk reduction may be used by reducing the probability of a risk event or its impact or both. A typical example is redundancy in R&D projects when two mutually exclusive technologies are developed in parallel to reduce the risk that a failure in development will harm the project. Although only one of the alternative technologies will be used, the redundancy reduces the probability of a failure.

• Risk sharing: It is possible in some projects to share risks (and benefits) with some stakeholders such as suppliers, subcontractors, partners, or even the client. Another form of risk sharing is with an insurance company.

• Risk absorption: If a decision is made to absorb the risk, buffers in the form of management reserve or extra time in the schedule can be used. In addition, contingency plans may be appropriate tools to help in coping with the consequences of risk events.

Since information is collected throughout the life cycle of a project, additional information is used to continuously update the risk-management plan. Risk-response control is a continuous effort to identify new sources of risk, update the estimates regarding probabilities and impacts of risk events, and activate the risk-management plan when needed. Constantly monitoring the project progress in an effort to update the risk-management plan and activate it when necessary can reduce the impact of uncertainty and increase the probability of successful project completion.

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