INTRODUCTION TO PROJECT RISK

 Project risk is an uncertain event or condition that,

if it occurs, has a positive or a negative effect on a
project objective. A risk has a cause and, if it
occurs, a consequence.
 Risk means uncertainty and the results of
uncertainty.
 Risk refers to a lack of predictability about
problem structure, outcomes or consequences in a
decision or planning situation.
 Risk management is the systematic process of
planning for identifying, analyzing,
responding to, and monitoring project risk.

 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.
 It includes :
Risk identification: determining which risks are
likely to affect a project
Risk quantification: evaluating risks to assess the
range of possible project outcomes
Risk response development: taking steps to enhance
opportunities and developing responses to threats
Risk response control: responding to risks over the
course of the project
 It involves processes, tools, and techniques that will
help the project manager maximize the probability
and consequences of positive events and minimize
the probability and consequences of adverse
events.
 Project risk management is most effective when
first performed early in the life of the project and
is a continuing responsibility throughout the
project.
 Risk management encourages the project team to
take appropriate measures to minimize:
- Adverse impacts to project scope, cost, and
schedule
- Management by crisis
 TYPES OF PROJECT RISKS
1. Nation / Region
 Political Situation : war, revolution, civil
disorders etc.
 Economic and Financial Situation : Inflation
rate increasing, Currency exchange rate
fluctuation, tax rate increasing.
 Social Environment : language barrier, Religious
inconsistency, Culture tradition differences,
insecurity and crime, Pestilence, Bribe and
corruption,
2. Construction industry
 Market fluctuations: demanding decreasing
structure changes.
 Law and Regulations- Incompatible arbitration
system, complex planning approval and permit
procedures, Import/export restrictions constraints
on employment and materials availabilities,
monetary restrictions.
 Standards and codes- inconsistencies in
design/construction, Differences in safety and
health care, Pollutions and nuisances.
 Contract system- Nonstandard contract form,
difference in legal relationship between partners,
3. Company
 Employer/Owner- Unclear requirements, Funding
shortages, Disadvantaged contracts.
 Architect- Unclear detail design or specifications,
Unfamiliar with local standards and codes, Lack of
interaction with construction method.
 Labor and Sub contractors- Direct labor
disturbances, Unfavorable sub contractors.
4. Internal
 Cash flow unbalance, Human resources shortages,
Affecting other projects productivity decreases.
5. Materials and Equipments
 Unfavorable sub-suppliers, default supply of
materials, equipment and plants.
6. Project
 Defective physical works – natural force, poor
design, lack of proper construction techniques,
damages by human errors, defective materials,
difficulty in quality control.
 Schedule delay- incomplete design, late
construction site possession, bad weather,
unforeseen ground conditions, disturbances in
labor, materials supplying, inefficient
communications/ coordination’s
5.3 Analysis of major source of risk
1. Change in project scope and requirements
 As a project progresses, a project team may later
find that a planned project scope and
requirements need to be revised due to changes
in user requirements, more information
gathered, and technical feasibility.
 As the project needs to be revised according to
new scope and requirements, the impacts are
typically in form of inefficiency, disruption, delay
and increased cost.
2. Design errors and omissions
 In any project, it is possible that someone does
unintentional errors or omits to implement the
project as planned.
 Due to the complex of the project and tight time
frame, a project team may misunderstand due to
ineffective communication.
 The examples of this source of risk are deficiency
design document, improperly sized equipment,
design calculation errors. Therefore, the impact
includes delay of the project and additional costs.
3. Inadequately defined roles and responsibilities

 Inadequately defined roles and responsibilities

can cause substantial and various project risks at
any stage from the starting of the project to the
ending of the project.
 The noticeable examples of this source of risk are
ineffective project communication, different
expectation, and lack of common direction.
 The impact includes overall project inefficiency,
disruption and delay.
4. Inaccurate cost and schedule estimates
 This source of risk results from ineffective project
planning at the early stage of the project.
 If the cost and schedule of the project are not
accurately planned and estimated, the entire
project will be in the wrong direction and many
issues will be escalated.
 The impact includes poor coordination,
ineffective use of resources, delay of the project
and increased project cost.
5. Insufficient skilled staff
 A manager must ensure that a project team has
enough skilled staff to execute the project
according to its objectives.
 Lack of skilled staff potentially causes many
problems in foreseeable future.
 This source of risk significantly affects the project
at the implementation stage since this stage
requires considerable technical knowledge,
effective project management expertise and
problem solving skill.
 The impact of this source of risk is in the form of
inefficiency as work cannot be completed
according to the schedule.
6. New technology
 New technology often plays an important role in
project risk analysis, since it can force project
team to change the strategy of the project or
revise technology used in the project.
 New and unproven technology is a major concern
in the project since it is hard for a project team to
predict potential risks.
 The impact of this source of risk includes
significantly increased project costs and time.
EFFECTIVE MANAGEMENT OF PROJECT RISK
1. Risk Management Planning (RMP)

 Risk management planning is the first step

of risk management process in a project.
 It is the document prepared after the risk
management planning meetings which
shows/describes the way, mechanism and
methods of performing risk identification,
risk analysis, response planning and risk
Monitoring and controlling mechanism.
 RMP includes
• Methodology
• Roles and responsibilities
• Timing
• Budgeting
• Risk categories and Risk Break down structure
• Risk Probability and impact
• Revised stakeholder’s risk tolerances
• Reporting format
• Tracking
 2. Risk Identification
 Risk identification involves identifying potential project risks
and documenting their characteristics. Risk identification
results in a deliverable — the project risk list.
 The assigned team members identify the potential risks and
opportunities, using:
-The sample risk list.
-Their own knowledge of the project
- Consultation with others who have significant knowledge
of the project or its environment

 The team considers:

 Risks — what might go wrong
 -Opportunities — better methods of achieving the project’s
purpose and need
 Triggers — symptoms and warning signs that indicate whether
each risk is likely to occur
3. Qualitative and Quantitative Risk Analysis
 Qualitative risk analysis assesses the importance of the
identified risks and develops prioritized lists of these risks
for further analysis or direct mitigation.
 The team assesses each identified risk for its probability of
occurring and its impact on project objectives.
 Team members sort the identified risks into high,
moderate, and low risk categories for each project objective
(time, cost, scope).
 Quantitative risk analysis is a way of numerically
estimating the probability that a project will meet its cost
and time objectives.
 Quantitative analysis is based on a simultaneous evaluation
of the impact of all identified and quantified risks.
 Quantitative risk analysis involves statistical techniques
that are most easily used with specialized software.
 4. Risk Response Planning
 Risk response planning focuses on the high-risk items
evaluated in the qualitative and/or quantitative risk
analysis.
 It identifies and assigns parties to take responsibility for
each risk response. This process ensures that each risk
requiring a response has an owner.
 The project manager identifies which strategy is best for
each risk, and then designs specific actions to implement
that strategy. These strategies and actions include:
Avoidance: The team changes the project plan to eliminate the risk or
to protect the project objectives from its impact. The team might
achieve this by changing scope, adding time, or adding resources.

Transference: The team transfers the financial impact of risk by

contracting out some aspect of the work. Transference reduces the risk
only if the contractor is more capable of taking steps to reduce the risk
and does so

Mitigation: The team seeks to reduce the probability or consequences

of a risk event to an acceptable threshold. They accomplish this via
many different means that are specific to the project and the risk.

Acceptance: The project manager and the project team decide to

accept certain risks. They do not change the project plan to deal with a
risk, or identify any response strategy other than agreeing to address
the risk if and when it occurs.
5. Risk Monitoring and Controlling

 Risk monitoring and control keeps track of the identified

risks, residual risks, and new risks.
 It also ensures the execution of risk response plans, and
evaluates their effectiveness.
 Risk monitoring and control continues for the life of the
project. The list of project risks changes as the project
matures, new risks develop, or anticipated risks disappear.