Chapter 5: Project Risk

analysis and management

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Project Risk analysis and management
• Project Risk analysis and management
• Introduction to project risk
• Types of project risk
• Analysis of major source of risk
• Effective management of project risk
• Risk management planning’
• Risk identification
• Quantitative and qualitative risk analysis
• Risk response planning
• Risk monitoring and controlling
5.1 Introduction to project risk
Introduction to Project Risk
Risk management is the process, which enables the analysis and
management of the risks associated with a project.
RM increases the likelihood of successful completion of a project to cost,
time and performance.
With ample data risk can be assessed statistically. No two projects are the
same and often things go wrong for reasons unique to a particular project.
Hence the increased need of proper risk management.
Risk Management includes:
• Risk analysis
• Risk management
Introduction to Project Risk
• Risk exists as a consequence of uncertainty.
• Uncertainties and risk could be of various types like: un-established
management and financial structure, not proven technology,
problems related to industrial relations and scarcity of resources.
These uncertainties exposes the project to risk that may cause failure
to keep budget within limit, complete project in time and to required
performance.
Procedures for decision making are modified if risk analysis is adopted.
Cost and time are produced in the form of ranges and associated
probabilities rather than single value figures.
Project risk management Process
Suitability, which projects?
• The more the risks or more innovative the project the greater will be benefits. On
small project the budget will probably justify only a low level of application, perhaps
omitting the quantitative analysis.
• Innovative, new technology projects
• Large investment projects
• Fast track projects
• Projects which interrupts crucial revenue streams
• Unusual agreements - legal, insurance and contractual
• Projects with sensitive issue - environment, relocation
• Projects with stringent requirements - regulatory or safety
• Projects with political/economical/financial parameters
Benefits of risk analysis and management
• An increased understanding of the project leading to more realistic plan
• Understanding of risk and allocation of risk to the party best able to handle them
• Selection of suitable type of contract
• Justification for decision
• Assessment of contingencies
• Information of historical risks will assist in better modeling of future projects
• Facilitation of greater, but more rational risk takings thus increasing the benefits
that can be gained from risk taking.
• Assistance in the distinction between good luck and good management and bad
luck and bad management
5.2 Types of project risk

Broadly types of risk can be categorized as;

• Internal – Lack of ownership and priorities, institutional and organizational issues,
Project management (poor leadership, lack of experience, poor communications,
lack of resources, personal issues, lack of skills, lack of commitment, lack of logistics,
inappropriate schedule etc) contract types, procurement process, use of unproven
or nonstandard technology, inappropriate selection of consultants and contractors .
• Internal risks exist within your organization and are easier for you and your team to mitigate
and manage.
• External – weather conditions, political changes, approvals, changes in law (legal),
market conditions, Funding (reduction in available capital, cash flow issues,
inflation), stakeholders or end users issues, environmental requirements,
• External risks happen outside of your organization and are typically beyond your control as a
team or project manager.
Common risk areas
• Cost risk: is anything that affects your ability to stick to the project
budget, whether it’s the result of scope creep or overly optimistic
project estimates.
• Schedule risk: refers to any factors that jeopardize project deadlines.
These may include pop-up feature requests, a team member who’s
out sick for an extended time, or unexpected delays in supply
delivery.
• Performance risk: impacts project goals and outcomes. This could
result from a lack of stakeholder support, an overworked team, or
misaligned project expectations.
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5.3 Analysis of major source of risk
• Project management risk
• Market risks – commercial risk, price rise, competitors, real states
• Technical risks – unproven technology, inappropriate technology, design
• People risk, – obstructions and hurdles related to people
• Process risk – faulty documentations,
• Financial risks – cost overrun, funding
• Political and social risk – unstable government, policies, communities objections
• Construction risk – selection of contractors, scarcity of materials etc.
• Legal risk - change in law, permits and approvals
• Natural calamities – flood, earthquake, land slides
• Environmental risks – environmental thresholds
• Etc.
5.4 Effective management of project risk

• Risk management planning

• Risk identification
• Quantitative and qualitative risk analysis
• Risk response planning
• Risk monitoring and controlling
Effective management of project risk
Risk management planning

A document that details risk management process of an organization or

project. A document prepared by the project manager to foresee risks,
its identification, evaluating them in terms of probability of occurrence
and impacts (risk assessment matrix) and finally define responses to
risks.
Procedures for decision making are modified if risk analysis is adopted.
Cost and time are produced in the form of ranges and associated
probabilities rather than single value figures.
Risk identification

Process of determining risk is called risk identification, which can be

done by
• Documentation reviews
• Information gathering techniques
• Brainstorming
• Interviewing
• SWOT analysis
• Root cause analysis
• checklist analysis - final stage to look if any risk are overlooked
Quantitative and qualitative risk analysis

Risk Analysis is study of risk

• Qualitative analysis - focus on identification and subjective
assessment of risks.
• Quantitative analysis - focus on an objective assessment of the risk.
a) Qualitative analysis
Qualitative analysis
• Main risk sources or factors are identified by the use of checklist,
interviews or brain storming sessions.
• Assessment could be the description if each risk and its impact or a
subjective labeling as high/low in terms of both impact and
probability.
• The aim of Qualitative analysis is to identify key risks (between five
and ten), which are then analyzed and managed in more detail
Qualitative analysis contd.
• Qualitative - the first and most important step is identification. This
can be done by interviewing, organizing brainstorming meetings and
using personal experience. Checklist can be used.

• The second step is categorizing the risks into high/low probability of

occurrence (likelihood) and major/minor impact (consequences) on
the project.

• Initial and urgent responses are also identified Secondary risk are also
to be identified that may arise in mitigating on category of risk.
 Risk analysis matrix
Probalility of occurance Impacts Prioritization

S. No Identified risks High Medium Low High Medium Low ranks

1People's obstruction Y y 3

2Material scarcity y y 5

3Earthquake y y 6

4Funding arrangment y y 1

5cashflow y y 4

6labor scarcity y y 2

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b) Quantitative analysis
Quantitative analysis
• Often involves sophisticated techniques requiring level of efforts ranging
from modest to extensively thorough, usually requiring computer use.
• Quantitative analysis includes measurement of uncertainty in cost and
time estimates and probabilistic combination of individual uncertainties

An initial qualitative analysis is essential, which creates an understanding

and helps to work towards developing a specific plan to deal with specific
risk issue.
Quantitative analysis
Quantitative - quantification is done against three project success factors cost, time and
performance.
• Sensitivity analysis - simplest form of RA. Considers one risk variables like delay in design. SA
is done for all risk having potentially high impact on cost or time scale of the project. It
highlights on how the effect of a single change in one risk variable can produce a marked
difference in the project outcome.
• Probabilistic analysis - specifies a probability distribution for each risk and then considers the
effect of risks in combination. Sampling techniques - Monte Carlo Simulation.
• Influence diagram - relatively new technique and by the use of computer a very complex risk
models can be used to analyze cost, time and economic parameters of projects.
• Decision trees - graphical method that bring together the information needed to make
project decisions and show the present possible courses of action and future possible
outcome. The out come must be given in probability value indicating its likelihood of
occurrence.
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Risk response planning

• Avoid or remove
• Reduce
• Transfer
• Accept
Risk management – risk response
Management of risk can be done by adopting some of the following ways
• Identify preventive measures to avoid a risk or to reduce its effect
• Establish contingency plans to deal with risks if they should occur.
• Initiating further investigations to reduce uncertainty through better
information
• Consider risk transfer to risk insurers
• Consider risk allocation in contracts
• Set contingencies in cost estimates, float in programs and tolerances in
performance specifications
Risk monitoring and controlling

• Re-assess the Risks regularly

• Weekly
• Monthly
• yearly
• Monitoring mechanism
• Inspection, checking, testing of risk status

• Controlling - intervention
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