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Chapter 6

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Project Risks Management

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What is Risk?

A basic dictionary definition says that risk is the possibility of loss or injury.

Project risk involves understanding potential problems that might occur on the project and how they might impede project success.

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What is Risk? (con’t)

it is important to note that risk management is an investment – there are costs associated with it.

The reason most people and organizations take risks is to benefit from opportunities.

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What is Risk? (con’t)

They took risks that created great opportunities.

The idea of striving to balance risks and opportunities suggests that different organizations and people have different tolerances for risks.

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What is Risk? (con’t)

Some organizations or people have neutral tolerance for risk, some have an aversion to risk, and others are risk-seeking.

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Risk-averse

A person or organization that is risk-averse gains less satisfaction from the risk or has lower tolerance for the risk when more payoff or money is at stake.

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Risk-seeking

Those who are risk-seeking have a higher tolerance for risk and their satisfaction increases when more payoff is at stake.

A risk-seeker prefers more uncertain outcomes and is often willing to pay a penalty to take risks.

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Risk-neutral

The risk-neutral achieves a balance between risk and payoff.

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The major processes in risk management:

Risk identification Risk quantification Risk response development Risk response control

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Risk identification

Involves determining which risks are likely to affect a project and documenting the characteristics of each.

Tools and techniques for identifying risks include checklists, flowcharts, and interviewing people involved in the project.

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Risk identification (con’t)

Risk events are specific things that may occur to the detriment of the project

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Risk identification (con’t)

Example of risk events are significant changes in scope, the performance failure of products produced as part of a project, specific delays in the project due to rejection of work or labor unavailability, supply shortages, litigation against company, strike, and so on.

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Risk quantification (con’t)

Once project managers have identified risks, they need to discover what impact those risks are likely to have on the outcome of projects.

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Risk quantification (con’t)

Risk quantification or risk analysis is the process of evaluating risks to assess the range of possible project outcomes.

By being able to quantify a risk, project managers can prioritize risks and establish thresholds to determine which risks deserve the greatest attention.

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Risk response development

Developing a response to risks involves defining steps for enhancing opportunities and developing plans for handling risk or threats to project success.

The three basic responses to risk are avoidance, acceptance, and mitigation.

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Risk avoidance Involves eliminating a specific threat or

risk, usually by eliminating its cause. For example, a project team may decide to

continue using a specific piece of hardware or software on a project because they know it works. Other products that could be used on the project may be available but if the team is unfamiliar with them, they could cause significant risk. Using familiar hardware or software eliminates this risk.

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Risk acceptance and risk mitigation

Risk acceptance means accepting the consequences should a risk occur.

Risk mitigating involves reducing the impact of a risk event by reducing the probability of its occurrence.

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Risk response control

Risk response control involves executing the risk management process and the risk management plan to respond to risk events.

Executing the risk management process means ensuring that risk awareness is an on-going activity performed by the entire project team throughout the entire project.