Analysis of Major Sources of Risk and Risk Management Planning

5.3 Analysis of Major Sources of Risk

Any factor with an uncertain probability of occurring that can influence the outcome of a project is considered as risk source or risk hazard. The most difficult part of risk identification is discovering things we don’t already know! Project risk can be broadly classified as

i. Internal source of risk and

ii. External source of risk

5.3.1 Main source of project risk are:

Some major sources of risk, that may create some adverse consequences on project objectives are listed and described below:

i.Market risk (change in project scope and requirements)

Market risk is the risk of not fulfilling either market needs or the requirements of particular customers. Incompletely / in an adequately defined market or customer needs, Failure to identify changing needs, Failure to identify newly introduce products by competitors leads to the risk of not fulfilling market demand.

ii.Error in design

Unintentional error in design document due to lack of proper communication may lead to the delay of the project and additional costs.

iii.Lack of proper division of work and responsibilities

Inadequately defined roles and responsibilities can cause substantial and various project risk at any from starting to the ending of the project. Ineffective communication and lack of common direction are the source of this risk.

iv.Cost and schedule risk

Cost and schedule risk is the risk of not finishing the project within the estimated cost resulting to cost overrun and time delay leading project to failure. If the cost and schedule of the project are not correctly planned and estimated, the entire project will be in the wrong direction.

v.Insufficiently skilled staff

Lack of skilled staff potentially causes many problems significantly at the project implementation stage since the implementation of the project requires experts specialized in different technical sectors. Impacts of this source of risk are work cannot be accomplished within time.

vi.Force majeure and adverse weather condition

Project managers and stakeholders usually have no control over these source of risk. Force majeure includes acts of god (earthquake), civil war, fire, explosion, and flood etc. In worst case force majeure may lead to stoppage of work.

vii.New technology

New technology often plays an important role in project risk analysis, since it can force project team to change the project strategy. New and an unproven project are of major concern since it is difficult to predict potential risks. It may lead to increase project cost and time.

5.4. Effective Management of Project Risk

• The systematic application of the risk management processes on a project is known as risk management. The processes consist of risk management planning, identification, analysis, responding, and monitoring & control.
• Risk management is done to maximize the probability and impact of positive events and minimize the probability and consequences of events adverse to project objectives.

• The curved line indicates the 'acceptable level of risk', whatever that may be in the individual case.
• The risk may be reduced to an acceptable level by reducing either or both of uncertainty and constraint.
• It is also worth noting from the diagram that total elimination of risk is rarely achieved.

5.4.1Risk Management Planning

• Risk management planning is the process of deciding how to approach and perform the risk management activities for a project. Risk management planning is the first step of risk management process in a project.
• Stakeholder’s risk tolerance is prime matter. After having these documents a risk planning meeting is carried out on the behalf of PM and all other stakeholders to prepare the risk management plan.

Objectives of Risk Planning

• Ensure that the risk management effort is proportionate to both the risk and importance of the project to the organization.
• Provide enough resources for risk management activities.
• Establish the basis for evaluating risk.

Risk Management Plan (RMP)

It is the document prepared after the risk management planning meetings which show/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

Bibliography:

IshwarAdhikari and Santosh Kr. Shrestha, “A text book of Project Engineering” 2011, Chandeshwori Publication, First Edition.

K. Nagarajan, “Project Management”, ISBN: 81-224-1340-4, New Age International (P) Limited, New Delhi, India, 2001.

E.R. Yescombe, “Principles of Project Finance” 2002, Yescombe-Consulting Limited.