Introduction to Project Risk and Types of Project Risk

5.1 Introduction to Project Risk

Risk is uncertainty and result of uncertainty. Every project is risky, meaning there is every chance that things won't turn out exactly as planned. Risk is a combination of the probability of occurrence of the negative event and its consequences. Outcomes of a project are determined by many things, some that are unpredictable and over which project managers have very less control. Risk level is associated with the certainty level about technical, schedule and cost factors. If high certainty, low-risk and if low- certainty, high risks. Certainty comes from knowledge and experience gained in previous projects, also from management's capability to control project outcomes and respond to arising problems.

Definition of Project risk:

• Project risk is the possibility or probability of an outcome being different from what desired i.e. lack of predictability of outcome in decision making.
• Project risk can also be defined as an uncertainty in event or condition that, if it occurs, has a positive or negative effect on a project goal or objective. Every risk has a cause and, if it occurs, an impact.
• Risk ₌ f (likelihood, impact) i.e. risk is the function of likelihood (probability of occurrence) and its impact.

5.1.1 Project Risk Management

It can be defined as the art and science of discovering, analyzing and responding to risk from beginning to the end of the project and in the best interest of meeting project objectives. Project risk management should start right from the start of the project because as the time passes chances of controlling event which may have the effect on project objective decreases. Risk management motivates project team to take suitable mitigation measures to reduce impacts to project objectives. Thus the goal of risk management is reducing potential threats and increasing the probability of fulfilling project objectives.

Project risk management is essential for improving the likelihood that a project will be completed within the estimated cost and time and also meets requirements and quality specification.

Advantages of project Risk Management:

• Risk management anticipates and addresses uncertainties so increases the likelihood of achieving project objectives.
• It mitigates risk uncovered during risk assessment.
• It also helps in developing realistic estimates.

5.2 Types of Project Risk

Types of risk associated with project vary depending upon the type, nature, and location where the project will be carried out. Broadly, there are five main categories of risk types associated with the project.

1. External Risks

External risk as its name suggest are mainly outside the control of the project manager and, in most cases, out of control of the organization too. Examples include:

• Development of Marketplace—rapid developments can cause an abrupt change of demand and scope of the project too.
• Market risks include fluctuation in interest rate, competition, foreign exchange.
• Change in government’s policies and regulation.
• Industry-specific procedures—new standards, issues
• Legal issues-disputes, lawsuits, and court orders
• Change-driven factors-new products, services, changes in market
• Corporate strategy and priority changes
• Disasters like fire, flood, and earthquake.
• Risks associated with strikes of laborers and civil war etc.
• Loss of power, heating, or ventilation; air conditioning failure
• Failure of security sensor.
• Destruction of the communications system.

2. Cost Risks

Budget overrun or cost risks are directly or indirectly under the project team’s control or within the area of influence of stakeholders or project manager. Cost risk is an increase in project costs due to the poor estimating accuracy of cost and scope change. Examples of cost risks include those arising from:

• Overrun of the budget by the project team.
• Lack of proper cost controlling measures.
• Change is the scope of the project.
• Poor approximation (estimation) of cost or error in cost estimation at planning phase results in unforeseen costs.
• The increase in project duration also causes increase in the project budget.

3. Schedule Risks (Time overrun)

Schedule risks or time overrun is not finishing work within the predetermined time i.e. Schedule risk is the risk that activities will take longer than expected. Schedule risks can lead to project failure by delaying a market opportunity for a product. Time overrun also causes increase in costs and, also, delay the receipt of project benefits, with a possible loss of competitive advantage. Such risks are caused by:

• Inaccurate estimation of time required to complete different activities.
• Increased effort to solve technical, operational, and external problems
• Shortage of resource, including staffing delays, insufficient resources, and unrealistic expectations of assigned resources
• Lack of planned resource assignment—loss of staff to other, higher-priority projects.

4. Technology Risks

Technology risks can result from a wide variety of circumstances. The result is the failure to meet systems' target functionality or performance expectations. Performance risk is the risk that the project will fail to produce results consistent with project specifications. Typical examples are:

• Problems with new and unproven technology.
• Use of the wrong tools.
• Use of untested software may fail to work efficiently.
• Integration problems
• Poor Software/hardware performance issues such as poor response times, bugs, errors

5. Operational Risks

These are the general risks that may affect the cash-flow of the project by increasing the operating cost or affecting the project’s capacity to continue to generate the quantity and quality of planned output over the life of the project. Typical causes are:

• Inefficiencies in operation or shortage in the supply of skilled labor.
• Inadequate resolution of priorities or conflicts
• Failure to designate authority to key people
• Lack of communication plan.
• Lack of proper implementation, procurement etc.

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.