What Are Project Management Risks?

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Last updated on
12th Jul, 2022
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12th Oct, 2021
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What Are Project Management Risks?

Risk is an integral part of any project. To have a project that is completely risk free is next to impossible. Risks can be hugely detrimental to projects and lead to massive losses in both revenue and organizational reputation. 

What organizations can do to minimize the effects of project management risks is to have proper risk management tools and procedures in place. Risk management is a discipline that is of utmost importance in project management and can help the enterprise reap rich rewards.

Get to know more about project description. 

What Are Project Management Risks? 

A risk is an unexpected event that affects project outcomes or objectives, either adversely or positively. Risks can be related to technology, communication, scope, cost, market, skills or operational processes, among other aspects. 

Although risks often adversely affect the project, there are also certain risks that can result in positive gains for the enterprise.  

Let us look at some of the risks associated with project management: 

  • Risk associated with costs: Possibly the most common type of risk, this occurs when the project exceeds its allocated budget. Cost overruns can lead to other associated risks including resource allocation risks, performance risk etc. Cost risks can occur due to poor cost estimation, inaccurate budget planning or even scope creep.  
  • Risk associated with schedule: This again can be a result of incorrect estimation or planning at the start of the project. Increasing customer requirements can also lead to schedule overruns. Schedule risks can feed cost risks as longer projects can cost more, and they will also affect implementation risks and delivery risks.  
  • Risk associated with performance: This type of risk comes into existence when the project fails to deliver what it is intended to do. The project may meet cost and time aspects but may still run into performance risks as it is not delivering its project objectives. Performance risks can lead to cost and schedule risks.  

Know more about characteristics of project management.

Defining “Overall Project Risk”

Project risk is defined as “the effect of uncertainty on the project as a whole” (PMI, 2009, 2013), or as “the exposure of stakeholders to the consequences of variations in outcome” (Association for Project Management, 2004, 2012). These two complementary definitions show that overall project risk has the same two dimensions as individual risks, namely uncertaintyandsignificance. Indeed, overall project risk is just another manifestation of the proto-definition of risk as “uncertainty that matters” (Hillson, 2009)--PMI  

How to Manage Project Risk?

Any risk must be managed, irrespective of whether it is negative or positive. Managing overall project risk is an important aspect of project management. Risks—individual and overall—should be identified at the time of planning or concept stage, which in turn will help with assessing and managing them appropriately. 

The planning stage of the project is when the objectives and scope of the project are chalked out. At this stage, the benefits and the overall goal of the project are defined. Along with the benefits, the risks that the system can be prone to are also defined. As the scope is clarified and the expected benefit-risk analysis is defined at every stage of the scope, there is implicit risk management being done to address overall project risks. 

Once the scope, benefits, risks and other parameters of the project are decided and the project is under way, the regular project risk management processes are applied to proactively address every individual risk that is identified. This is explicit risk management, wherein individual risks are assessed and mitigated. 

At key milestones within the project, the overall project risk assessment is re-visited to ensure that risks do not exceed the defined overall risk levels.  

Positive Risk: Is That a Thing?

We always associate risk with something negative, something that will cause us to fail or lead to losses. But risk can also be positive, in the sense that it leads to unexpected gains or profits and benefits. In fact, risk takers are often rewarded when their gambling pays off. Positive risks can often be successful drivers for the future.

Positive Risk

Let us look at some examples of positive risks: 

  • A company or government policy that results in additional funding 
  • A change in company or government rules that help you market your product better 
  • A new product is a risk, but the product does well and brings in huge profits 
  • A project gets completed under budget, which could mean a potential error in the estimation of initial costs 

But as the adage goes, ‘too much of anything is not good’, too much of positive risk can also lead to negative business impact. Now this seems like a paradox, but the truth is if positive risks are not properly managed, positive risks can become negatives.  

Is There a Difference Between “Risks” and “Risk”?

While we may think that this is like comparing many and one, there is still a subtle difference between risks and risk in the world of project management. The PMI® states that there is a difference between risks and an individual risk. 

Risks or overall risks can relate to risks associated with the overall project; in other words, this refers to the effect of uncertainty on the overall project. 

Risk, on the other hand, refers to an individual risk which might have a negative or a positive impact on the objectives of the project. 

Both risks and risk can be positive or negative. Individual risk may cause delays in meeting or delivering milestones or cause budget overruns. They may also positively impact the project by helping underspend. Overall risks, on the other hand, when they negatively impact the organization, can cause the cancellation of the entire project or a significant change in the scope that in turn may lead to various other risks. The impact of positive risks can be the gain of additional benefits, which otherwise would not have occurred. 

The difference between these two types of risks has been mentioned in thePractice Standard for Project Risk Management (PMI, 2009, and in the PMBOK® Guide - Fifth Edition. The overall project risk does not impact only the objectives or the goals of the project but the entire project itself, while individual risks affect the project objectives.

How are Overall Project Risks Identified?

Overall Project risk is defined as “the effect of uncertainty on the project as a whole”—PMI®  

The same common standards of identifying typical risks, that is identifying the potential sources of risk and the areas of the project where these risks will have an impact, cannot apply to identifying overall project risks.

Identifying overall project risks requires an assessment at a high level where the potential causes and effects are identified rather than the risk itself. 

What are the Causes of Overall Project Risk?

There can be a number of extraneous and internal factors that can lead to overall project risks. There are several risk identification techniques that can be used to identify overall project risks. 

Some of these according to the PMI® are:  

Five Elements to Consider When Determining Risk in Project Management

Creating a risk assessment plan that answers these questions will help you be prepared to handle the risks and mitigate it effectively.  

  1. Risk event: How will it affect the project? 
  2. Risk timeframe: When is it expected to take place? 
  3. Probability: What is the probability of the risk happening? 
  4. Impact: What is the impact of the risk? 
  5. Factors: What events may trigger or preempt the risk?

Managing Risk Throughout the Organization

Risks are a part and parcel of not just our projects, but even have an impact at the organizational level. So, it goes without saying that organizational risk management should be performed diligently. While many may find organizational risk management to be an overwhelming task, it is an exercise that must be undertaken. 

Most organizations use a risk assessment matrix that allows them to view and share results of risk assessment across the organization. This helps everyone to be clued in on the risks that are imminent. Having a handy color-coded visual aid also helps in making decisions related to risk mitigation.

The Risk Assessment Matrix

Once the risks and their likelihood of happening are entered into the matrix, teams can, at a glance, identify the threats and prioritize them based on urgency and threat level.  

Conclusion 

As projects get more intense and wider in scope, risk has become an inevitable part of the project lifecycle. But risks cannot be ignored. Rather, organizations should invest in an effective risk culture, where there is effective identification and monitoring of risks. Recognizing overall project risks early will help teams and organizations design appropriate risk management policies and achieve strategic and organizational goals. 

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