I have chosen to write a series on the importance of risk management as this is one of the reasons that many projects fail. It is therefore necessary to provide persons with information that can assist them in doing risk management the right way. This is the first of four posts on the topic. If you want to be sent copies of subsequent posts please subscribe.
Many persons downplay the importance of risk management on projects often to the detriment of the project’s success. They often view a risk as a negative event that can adversely affect the project but that may not necessarily occur and should therefore not use the project’s resources. The Project Management Institute of the United States of America, in its PMBOK Guide defines a risk as
“ an uncertain event or condition that, if it occurs, has a positive or negative effect on a project’s objectives.”
The project objective is the real reason for having the project. When the government has a project to build a school, the project’s purpose is the construction and equipping of the school. The business objective is the education of the citizens of the country and in the long run the improvement in the standard of living of citizens who are now able to access better jobs.
Risk management is a systematic way of determining the risk that can occur, planning risk response measures to address them and implementing those measures thus controlling risk on a project. You have to plan for both positive and negative risk events.
Key questions include:
What can go right?
What can go wrong?
What measures do I take to address them?
Project have assumptions
One may ask why risk management is needed on projects. The answer is simply that projects are planned today to be implemented tomorrow. In order to plan for a project you therefore need to make assumptions about some key aspects that are at this time not normally known. An assumption is something in the future that you believe to be true, real or certain e.g. the government of Trinidad and Tobago in doing the annual budget for the year 2017, needs to determine the revenue to be received from oil, based on the price of oil in 2017.
This price is now unknown but government’s planners can use the following and assume a possible price for oil in the upcoming year.
- the existing oil prices
- Price movements — trends to date.
- Other market information e.g.
- New entities coming into the market and their possible impact,
- Substitute products and their impact, etc.
You now know something more about assumptions. It is not just a good guess but has to be based on your knowledge, experience, available market and other information and often trend analysis.
A possible assumption a project can have is that disbursements will be available when requested. You realize that if this does not occur it can have a negative impact on the project’s objectives.
Projects also have constraints
Constraints are limitation imposed on a project and projects have to be done within these constraints. The main constraints are schedule, scope, quality, budget, resources and risk.
You must analyze how both assumptions and constraints will affect your project and if there are any risk factors involved in them e.g. a possible risk is that disbursements will be delayed thus negatively impacting schedule and even the continuation of work on the project.
Importance of risk management
- It helps you to achieve the project’s objectives, thus ensuring the successful completion of the project
- The cost of addressing risks early far exceeds the negative impact if the risk event occurs.
- It allows you to decrease the possibility and impact of negative risks and increase the possibility and impact of positive risks.
- It helps you to explore new opportunities early and hence plan for them. A positive risk is an opportunity. When doing a construction project a reduction of the cost of galvanize is one such opportunity which can be exploited, if planned for.
- Enhances your ability to control your project’s implementation as you are now aware and have planned for things that can go wrong in your project and have assigned responsibility for the identified risk and the risk response to a person on your team.
- It allows managers to make better strategic decisions.
- It help organizations avoid the negative impacts of litigation, etc. as a result of failed projects.
- The ultimate goal of good risk management practices for the organization is the protection and enhancement of shareholder value.
Do you have anything you can add on this topic. I encourage you to comment,