Masters of Business and Operations

Management

MODULE: Project Management

(SIEM004)

Session: 2008/09

Compiled By:
Mohammed Ahmed

INTRODUCTION

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In the real world, project decisions are made with incomplete information about uncertainties
throughout the life cycle of a project. Uncertainties are a fundamental part of project which
can either derail a project or turned into opportunities. These uncertainties results in risks
(Burke, 2006).

RISK IN PROJECTS

According to Olsson (2002), risk is the uncertainty of the future which cannot be predicted.
They are potential events that pose a threat or opportunity to projects that may result in goals
not being achieved as set out in a project plan (Heldman, 2005). PMBOK (2004) defines
project risk as an uncertain condition that when allowed to occur would have a negative or
positive outcome on project objective. Risks are an integral part of project management from
the inception of the profession (Olsson, 2007). Risks have the probability of occurring or not
occurring and their uncertainties can best be judge based on the knowledge and experience of
the project manager (Newell and Grashina, 2004). Project risk management as defined in
PMBOK (2004) involves the practices concerned with conducting risk management planning,
identification, analysis and reporting, monitoring and controlling projects.

RISK EVALUATION

According to Lansdowne (1999), risks are evaluated using a five-point scale to understand
the level of impact when allowed to occur in projects.

1. Critical risk would cause project failure.

2. Serious risk would cause major cost or schedule increase which may prevent
secondary requirements to be achieved.

3. Moderate risk would cause moderate cost or schedule increase, though it will still
allow important requirements to be realised.

4. Minor risk would cause only small cost or schedule increase.

5. Negligible risk would have no substantive effect on cost or schedule.

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CLASSES OF RISK

Pure risks: Risks that act as threats to projects

Business risks: Risks normal to businesses

Opportunity risks: Risks with good outcome.

CAUSES OF RISK

Project risk analysis from root cause analysis (fishbone) diagram helps the project leader to
fully understand the causes, nature and the extent of risks (Kendrick, 2003). Briner et al
(2001) suggested that for a project manager to avoid being caught in a web of difficulties, the
need to anticipate and analyse the potential impact of risk is important.

• Inadequate feasibility studies

• Weather/ climatic conditions

• Poor communication

• Evaluation of project proposal based on price rather than long-term consideration of

quality

• Lack of skills and knowledge in project and risk management

RISK MANAGEMENT PROCESSES

Risk Planning: Developing and documenting the strategies necessary to handle risks when
they occur.

Risk Assessment: The method of identifying and analysing areas that would help the project
meet the cost, schedule and performance objective even when risk occur.

Risk Handling: It helps to evaluate and select one or more strategies to help put the project
risk under negligible level.

Risk Monitoring: This involves tracking and evaluating the performance of the processes
employed in managing the project risks.

RISK IDENTIFICATION TECHNIQUES

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 At the beginning of any project the project manager and other stakeholders should;

Brian-storm the possible risks

Delphi method

Consider past projects and their risks

Analyse how the risks were tackled

Weigh the risks

Focus on the very serious ones

TYPES OF RISKS

Risk Management

Risk Identification

External External Internal non Technical Legal

Unpredictable Predictable -technical

Regulatory Market risks Management Performance Licences

Natural hazard operational Schedule Design Contractual

Postulated events Environ. Impact Cost Changes in tech. Suites

Side effect Social impact Cash flow Tech-specific risks Rights

Completion Currency changes Loss of potential Complex project

Inflation

Culled from Wideman, 1992.

Furthermore, risks can be classed according to Wideman, (1992) as follows:

• Cost risks: The inability to complete a project within the estimated budget

• Quality risks: It is the failure of a project meeting the agreed technical and quality
objective specified by the customer or client

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 • Schedule risks: Unable to meet the deadline proposed for project closure and
handover.

• Scope risks: When a project cannot be delivered due to scope creep

TOOLS FOR ANALYSING and MEASURING RISK

Project manager and practitioners use tools from quality and reliability engineering to
identify, score, rank and measure project risk for effective management (Lock, 2003, Wood
and Ellis, 2003). These tools include:

Probability impact matrix

Monte Carlo simulation

Failure mode and effect analysis (FMEA)

Program evaluation and review technique (PERT)

Earned value management (EVM)

Hazard and operability study (HAZOP)

Sensitivity analysis

Fault tree analysis

@Risk and others.

METHODS OF MANAGING RISK

Avoid every causes of risk: This is achieved by not undertaking the activity that gives rise to
unmanageable risk (Zhi, 1994) or changing the project plans to eliminate the risk completely.

Prevent or mitigate the impact of risk: This involves the use of tested techniques and
standards to reduce the impact of risks. The project team develops prototypes and models to
simulate real life situations (Burke, 2006)

Share the risk between stakeholders: The risk is shared amongst the parties involved in the
project either through insurance or other methods to reduce the financial impact on the
project manager

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Transfer the risk to a third party for a fee: Risks can be transferred to an outside vendor with
adequate competence to deal with as it may delay project completion (Cervone, 2006) for a
fee that would not overrun the budget excessively.

In-process audit: This is a continuous review and monitoring of every stage of a project as
progress is made to ensure that the objectives will be met. It is an assessment of the validity
of the risks management plans (Nokes and Kelly, 2003)

CONCLUSION

According to Ahmed et al (2007) project risk management attempts to supplement project

management practices by examining project structure, organizational environment, external
environment, products, processes and procedures in detail. Risks are therefore not completely
unavoidable, they can only be minimised such that the opportunities in investing in projects
are maximised. For any organisation to be successful, it must adopt a proactive approach in
managing risk (Kendrick, 2004)

REFERENCE
Ahmed, A., Kayis, B. and Amornsawadwatana, S., 2007, A review of techniques for risk
management in projects, Benchmarking: An International Journal Vol. 14 No. 1, pp. 22-36
Briner, W., Hastings, C. and Geddes, M., 2001, Project leadership, 2nd Edn.
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Burke, R., 2006, Project management, planning and control techniques 5th Edn.
Cervone, H. F., 2006, Managing digital libraries: the view from 30,000 feet project risk
management, OCLC Systems & Services: International digital library perspectives Vol. 22
No. 4, pp. 256-262
Heldman, K., 2005, Project manager’ spotlight on risk management
Kendrick, T., 2003, Identifying and managing project risk: American management
association
Kendrick, T., 2004, Strategic risk: am I doing OK? Corporate governance, Vol. 4, No. 4 pp.
69-77
Kerzner, H., 2003, Project management, a system approach to planning, scheduling and
control, 8th Edn.
Lansdowne, Z.F. (1999), “Risk matrix: an approach for prioritizing risks and tracking risk
mitigation progress”, Proceedings of the 30th Annual Project Management Institute,
Philadelphia, PA, October 10-16
Lock, D., 2003, Project management 8th Edn.
Newell, M. W. and Grashina, M. N., 2004, The Project Management Question and Answer
Book
Nokes, S. and Kelly, S., 2003, The definitive guide to project management, the fast track to
getting the job done on time & on budget, 2nd Edn.
Olsson, C., 2002, Risk management in emerging markets: how to survive and prosper
Olsson, R., 2007, Risk management in a multi-project environment: An approach to manage
portfolio risks, International Journal of Quality & Reliability Management Vol. 25 No. 1, pp.
60-71
PMBOK (2004), A Guide to the Project Management Body of Knowledge, Project
Management Institute
Wideman, M., 1992, Project and program risk management: A guide to managing project
risks and opportunities
Wood, G. D. and Ellis R. C. T., 2003, Risk management practice for leading UK consultants:
engineering, construction and architectural management, Vol. 10 No. 4 pp. 254-262
Zhi, H., 1994, Risk management for overseas construction projects, International Journal of
Project Management, Vol. 13 No. 3 pp. 231-7