Module 4: The Project Risk Management Knowledge Area

Socratic Approach:

How do you differentiate between project risks and issues?

Answer: Risks are potential future events or uncertainties that require proactive management to prevent
or mitigate their impact, while issues are current problems that demand immediate attention and
resolution.

Examples:

Risks in a project could include adverse weather affecting construction timelines, market fluctuations
affecting product demand, or a key team member potentially leaving the project.

Issues in a project could include equipment breakdowns, budget overruns, conflicts among team
members, or a missed project milestone.

Projects, regardless of their type or industry, share several similarities and differences. Understanding
these commonalities and distinctions can help in effective project management and planning.
Understanding both the commonalities and distinctions is crucial for successful project management.
WHAT IS RISK?

The Project Management Institute in their Guidelines for Project Management Body of Knowledge
(PMBOK-2008) stated that: Project risk is an uncertain event or condition that, if it occurs, has an effect
on at least one project objective.

These risks can come from various sources, including internal factors related to the project and external
factors beyond the project team's control. Managing project risks is essential to minimize their negative
impact and increase the likelihood of project success.

By addressing project risks proactively, project managers and teams can increase the chances of
achieving project objectives, staying within budget, and delivering on time.
Risk conditions could include aspects of the project environment that may contribute to project risk such
as poor project management practices, or dependency on external participants that cannot be
controlled.

Risk, therefore, tended to be insurable. It is designed to mitigate the financial impact of uncertain
events or risks. Using the logic, the actual risk to be carried was quantified as follows:

Risk = Probability of event x Magnitude of loss/gain

Risk: When you multiply the probability of the event by the magnitude of the loss or gain, you get a
measure of the expected value or expected impact of that event. In other words, it quantifies the average
outcome if you were to repeat the event many times.

Probability of Event: This represents the likelihood or chance that a particular event or outcome will
occur. It is typically expressed as a probability value between 0 and 1, where 0 indicates no chance of the
event happening, and 1 indicates certainty that it will occur.

Magnitude of Loss/Gain: This refers to the amount of potential loss or gain associated with the event. It
is often measured in monetary terms or some other relevant unit, and it can be positive (indicating a
potential gain) or negative (indicating a potential loss).

Scenario: Imagine a construction company is working on a project to build a new

office building for a client. One of the risks they want to assess is the possibility
of project delays due to adverse weather conditions.
Probability of Event: In this case, the probability of the event (project delay due to adverse weather) can be
estimated based on historical weather data and local climate conditions. Let's say there's a 30% chance of
adverse weather conditions causing a delay during the construction period.

Probability of event = 0.30 (or 30%)

Magnitude of Loss/Gain: The magnitude of loss/gain represents the financial impact of the event. If adverse
weather conditions cause a delay, it might result in additional construction costs, extended labor expenses, and
potential penalties for missing project deadlines. Let's estimate the potential loss if a delay occurs to be
$100,000.

Magnitude of loss/gain = $100,000

Now, we can use the equation to calculate the risk associated with the project delay due to adverse weather:

Risk = Probability of event x Magnitude of loss/gain

Risk = 0.30 x $100,000

Risk = $30,000

So, in this construction project example, the calculated risk associated with adverse weather conditions causing
a project delay is $30,000. This means that, on average, the construction company can expect to face a financial
impact of $30,000 due to weather-related delays, taking into account both the likelihood of such delays (30%)
and the potential financial loss if they occur ($100,000).

This risk assessment can help the construction company make informed decisions about whether to allocate
resources for weather-related risk mitigation measures, such as scheduling flexibility or weather monitoring, to
reduce the potential impact on the project's budget and timeline.
There will be good reasons for differences in estimates produced by different contractors for the same
project.

In practice, project owners often seek multiple bids to get a range of cost estimates, and they evaluate
these estimates based on factors like contractor qualifications, reputation, and the overall approach to
the project. Variations in estimates are expected, but they should be thoroughly reviewed and discussed
with contractors to ensure that the final contract accurately reflects the project's scope and
requirements.
Project Risk Management

The purpose of project risk management is to minimize the risks of not achieving the objectives of the
project and the stakeholders with an interest in it, and to identify and take advantage of opportunities.

Project risk management is a critical aspect of project management that aims to systematically identify,
assess, and address uncertainties and potential problems throughout a project's lifecycle.

There are three keys to managing project and procurement risk effectively:

1. identifying, analyzing and assessing risks early and systematically, and developing plans for handling
them;

- the process of identifying, analyzing, and assessing risks early and systematically is critical for effective
risk management. It allows organizations and individuals to make informed decisions, allocate resources
effectively, and develop strategies to deal with potential challenges and uncertainties. By following this
process, you can enhance your ability to achieve your objectives while minimizing the negative impacts of
unforeseen events.

2. allocating responsibility to the party best placed to manage risks, which may involve implementing
new practices, procedures or systems or negotiating suitable contractual arrangements; and

- By allocating responsibility to the party best equipped to manage risks, organizations can enhance their
risk management capabilities. This ensures that risks are addressed efficiently and effectively, minimizing
the potential negative impact on projects, operations, or goals. Additionally, it helps organizations take
advantage of the expertise and resources available within or outside their own boundaries to handle risks
appropriately.

3. ensuring that the costs incurred in reducing risks are commensurate with the importance of the
project and the risks involved.

- ensuring that the costs of risk reduction are commensurate with the project's importance and the
associated risks is about making informed decisions that strike a balance between risk mitigation and
cost-effectiveness. This approach helps organizations optimize their risk management efforts and allocate
resources efficiently while safeguarding their critical projects and objectives.