Project Risk Analysis

Risk analysis consists of using tools and techniques to determine the likelihood and impact of
project risks that have been previously identified. Therefore, risk analysis helps project
managers decipher the uncertainty of potential risks and how they would impact the project in
terms of schedule, quality and costs if, in fact, they were to show up. Risk analysis isn’t
exclusive to project management and it’s used in other disciplines such as business
administration, construction or manufacturing.

Risk analysis is the process that determines how likely it is that risk will arise in a project. It
studies the uncertainty of potential risks and how they would impact the project in terms of
schedule, quality and costs if, in fact, they were to show up. Two ways to analyze risk are
quantitative and qualitative. But it’s important to know that risk analysis is not an exact science,
so it’s important to track risks throughout the project life cycle.

How to Analyze Project Risks

At a basic level, there are three things you should consider when assessing project risks: risk
probability, risk impact and risk exposure. These three things can be estimated through
qualitative and quantitative risk analysis.

Risk Probability

All risks have a certain probability of occurrence, which means they might or might not happen.
Estimating risk probability isn’t an exact science, but there are several techniques you can use,
such as examining data from past projects. By analyzing similar projects from the past, you can
better determine whether there’s a high or low chance of project risk.

Risk Impact

Consider the type of risk and its potential impact on the project. Some risks will bring financial
stress, while others might involve resource management issues or delays to the project
schedule. To make things simple, you can simply assign levels of impact for your project risks,
such as low, medium or high depending on how critical they are.
Risk Exposure

Risk exposure combines risk probability and risk impact in one formula that’s used by
businesses to determine whether they’re ready to assume a potential risk or not. This
technique can only be used when you can measure the potential losses associated with risk.
The risk exposure formula is: Risk Exposure = Risk impact * Risk probability

So, if a given risk had an impact of $1 million and the probability of that risk was 50%, your risk
exposure would equal $500,000.

SOURCES OF RISK IN PROJECT MANAGEMENT

There are risks in business decisions because businesses operate in a complex and dynamic environment
that is constantly changing. Successful businesses are those that are able to identify and manage these
risks effectively. This requires a combination of sound decision-making processes, effective risk
management strategies, and ongoing monitoring and assessment of the business environment. Project
management involves a range of risks that can impact the success of a project. Some of these risks are
as follows:

Uncertainty: Business decisions are often made based on incomplete or uncertain information. This can
lead to risks associated with incorrect or inaccurate decisions.

Competition: Businesses operate in a competitive environment, and decisions made by one business
can impact the success of another. This can lead to risks associated with market changes, new
competitors, and shifting consumer preferences.

Economic factors: Economic conditions can change rapidly, leading to risks associated with changes in
interest rates, inflation, and foreign exchange rates.

Resource constraints: This occurs when there are not enough resources (such as personnel, time, or
budget) to complete the project. It can lead to delays, a failure to deliver the project on time, or to
deliver it at a lower quality than expected.

Technological changes: Technological changes can disrupt industries and change the way businesses
operate. This can lead to risks associated with changes in technology and the need to adapt to new
business models.
Technical problems: This occurs when there are problems with the technical aspects of the project, such
as software bugs or hardware failures. It can lead to delays, budget overruns, or a failure to deliver the
project at the required quality.

Regulatory changes: Government regulations can change rapidly, leading to risks associated with
compliance issues and changes in the legal environment.

Internal factors: Businesses also face risks associated with their own internal operations, such as
employee turnover, supply chain disruptions, and financial issues.

Communication breakdowns: This occurs when there is a breakdown in communication between

project team members, stakeholders, or customers. It can lead to misunderstandings, delays, or a failure
to deliver the project at the required quality.

What Is Qualitative Risk Analysis?

Qualitative risk analysis refers to the risk analysis tools and techniques that rely on expert
subject matter opinions, subjective and non-statistical means to assess the likelihood and
impact of project risks. A risk matrix is a typical example of a qualitative risk analysis tool.

What Is Quantitative Risk Analysis?

By contrast, quantitative risk analysis is a statistical analysis of project risks. While it takes
longer than qualitative analysis, quantitative risk analysis tends to be more accurate as it relies
on data. Some examples of quantitative risk analysis tools are linear regression models or the
Monte Carlo simulation, both statistical techniques that simulate scenarios and their different
outcomes so that managers can better understand how risk can affect their business or project.
Let’s take a closer look at some risk analysis tools and techniques you can use.

Project Risk Analysis Tools & Techniques

There are several risk analysis methods and tools that help managers through the analysis and
decision-making process. Some of these involve the use of risk analysis tools such as project
management charts and documents. Let’s dive into these risk analysis methods and how they
can help you.
1. Team Brainstorming Sessions

Estimating risk probability and impact is a huge part of risk analysis. As stated, this can be done
subjectively, which might lead to error, especially if you do it by yourself as the project
manager. To avoid this, you can involve all the team members you consider relevant to get their
input on risk likelihood and potential negative consequences.

2. Delphi Technique

The Delphi technique involves a panel of experts on topics that are critical to your project risk.
It could be financial experts, lawyers, project management consultants or any other type of
professional. This risk analysis method consists of promoting a debate among these experts
who ultimately need to reach a consensus on a particular topic, such as estimating the business
impact of a risk.

3. SWOT Analysis

SWOT analysis allows managers to understand the current situation of their business or project
by looking at its strengths, weaknesses, opportunities and threats. As a risk analysis tool, it lets

you note which of your weaknesses might be exploited by others and which external threats
might affect your projects, such as economic conditions or the threat of new competitors.
4. Risk Analysis Matrix

The risk analysis matrix assesses the likelihood and the severity of risks, classifying them by
order of importance. It’s main purpose is to help managers prioritize risks and create a risk
management plan that has the right resources and strategies to properly mitigate risks. Risk
likelihood is measured on a relative scale, not a statistical one, which makes it a qualitative risk
analysis tool. This tool is also called the probability/consequence matrix by some project
managers.

5. Risk Register

A risk register is a crucial project management tool to document project risks. It’s a document
that lists all the potential risks that could occur during the project execution phase, as well as
critical information about them. It’s meant to be used as input for the risk management plan,
which describes who’s responsible for those risks, the risk mitigation strategies and the
resources needed. Creating a risk register usually involves several reliable information sources
such as the project team, subject matter experts and historical data.

6. Decision Tree Analysis

A decision tree analysis consists of mapping out the potential outcomes that might occur after a
decision is made. This is a great method to analyze risks in new projects. Create decision trees
as you go through your project planning process so you can identify potential risks and their
probability and impact along the way.

7. Bow Tie Analysis

This qualitative risk analysis method is used to identify causes and consequences for all
potential project risks. The project management team must first identify risks that might affect
the project and then think about causes, consequences and more importantly, a risk mitigation
strategy for them. It’s a versatile method that can be used in any industry.

8. SWIFT Analysis

SWIFT stands for Structured What If Technique. It’s a risk analysis method that focuses on
identifying potential risks associated with changes made to a project plan. As its name suggests,
team members have to come up with any “what if” questions they can to find out all the
potential risks that could arise.