Sources of Risks and Types of

Risk
Progress Choongo
 Sources of Risk
• Sources of risk is any factor that can affect a project or business
performance e.g. inappropriate targets
• Important to set clear objectives and performance criteria
• Risk management can be regarded as removing or reducing
possibility of underperformance
• Many sources of risk
• Sources of risk occur at different times of an investment
• Risk may be specific to the corporate level such as political,
financial & legal
• Strategic business level – economic, natural and market risk may
be assessed before the project is sanctioned
• Projects risk, Specific to project – Technical, health and safety,
operational and quality risks
• Risks assessed at corporate and business level may be reassessed
at project levels since risk can affect the ongoing project
• Sources of risk are summarised in the table below
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 Risk Sources
Physical natural, ground conditions, adverse weather, physical
obstructions
Construction availability of plant and resources, industrial relations,
quality, workmanship, damage, construction period,
delay, construction programme, construction
techniques, milestones, failure to complete, type of
construction contracts, cost of construction,
commissioning, insurances, bonds, access and
insolvency.
Design incomplete design, availability of information, meeting
specification and standards, changes in design during
construction.
Technology new technology, provisions for change in existing
technology, development costs.
Technical Design adequacy, operational efficiency, reliability
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 Risk Sources
Financial Bankruptcy, margins, insurance, risk share
Risks
Political Risks Government policy, public opinion, change in ideology,
legislation, disorder (war, terrorism, riots)
Legal risks Those associated with change in legislation.
Market Risks Demand (forecasts), competition, obsolescence,
customer satisfaction, fashion.
Economic Taxation, cost inflation, interest rates, exchange rates
Project Definition, procurement strategy, performance
requirements, standards, leadership, planning,
resources, communication and culture
Environmental Environmental law or regulations, public opinion,
permissions, contaminated land or pollution liability
Human Error, incompetence, communication ability, culture.
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 Risk Sources
Planning Permission requirements, policy and practice, land use,
social-economic impacts, public opinion
Regulatory Changes in regulator

Criminal Lack of security, vandalism, theft, fraud, corruption

Safety Regulations, (e.g. MSD, ECZ) hazardous substances,
collisions, collapse, flooding, fire and explosion

• The above list is extensive but not complete

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 Types of Risks
• Project Risk - failure to complete project within time, cost & quality
• Risk associated with project is influenced by project size, technology
maturity, project structural complexity
• Risks influencing projects can be categorised as global and elemental
• Global Risks – source external to project environment, uncontrollable.
These risks dealt at corporate level, often determine whether a project
will be sanctioned.
• Four major global risks are political, legal, commercial and environmental
• Elemental Risks – origin from within a project environment, usually
controllable, mainly assessed at SBU ad project levels
• Four main elemental risks are construction, manufacture, operational,
financial and revenue
• Holistic Risk – holistic risk management identifies and quantifies all
threats to project objectives,
• Includes risks associated with intangible assets such as reputation,
market share, value, technology, intellectual property, change in
methods/strategy, shareholder perception, company safety and quality of
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 Types of Risks
• Static Risk – e.g. losing markets for a particular product or brand of goods
by not introducing new products
• Some organisations mitigate this risk by entering into JV with more dynamic
companies
• Dynamic Risk – risk of loss of something certain for gain of something
uncertain
• There is potential of gains as well as losses. E.g. MCM tried to gain by
changing from Zambia to DRC
• Inherent Risk – e.g. oil companies have are in an inherently risky business
– the treat of fire and explosions is always there.
• Financial institutions have lower fire and explosion risk but may have default
risk
• Level of attention given to managing risk in an industry is important
• Contingent Risk – occurs when an organisation is affected by an event
beyond its control such as a weak supplier
• A contingent is assigned to that risk to cover costs should they occur
• E.g. 4 bidders, risk envelop should be part of the bid.
• Customer Risk – dependency on one client create vulnerability
• Risk can be managed by creating a larger customer base

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 Types of Risks
• Fiscal/Regulatory Risk – e.g. windfall profits tax. Keep abreast with
potential changes in the business environment.
• Purchasing Risk- analyse purchasing systems, emphasise on maximum
standards from suppliers, ensure correct contracts
• Reputation/Damage Risk – not risk itself but consequence of another e.g.
failure to attend to complaints, building destroyed, fraud, lack of respect for
others
• Organisational Risk – weak controls and poor communication can impact
on the business
• Interpretation Risk – occurs when mgnt & staff in the same organisations
cannot communicate effectively because of professional language.
Engineers, lawyers, academicians, banker, insurers have their own terms
• IT Risk – software risk include personal shortfalls, unachievable schedules
and budgets, developing wrong functions, wrong user interface, shortfalls in
externally furnished components, shortfalls in externally performed tasks.
• Software risks regularly identified include: project size, unclear
misunderstood objectives, lack of senior mgnt commitment, failure to gain
user involvement, unrealistic schedule, inadequate knowledge/skill, wrong
software functions, failure to manage user expectations

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 Types of Risks
• Opec Risk – consider oil prices when assessing the economic viability of
investment,
• Oil increases due demand, others material, cement
• Forward/future buying to mitigate risk associated with price & availability, but
risky
• Process Risk – arises from the project management process. Early stage of
project most flexible
• Heuristics – risks associated with human failure. Need for a structured
approach to risk management. To identify potential bias among participants
• Structured approach to risk management brings soft and hard benefits
• Hard benefits include:
 Better formed and achievable plans, schedules and budgets
 Increased likehood of project meeting targets
 Proper risk allocation
 Better allocation of contingency to reflect the risk
 Ability to void taking on unsound projects
 Identification of the best risk owner

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 Types of Risks
• Soft benefits include:
 Improved communication
 Development of common understanding of project objectives
 Enhancement of team spirit
 Focus of management attention on genuine threats
 Facilitation of appropriate risk taking
 Demonstrated professional approach towards customers
• Decommissioning Risk – purpose of decommissioning is to take former
operational plant back to Greenfield site status.
• Have a plan to end operational industries such as (mining, quarrying,
chemical industries, nuclear. Essential to take these risks before sanctioning
project.
• Institutional Risks – risks caused by organisational structure and
behaviour e.g. beauracracy, culture and poor practice can lead to increased
risks
• Subjective Risk and Acceptable Risk – extent to which a person feels
threatened by a particular risk, regardless of the probability of risk occurring.
• Acceptable risk is amount of risk individual/organisation can accept

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 Types of Risk
• Pure risks – risks which offer probability of loss. Most
pure risks can be insured
• Speculative Risks – produce either a profit or a loss &
offer either favourable or unfavourable consequences
• Virtual Risk – risks scientists do not fully understand or
cannot agree on impact e.g. mobile phones, global
warming, low level of radiation
• Force Majeure – is risk that result from abnormal,
unforeable, an extraordinary event or circumstance
beyond control of parties such as war, strike, riot, act of
God (flood, earthquake, volcano or natural disaster).
• A contract may provide liability to be excluded for any
disruption of business.

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 Summary
• Risk is unavoidable feature of human existence
• Different sources and types of risk have been outlined
• Risk management developed because of failure of
projects to meet budgets, completion dates, quality and
performance or to generate funds to service principal &
interest
• All risks should be assessed at all levels
• Corporate risks can affect organisation in terms of
reputation or ability to raise finance
• SBU need to consider risks associated with portfolio of
projects
• Be aware that risk can provide benefits and should not
be considered on a negative basis

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 References
• Al-Thani and Merna Tony (2008),
Corporate Risk Management, 2nd edn.
John Wiley and Sons, London Chapter 2

• Nigel J. Smith, (2003) Appraisal, Risk,

Uncertainty, Thomas Telford, UK

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 END

QUESTIONS???

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