5. Project Risk Analysis & Management [7 hrs.

5.1 Introduction to Project Risk

5.2 Types of Project Risk
5.3 Analysis of Major Sources of Risk
5.4 Effective Management of Project Risk
• Risk Management planning
• Risk Identification
• Qualitative and Quantitative Risk Analysis
• Risk Response Planning
• Risk Monitoring and Controlling
 5.1 Introduction to Project Risk

• Project involves (1) the probability that something could go wrong, and (2)
adverse consequence that will occur if it does go wrong.
• PMBOK Guide (2004) defines risk as “an uncertain event or condition that, if
it occurs, has a positive or negative effect on the project objectives”.
• Risk means uncertainty, uncertain event, situations, or conditions.
• Risk is viewed differently by different people.
• Some risks may pose a threat to the achievement of project objectives while
some other risks may enhance achievement of project objectives.
• Favorable risks are called opportunities & unfavorable risks are called threats.
• Unfavorable risky situations are called hazards.
 Introduction to Project Risk contd.

• Project risk is always in the future.

• Risk is an uncertain event or condition that may have
effect on project scope, schedule, cost, and quality.
• A risk may have one or more causes and, if it occurs,
it may have one or more impacts.
• A cause of risk may create the possibility of positive
or negative outcomes.
 Introduction to Project Risk contd.

• Project risk has its origin in the uncertainty present in

all the projects.
• Known risks are those that have been identified and
analyzed, making it possible to plan responses for
these risks.
• Specific unknown risks cannot be managed proactively
which suggests that the project team should create a
contingency plan.
 Introduction to Project Risk contd.

• Precautionary steps to minimize risk is called risk management.

• Risk management refers to assessing, reducing, and controlling
risks so that project objectives are met without requiring
excessive resource budgets.
• Some risks are best handled by owners, some are best handled
by designers, and some by contractors.
• Some risks can be covered by insurance; others can be
eliminated by contractually transferring risks to another party.
 Introduction to Project Risk contd.

• Risk management is the art and science of managing risks

caused by unforeseen changes which may require deviations
from the project plan and therefore affect the achievement of
project objectives.
• It includes process of conducting risk management planning,
identifying, analyzing, response planning, and monitoring &
control on a project.
• It involves processes, tools & techniques that will help PM to
maximize positive outcomes and to minimize adverse impacts
to project scope, cost, & schedule.
 5.2 Types of Project Risk
•. Project Risk

Internal Risk External Risk

 
1. Economic
Local Global 2. Physical
3. Political
4. Technological
1. Labor 1. Construction
2. Material 2. Client
3. Plant
4. Site 3. Design
5. Sub-contractor 4. Environmental
 
5. Financial
6. Management
7. Location
Types of Project Risk contd.
1.Nation/Region
2.Construction Industry
3.Company
4.Internal
5.Materials and Equipment
6.Project
7.Force Majeure
 Types of Project Risk contd.
1. Nation/Region
• Political Situation: War, revolution, civil disorders, inconsistency
of government policies.
• Economical and Financial Situation: Gross national production
(GNP) decreases, interest rate fluctuation, inflation rate
increasing, currency exchange rate fluctuation, tax rate
increasing.
• Social Environment: Language barrier, religious inconsistency,
insecurity & crime, bribe & corruption, pestilence (a deadly
epidemic disease).
 Types of Project Risk contd.
2. Construction Industry
• Market Fluctuation: affects the construction project..
• Law and Regulation: Incompatible arbitration system, complex planning
approval & permit procedure, import/export restriction, constraints on
employment & materials availabilities, monetary restrictions.
• Standards and codes: Inconsistencies in design/construction,
differences in safety & health care, pollutions & nuisance.
• Contract system: Nonstandard contract form, difference in legal
relationship between partners, unfamiliar with contract conditions for
claims & litigation, differences in defective liabilities, special local
requirements.
 Types of Project Risk contd.
3. Company
• Employer/Owner: Unclear requirements, funding shortages,
disadvantaged contracts.
• Consultant/Architect: Unclear detail design or specifications, unfamiliar
with local standards and codes, lack of interactions about construction
method.
4. Internal
• Cash flow unbalance, human resource shortages, affecting other
projects productivity decreases.
5. Materials and Equipment
• Unfavorable sub-suppliers, default supply of materials, equipment & plants.
 Types of Project Risk contd.
6. Project
• Defective Physical Works: Natural force, poor design, lack of proper
construction techniques, damage by human errors, defective materials,
difficulty in quality control.
• Schedule Delay: Incomplete design, late construction site possession,
bad weather, unforeseen site condition, disturbances in supply of
labor/materials, inefficient communication and coordination.
• Cost Overruns: Unclear boundaries of works, inaccurate estimation,
inadequate insurance, labor/material/price fluctuations.
7. Force Majeure
• Earthquake, fire, flood, bad weather & other events difficult to predict.
 5.2 Analysis of Major Sources of Risk
• A project is always associated with risks.
• It is important that project team should understand
project objectives & priorities.
• An attempt to exercise analysis of risks without having
knowledge about project objectives & priorities is a
complete waste of time.
• Project team should understand root causes of the
problem before identifying & analyzing risks.
 Analysis of Major Sources of Risk contd.
Sources of risks associated with the project are:
1. Change in project scope and requirements
2. Design errors and omissions
3. Inadequately defined roles and responsibilities
4. Inaccurate cost and schedule estimates
5. Insufficient skilled staff
6. Force majeure
7. New technology
 Analysis of Major Sources of Risk contd.

1. Change in project scope and requirements

• As the project progresses, a project team may later find
that a planned project scope and requirements need to
be revised due to changes in user’s requirements.
• As the project needs are revised according to new
scope and requirements, it may impact disruption, delay
and increased cost.
• For example, if client makes changes in project scope,
project team need to conduct feasibility of the project.
• Such risks often occur at the later stage of the project.
 Analysis of Major Sources of Risk contd.

2. Design errors and omissions

• It is possible that unintentional design errors and
omissions may obstruct project progress as planned.
• Project team may misunderstand due to complexity of
the project, tight time frame and ineffective
communication.
• Example of such risks may be deficiency in design
document, error in design calculation, improper
equipment etc. which may impact delay in project
completion time & increase in project cost.
 Analysis of Major Sources of Risk contd.

3. Inadequately defined roles and responsibilities

• Project risk is common in any typical project because of changes in
project management structure and ambiguous roles & responsibilities.
• Inadequately defined roles & responsibilities can cause substantial
project risks at any stage from starting to ending of the project.
• Noticeable examples of such risks are ineffective communication,
different expectations, & lack of common direction.
• The impact includes overall project inefficiency, disruption, & delay.
 Analysis of Major Sources of Risk contd.

4. Inaccurate cost and schedule estimates

• This source of risk happens due to ineffective project planning.
• If cost & schedule of project are not accurately planned &
estimated, entire project will be in wrong direction.
• Project objectives & priorities must be clearly defined.
• An attempt to execute a project with uncertainty about
objectives & priorities is completely a waste of time &
resources.
• Risk from inaccurate cost, schedules estimates, & ineffective
use of resources impact on delay & increased project cost.
 Analysis of Major Sources of Risk contd.

5. Insufficient skilled staff

• PM must ensure that the project team has enough skilled staff to
execute project according to project objectives.
• Lack of skilled staff potentially causes many problems during project
execution.
• Lack of technical knowledge, effective project management expertise
& skill adversely affects project.
• The impact of this source of risk is in the form of inefficiency as work
cannot be completed according to the schedule.
 Analysis of Major Sources of Risk contd.

6. Force majeure
• Force majeure includes act of God, insurrection or civil disorder,
war or military operations, national or local emergency, acts or
omission of government or any competent authority, industrial
disputes, fire, lightening, explosion, flood, subsidence, and bad
or foul water.
• This source of risk is uncontrollable.
• All these risk will adversely affect the project. In worst case,
such risks may impact complete stoppage of the work
 Analysis of Major Sources of Risk contd.

7. New technology
• New technology often plays an important role in project
risk analysis, as it can force project team to change
strategy of project or revise use of technology in project.
• New and unproven technology is a major concern for
the project since it is hard for a project team to predict
potential risks.
• The impact of this source of risk includes significantly
increased project costs and time.
 5.4 Effective Management of Project Risk

• Precautionary steps to minimize risk is called risk

management.
• Risk management refers to assessing, reducing, and
controlling risks so that project objectives are met without
requiring excessive schedules or resource budgets.
• Some risks are best handled by owners, some are best
handled by designers, and some are assumed by contractors.
• Some risks can be covered by insurance; others can be
eliminated by contractually transferring risks to another party.
Effective Management of Project Risk contd.
• Risk management is the art and science of managing risks caused
by unforeseen changes which may require deviations from the
project plan and therefore affect the achievement of project
objectives.
• Project risk management includes process of conducting risk
management planning, identifying, analyzing, response planning,
and monitoring & control on a project.
• It involves processes, tools and techniques that will help PM to
maximize consequences of positive outcomes and to minimize
adverse impacts to project scope, cost, and schedule.
Effective Management of Project Risk contd.
Project risk management processes are:
1. Plan Risk Management
2. Identify Risk
3. Perform Qualitative Risk Analysis
4. Perform Quantitative Risk Analysis
5. Plan Risk Response
6. Monitoring And Control Risks
Effective Management of Project Risk contd.
1. Plan Risk Management: is the process of conducting risk management
activities for a project.
• It should begin as a project is conceived & be completed during planning.
• It includes reducing uncertainties, avoiding risks, and transferring risks.
• Uncertainty reduction: may convert the risk to certainty or reduce the
probability of an adverse outcome.
• Consequence reduction: A risk’s consequences can be reduced by
removing dependencies and by providing reserves of resources
requirements.
• Risk avoidance: Some risks can be avoided by reducing requirements, or
increasing the budget, or extending the schedule.
• Risk transfer: A risk can be reduced by transferring it to another entity by
the use of insurance and the alignment of responsibility & authority.
Effective Management of Project Risk contd.
2. Identify Risk: is a process of determining risk that affects project.
• Risks can be internal & external, predictable & unpredictable, and
technical & nontechnical.
• Risk assessment should identify risks items & estimate their
consequences.
• Participants in risk identification include project manager, project team
members, customers, experts, and end users.
• All project personnel should be encouraged to identify risk.
• Identify risk is an iterative process because new risks may evolve or
become known as the project progresses through its life cycle.
• Project team should be involved as they can develop and maintain a
sense of ownership and responsibility for the risks.
Effective Management of Project Risk contd.
3. Perform Qualitative Risk Analysis: is the process of prioritizing risks for
further analysis their probability of occurrence and impact.
• It assesses the effect of identified risk associated with cost, schedule & quality.
• Project’s performance can be improved by focusing on high-priority risks.
• Risk shall be analyzed with reference to their potential impact as follows:
• Insignificant risks: that may not affect the project schedule and budget.
• Normal risks: which may not affect the project budget.
• Serious risks: that will necessitate revision of cost estimates & budget.
• Very serious risks: that may upset the project’s viability itself.
• Insurable risks.
• Uninsurable risks.
Effective Management of Project Risk contd.
4. Perform Quantitative Risk Analysis: is the
process of numerically analyzing the effects of
identified risks on project objectives.
• It is performed on risks that have been prioritized
by perform qualitative risk analysis process.
• It analyze the effect of prioritized risk events.
Effective Management of Project Risk contd.
5. Plan Risk Responses: it is the process of developing
options and actions to enhance opportunities & to reduce
threats.
• It includes the identification and assignment of one
person (risk response owner) to take responsibility.
• Risk responses address the risk by their priority,
including resources, budget, schedule, & project
management plan.
Effective Management of Project Risk contd.
6. Monitoring and Control Risks: is the process of implementing risk response
plans, tracking identified risks, monitoring residual risks, identifying new risks,
and evaluating effectiveness of risks process.
• It includes choosing alternative strategies, executing a contingency plan, taking
corrective action, and modifying the project management plan.
• New, changing, and outdated risks should be continuously monitored.
• Its tools and techniques of are risk assessment, risk audits, and variance &
trend analysis.
• Controlling risk include identification, classification, mitigation, & administration.
• Risk control consists of monitoring the use of reserves, reassessing risks, re-
planning risk reduction, & evaluating the impact of proposed changes on risk.
End of Chapter