PART SIX

Development Risk
Dr. Atsede Edited by Mukerem
 Discussion topics
 Risk Awareness
 Uncertainty in Projects
 Framework of RM
 Risk Management Culture
 Characteristics of RM
 Classification of RM
 Project Risk
 Risk Awareness
 Risk is an uncertainty that is characterized by its probability of
occurrence and its impact on project objectives. Uncertainty is
about a future event that may or may not happen.

 All projects contain risk, arising from interactions between

OBJECTIVES ... What must happen
UNCERTAINTY ... What might happen
 Risk Awareness
 Risks are uncertainties which, if they occur, would affect the
project objectives either negatively (threats) or positively
(opportunities). Project objectives include scope, schedule, cost,
and quality.

 In any given decision situation both threats and opportunities are

usually involved, and both should be managed.
Risk management assists project managers in setting priorities,
allocating resources and implementing actions and processes that
reduce the risk of the project not achieving its objectives.

 All projects are exposed to risk, denial does not make them go away, it just
makes you unprepared for them if they occur. (unrealistic objective)

 Risk should be considered at the earliest stages of project planning and risk
management activities should be continued throughout a project.

 Risk management plans and activities should be an integral part of an

organization’s management processes
Integrating risk with other management functions
 Uncertainty in Projects

 Risk’ is ‘uncertainty that matters’ but not every uncertainty is

a risk.
 It matters because it can affect one or more objectives.
 There are uncertainties that are irrelevant in terms of
objectives, and these should be excluded from the risk
management process (RMP)

Example: Unseasonal weather conditions in construction project matters

( the possibility of rain is an uncertainty that matters). But such condition may
not matter if we are conducting an IT project.
The six Ws framework for the roots of uncertainty

 Who- Who are involved?

project initiators, later players and other interested parties
 Why- What do the parties want to achieve?
(Profit or other motives )
 What- what is it, that the parties are interested in?
Design (building, other physical product, service, or process)
 Which way- how is it to be done? ( Activities)
 Wherewithal- What resources are required, especially financial means,
 When- When does it have to be done? (Timetable)
 Risk Management Culture
 Organizational culture drives the approach to risk. Thus, organization needs
to build a culture of risk management in order to be successful in managing
project risk.

 Risk culture definition

The norms and traditions of behaviour of individuals and of groups within an organization that
determine the way in which they identify, understand, discuss and act on the risks the organisation
confronts and the risks it takes. (IIF, 2009).

 Culture is how organization do things-“ risk is our way of doing business”

 Building a risk-based culture involves integrating risk into the project

planning and control process.
Characteristics of successful risk management organizations

link RM with corporate and project planning. Risk management

program is consistent with company strategy and planning.
Provide training and development in risk planning and
management.
Document past project experiences and learn lessons from the
experiences (Learning organization).
 Seeing through Johari window

 One of the major risks in any

project is the tendency of its key
project decision makers to
overestimate what they know and
underestimate what they don’t
know.

 Within the Johari Window model,

interpersonal communication can
be improved by enlarging the area
of Arena (open area) through self-
disclosure and feedback.
 Classification of risks

Different approaches are found to classifying what are often the

same types of risks. The main categories of risk can be classified as:

 Physical: loss of (or damage to) information, equipment or

buildings as a result of an accident, fire or natural disasters such as
floods, earthquake.

 Technical: Systems that do not work or do not work well enough

to deliver the anticipated benefits.
 Classifying risks

 Labor: Key people unable to contribute to the project because of, for example,
illness and career change.

 Political/Social: For example, withdrawal of support for the project as a result

of change of government, a policy change by senior management, or protest
from the community, the media, service user or staff.

 Legal concerns : legal action or the treats of it because some aspects of the
project is considered to be illegal or because there may be compensation
claims if something goes wrong.
 PROJECT , RISK & PROJECT RISK MANAGEMENT

Project

 A project is a one-off, non-repeated activity , which achieves clearly stated

objectives within a limited time.

 Maylor (1996) suggests that most projects have the following common
characteristics.
 They are goal oriented.
 They have clear beginnings and ends.
 They have set of constraints that limit and define the process.
 Their output can be measured in terms of performance against agreed
indicators.
 Project Risk
 Risk in projects may be defined as ‘an event or situation which can endanger all part
of the project objectives ( Nickson and Siddons, 1997).

 Project risks are uncertainties which, if they occur, would affect the project
objectives either negatively (threats) or positively (opportunities)

Project threat: A condition or situation unfavorable to the project, a negative

set of circumstances, a negative set of events.

Project opportunity: A condition or situation favorable to the project, a

positive set of circumstances, a positive set of events.
 In any given decision situation both threats and opportunities
are usually involved, they are seldom independent and both
should be managed.
Example
– The possibility that planned productivity targets might not be met.
– Interest or exchange rates might fluctuate.
– The chance that client expectations may be misunderstood.
– Whether a contractor might deliver earlier than planned.
– IT risks such as spam, viruses and malicious attacks.
 Characteristics of Project Risk Management

 The goal of project risk management is to minimize potential threats while

maximizing potential opportunities.
 Project risk management is proactive.
 Project risk management plays a key role throughout the life of a project ( from
initiation to closing).
 Project Risk Management cannot take place in isolation. Success relies heavily
on communication throughout the process
 Base plans include target scenarios that provide a bases for project preparation,
execution, and control.
 Contingency plans are a second level plan that include predefined actions to be
taken in the event of any of the most likely risks occurring.
keys to managing project and attaining risk effectively:

• Identifying, analyzing and assessing risks early and systematically, and

developing plans for handling them;
• 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
• Ensuring that the costs earned in reducing risks are equal with the
importance of the project and the risks involved.
 Risk- benefit analysis
 Risk-benefit analysis involves the comparison of the risk
of a situation to its related benefits.

 This analysis is used to establish whether it

is worth assuming some risks comparing
the resulting benefits.

 High risk, low benefit

 High risk, high benefit
 Low risk, low benefit
 Low risk, high benefit

 Can be very dependent on the individual doing the analysis.

Good project risk management within an organization has the
following characteristics:

 Project risk management activities begin at the initiation of the project,

risk management plans are developed and risk management continues
throughout the project life cycle;

 Project risk management is not a discrete stand-alone process, but is

integrated with other project management functions; and

 The implementation of project risk management is the responsibility

of all project stakeholders and they participate actively in the process.
 Project manager’s role

 Encouraging senior management support for Project Risk Management

activities.
 Determining the acceptable levels of risk for the project in consultation with
stakeholders.
 Developing and approving the risk management plan.
 Promoting the Project Risk Management process for the project.
 Facilitating open and honest communication about risk within the project
team and with management and other stakeholders.
 Approving risk responses and associated actions prior to implementation.
 Project manager’s role
 Applying project contingency funds to deal with identified risks that
occur during the project.
 Overseeing risk management by subcontractors and suppliers.
 Regularly reporting risk status to key stakeholders, with
recommendations for appropriate strategic decisions and actions to
maintain acceptable risk exposure.
 Monitoring the efficiency and effectiveness of the Project Risk
Management process.
 Auditing risk responses for their effectiveness and documenting
lessons learned.
 Why are Projects Risky?
Common characteristics: Factors found in all projects which make them
inherently risky include:

 Uniqueness. Every project involves at least some elements that have not
been done before, and naturally there is uncertainty associated with
these elements.
 Assumptions and constraints. Assumptions and constraints may turn out
to be wrong, and it is also likely that some will remain hidden or
undisclosed, so they are a source of uncertainty in most projects.
 Stakeholders. These are a particular group of people who impose
requirements, expectations and objectives on the project.
 Performance/quality standards. The higher the standard of performance
or quality required in a project the risker the project.
 Financial risk. Large capital outlays , unbalanced cash flows etc.
End