If you were to start a new project or take your wedding vows, there are significant risks associated with them. Does the associated risk deter you from pursuing them?
Sometimes risks and uncertainties cannot be eliminated as they are necessary for your progress and well-being.
So, does this mean it’s right to take a risk blindly?
Well, you can always manage project risks to achieve the desired result. We can’t suggest risk management that ensures a lasting marriage, but we can help you uncover everything about project risk management.
What is project risk management?
According to PMBoK 6th Edition , Project Risk Management includes:
The processes of conducting risk management planning, identification, analysis, response planning, response implementation, monitoring risk on a project.
The main objective of project risk management is to increase the probability/ impact of positive risks and decrease the probability/impact of the negative risk to optimize the chances of project success.
For example, have a peek at the failed keynote demo during the Apple event. One bad instance and the expected project outcome gets derailed.
Source: Apple keynote event
According to Mckinsey about 70% of digital transformation projects go unsuccessful. Another study proposes that 10% of every dollar is wasted due to poor project performance. These statistics clearly show the importance of project risk management.
Definition of risk probability and impact
A probability and impact matrix is a tool used in project risk management to assess and prioritize the risk within projects. It helps in the analysis of the potential effects of risks on the project if they are likely to occur.
Risk probability refers to the likelihood or chance of a risk event occurring. It is expressed as a percentage or a qualitative score (high, medium, moderate, low). Risk impact refers to the potential negative consequences or effects on project if the risk event occurs. Impact is also expressed qualitatively (high, medium, low) or quantitatively (% increase in time delay, % increase of project cost).
The objective of project risk management is to increase the probability and impact of positive events and decrease the probability and impact of negative events.
Project Objective
| Low (0.10) | Moderate (0.20) | High (0.40) | Very high (0.80) |
Cost | < 10% cost impact | 10-20% cost impact | 20-40% cost impact | >40% cost impact |
Time | < 5% schedule impact | 5-10% schedule impact | 10-20% schedule impact | >20% schedule impact |
Scope | Minor areas impact | Major areas impact | Not meet acceptance criteria | High impact on product |
Quality | Few features will get impacted
| Reduction in quality | Not meet acceptance criteria | High impact on product |
Risk probability and impact matrix
Impact | 1 | 2 | 3 | 4 | 5 |
Probability | Negligible | Low | Moderate | Significant | Severe |
(81-100) % | Low Risk | Moderate Risk | High Risk | Extreme Risk | Extreme Risk |
(61-80) % | Minimum Risk | Low Risk | Moderate Risk | High Risk | Extreme Risk |
(41-60) % | Minimum Risk | Low Risk | Moderate Risk | High Risk | High Risk |
(21-40) % | Minimum Risk | Low Risk | Low Risk | Moderate Risk | High Risk |
(1-20) % | Minimum Risk | Minimum Risk | Low Risk | Moderate Risk | High Risk |
Importance of project risk management
Gary Cohn, the Vice Chairman of IBM once stated that – If you don’t invest in risk management, it doesn’t matter what business you are in, it’s a risky business.
Risk management is crucial as it facilitates delivering more projects successfully. Even a single risk program could save your business millions. With that in mind, let’s look at some of the benefits of project risk management for your organization.
Predictable project outcomes
A well-defined risk management process eliminates unknowns and uncertainties into calculated risk. Identification and analysis of any potential roadblocks enable teams to develop contingency plans for risk mitigation proactively. It reduces the likelihood of unknowns and supports a more predictable path for project delivery.
Stable project operations
A structured risk framework assists in assigning clear ownership for each identified risk. Such accountability ensures there is risk assessment and contingency plans wherever necessary. This clarity fosters a sense of ownership and control within projects and minimizes disruptions during any unforeseen events.
Addressing regulatory compliance
Risk assessment often discloses potential regulatory hurdles. By proactively identifying these compliance requirements, teams can prepare necessary documentation, standards, and implement procedures to meet legal obligations. These prevent costly delays and penalties and also showcase standard project execution.
Reduced legal liability
A risk management plan serves as testament towards mitigation of potential damage proactively. This can be crucial for future legal challenges stating your due diligence process and commitment to safety and compliance. This helps in reducing your exposure to litigation.
Proactive compliance with evolving legislation
Regulations are constantly changing. A good risk management process includes analysis and monitoring of legal and regulatory climate. This allows teams to adapt to new legislation, ensuring their projects remain compliant and lessening costly retrofits down the line.
Assessing risk periodically allows you to stay flexible and adaptable in case of any potential risks.
Project risk management is a crucial process for addressing the uncertainties in any project.
Pros and cons of project risk management
Project risk management, while offering significant benefits, also presents challenges that organizations must handle to rea 1lize its full value. Here’s a breakdown of the pros and cons:
Pros | Cons |
Improved decision making: PRM facilitates proactive planning and informed decisions. This enables project managers to anticipate and address potential issues.
| Misalignment with business goals: Ineffective risk management processes can fail to address actual risks. It will increase the project’s vulnerability. |
Cost savings: By mitigating potential risks, it can prevent costly overruns and delays. | Slower decision making: Long risk processes can hinder timely decision making that will lead to jeopardizing project success.
|
High stakeholder confidence: Effective risk management shows a commitment to responsible project management. Thus, it boosts stakeholder trust and confidence.
| Lack of authority: Assigning a risk champion without sufficient authority can undermine the implementation of risk management strategies. |
Improved efficiency: It promotes efficient resource allocation and helps organizations improve efficiency ratios in uncertain macroeconomic environments.
| Unclear objectives and scope: Poorly defined objectives and scope can lead to wastage of efforts and inefficient resource allocation. |
Continuous improvement: It fosters a culture of proactive risk identification and mitigation. As a result, it leads to continuous improvement and organizational resilience.
| Over-Optimism: Unrealistic expectations can lead to underestimation of risks, inadequate preparation with higher likelihood of project failure. |
Pros and cons of project risk management presentation template
Key steps in project risk management process
Project risk management must have these components that are scalable based on project size and type.
- Risk management planning
- Risk identification
- Qualitative risk analysis
- Quantitative risk analysis
- Risk response planning
- Risk monitoring and control
Step 1: Risk management planning
Risk management planning is essential for the success of any project. It states how project risk can be identified, managed, handled and mitigated. In this process, a key program evaluation area needs to be defined and established. The planning of project risk management should be confined to the project triangle – budget, time, scope and quality.
Project risk planning includes these activities:
- Identifying risks: This includes assessing and analyzing all potential risk areas that could affect the project. Risks can be categorized as internal (related to project team, processes) or external (market conditions, economic factors).
- Assessing risks: Once risks are identified, they need to be assessed based on their potential likelihood and impact. Tools like risk probability and impact matrix can be used to prioritize risks.
- Responding to risks: Common risk response includes risk avoidance, risk mitigation, risk transfer and risk tolerance. For each identified risk, a specific response strategy should be documented along with assigned owners.
- Establishing common risk categories: Categorizing risk helps in understanding the nature and potential impact of various project areas. Common risk categories are technical risks, financial risks, operational risks, legal risks. Understanding these categories facilitates better risk analysis and benchmarking study.
- Monitoring project risks and executing response actions: Throughout the project lifecycle, risks need to be monitored for changes in likelihood and impact. It involves risk reviews, tracking trigger events and updating risk registers. When a risk occurs, a pre-defined plan should be executed promptly.
Step 2: Risk identification
Risk identification includes all possible risks that could either positively or negatively affect the project. It helps in understanding which risks can affect the project more and documenting their characteristics. Potential contributors to risk identification are – project members, risk management members, subject matter experts, customers, and leaders.
To capture all project risks, it requires frequent communication and feedback among team members. These enable the project team to understand inaccuracies, inconsistencies, and assumptions surrounding the project. From these identified risks, a risk register can be drafted to ensure all risks are analyzed and monitored.
How to identify project risk?
- Determine what constitutes a significant risk for your project
- Set a minimum threshold for the project and establish a minimum dollar amount and time duration
- Identify significant risk that might affect project objectives
- Analyze and document all your risk in the risk register
- Classify risk in terms of how severe and likely it is
Note: High impact risk with low probability also referred to as black swan, demands most attention. Otherwise, these will devastate the entire project.
Sample Risk Identification:
Risk types | Scope creep |
Description | Changes in scope creep without adjustments on the time and cost |
Cost impact | High |
Probability | 25% |
Risk level | High |
Responses | Frequent reviews |
Action Owner | Project Manager |
Step 3: Qualitative risk analysis
This assessment looks at how severe the risk could be and how likely it is to happen. Then, it facilitates developing priority lists to determine which risk should be evaluated first.
For the qualitative risk analysis, priority level (high, medium, low) is assigned to each risk. The priority level should be in alignment with the business risk management plan. It is crucial for the project team to identify all the project risks that need to be monitored.
Qualitative risk analysis is often performed:
- For initial review or screening of the project risks
- When a quick assessment is needed
- For simple and smaller projects where complex quantitative analysis is not required
How to do qualitative risk analysis?
Once a risk is identified, this needs to be documented to understand the nature and severity of the risk. Here are few ways to carry out qualitative risk analysis:
- Evaluate which qualitative risk matrices to employ
- Review risk information from the risk identification step
- Brainstorm and discuss risk with your team
- Assess the likelihood of risk occurring by asking questions such as, “how likely this risk will occur”
- Evaluate the consequences of risk
- Prioritize risk based on the results of qualitative analysis
Step 4: Quantitative risk analysis
Quantitative risk analysis provides the probability estimates that a project will meet its cost and time objectives. This is based on the evaluation of the impacts of all identified and quantified risks. It takes into account both the probability and potential impact of the risk events occurrence. Determining quantitative risk analysis can result from a variety of activities such as:
- Interviews – These interviews are conducted to collect the probability data and impact for a range of scenarios. These can be – optimistic, most likely, pessimistic.
- Decision trees – These trees provide the quantitative analysis of risks and returns probability of various decisions.
- Monte Carlo simulation – This is a powerful tool for analysis of project risk and uncertainty. This technique provides forecasts with an overall outcome variance for estimated project cost and schedule.
Reports that can be derived from quantitative risk analysis are:
- How much will my project cost?
- How long will it take?
- Why?
Step 4: Quantitative risk analysis
During this phase, the team develops response actions and alternate options to reduce risks. This takes into consideration all the available resources and potential repercussions of the response plans. The objective of risk response is to align risks with an appropriate response based on the severity of the risk, along with costs.
Actions in response to risk:
Common options for a response are avoidance, transference, mitigation and acceptance.
- Avoidance actions include changes in project plan to avoid the potential risk or condition. PMBOK guide suggests that some of the risks that arise early in the project can be avoided by clarification of requirements, information, communication, or added expertise.
- Transference is the response owned and managed by third parties. In this case, consequences associated with risk are shifted to other parties. For example, contracts may be used to transfer specified risks to other parties.
- Mitigation is the process to take preventive actions to reduce the probability of occurrence or impact on the project. Taking early action is more effective than acting on the consequences after the damage is done. Preventive responses tackle the cause of risk, where it’s not possible to reduce probability. While mitigation response addresses the adverse effect that determines the extent of severity.
- Acceptance: It refers to risks that remain after response action or for which response is not cost effective are accepted. It is not possible to eliminate all threats or take advantages of all opportunities.
| Impact | ||
Probability | High | Transfer
| Avoid |
Low | Accept
| Mitigate | |
| Low
| High | |
Risk response matrix
Step 6: Risk Monitoring & Control
The process tracks the potential risks, implementation of risk plans, and effectiveness of risk management procedures. It is conducted throughout the project lifecycle and helps improve and guide the risk process.
Monitoring involves regular risk reviews, tracking trigger events, and updating the risk trigger. If a risk occurs, the predefined risk, the predefined response plan is executed. The effectiveness of response is also evaluated to ensure it achieves the desired outcomes.
Helpful tips:
- Be detailed and thorough in gathering status update information for risks
- Monitor trends and status continuously
- Address problems and issues immediately
- Communicate
Types of risks in project management
Effective risk management is essential for the success of any project. Although every project presents a unique set of challenges, these are some common risks in project management. It is important to consider these five types of risk management in project management:
Financial risk management
In financial risk management, you study, analyze and plan for budget risks. This includes increasing project costs, low revenue, or a lower budget.
- Cost increase risk: This can be quantified as a percentage of the total budget. Historical data on similar projects can inform such estimates.
- Low revenue risk: This can be quantified as a range of potential revenue outcomes along with their associated probabilities.
- Lower budget risk: This can be quantified as the probability of budget cuts and their impact on project scope.
External risk management
In external risk management, you study, analyze and plan for external events that could impact the project. Examples include new regulations, emergencies, supply chain issues, and macroeconomic events. Scenario planning can be used to estimate their potential impact. For example.
- New regulations: Medium impact, low probability
- Emergencies like natural disaster: High impact, low probability
- Supply chain: Medium impact, medium probability
- Macroeconomic events: High impact, low probability
Schedule risk
Schedule risk is the probability of not meeting predetermined deadlines. There can be a lot of factors that can cause schedule risk. Some examples of these are delays in longer hiring timelines, operation delays, and scope creep.
Not all of these can be avoided, some, such as scope creep can be done. Scope creep happens when a project becomes larger than expected and takes more resources and delays the project’s timeline.
Performance risk
Performance risk refers to the possibility that the project may not be able to achieve its specified goals or deliverables. The predicted performance risk can halt a project in its track.
Examples of performance risk include volatility in resources, material cost, or delivery timelines. During examination of performance risk, it’s crucial to consider the potential outcomes aren’t success or failures. These may vary based on cost, time, and production level.
Cost risk
Cost risk is one of the most anticipated risks in project management. Small businesses run on small margins, and the incurrence of any additional costs without contingency budget can have severe consequences. Some common risk factors that cause cost risk are unanticipated resources, legal, administrative, or materials costs.
How to reduce risks in project management?
Every project, regardless of size or scale, faces potential risks related to technology, processes or resources. These risks are not avoidable. Ignoring them can jeopardize project success. Below are a few steps for effective risk management in project management:
1. Craft a risk management framework
A structured framework provides a clear and organized method for mitigating project risk. This framework can be applied across various industries and consists of several core components. These are some of the core components:
- Risk identification: Proactively identify potential risks through brainstorming, expert interviews, past lessons, and checklists tailored to specific risk categories (e.g. technical, financial, operational).
- Risk assessment: Analyze risk by evaluating their potential impact (e.g. cost overruns, schedule delays, quality issues) and likelihood (e.g. low, medium, high). In this study, you should also include impact/ probability matrices to prioritize risks.
3. Risk response planning: Develop tailored strategies for every prioritized risk. Common responses include:
- Avoidance: Change the project plan to eliminate the risk
- Mitigation: Implement actions to reduce the risk’s likelihood or impact
- Transference: Shift the risk to a third party such as insurance or outsourcing
- Acceptance: Accept the risk entity and develop contingency plans
4. Risk monitoring and control: In this final step, you need to continuously monitor identified risks for changes in likelihood or impact. Track trigger events, implement risk response plans as needed, and document lessons learned. Regularly review and update the risk register for tracking risks, responses, and ownership.
2. Conduct thorough risk analysis
A comprehensive risk analysis checklist provides detailed insights for informed decision-making. Key areas to address include:
- Scope and impact assessment: Cleary define the project scope and identify potential risks within each area, such as technology, personnel or resources. Assess the potential impact of each risk on project objectives
- Probability estimation: Determine the likelihood of each risk occurrence. This estimation should include historical data, expert judgment, or quantitative analysis
- Timing analysis: Identify potential timelines for risk occurrence like early stages, critical milestones, or project closure.
- Resource allocation: Determine the resources (budget, resources, time) required for effective risk mitigation.
This analysis informs decisions on whether to avoid, mitigate, transfer, or accept specific risks.
3. Prioritize risks based on probability and impact
Use tools like the Impact-Probability matrix visualize risks based on their combined likelihood and potential impact. This prioritization focuses resources on high-impact, high-probability risks while allowing for efficient monitoring of lower-priority risks.
4. Implement early risk response strategies
Proactively address high priority risks proactively by developing detailed action plans. Document responsibilities, timelines, and budgets within the risk register. Also, assign a risk owner for each high-priority risk to ensure accountability and timely execution of mitigation strategies.
5. Foster clear communication with stakeholders
Maintain open communication with stakeholders regarding risk management processes and identified risks. This includes definition of key terms like ‘risk appetite’ (the acceptable level of risk for the organization) and ‘risk tolerance’ (the acceptable level of risk variation after mitigation). This shared understanding ensures alignment on risk thresholds and facilitates informed decision-making.
6. Continuous risk management
Risk management is an iterative process, not a one-time event. Continuously identify, assess, and respond to risks throughout the project lifecycle. This ongoing monitoring enables project leaders to proactively address potential threats. It safeguards project integrity and maximizes the likelihood of success.
Project management tools for effective project risk management
Managing project risks is a critical element of effective project management. This requires time and resources to anticipate and assess risks. Project management tools can aid teams and project managers to significantly reduce the chances of risks that can derail the project. These are great for supporting collaboration and providing high level view of projects.
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With 5day.io, you can take complete control of all your projects and tasks. Utilize Analytics to gain actionable insights for data driven decision making. Keep tabs on important deadlines with our progress tracking. Visual tools such as Kanban offer you a clear, flexible view of your project statuses and owners of the tasks.
Our top features such as custom fields allow you to add project specific data beyond the standard fields. It provides flexibility to track information relevant to your team or industry. The extra data fields can enhance reporting, filtering, and analysis that leads to better insights and decision making.
- Task Management
With 5day.io task management tool, you can break down large projects into easily manageable tasks and subtasks. can manage, approve, or track timesheets with ease and precision. Our platform supports team collaboration by enabling task assignments and shared accountability.
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5day.io offers a timesheet management solution that simplifies time tracking, enables approvals, and improves reporting accuracy. Our platform allows users to log work hours for their tasks and create detailed timesheets that can be reviewed and edited before submission. It also supports an easy approval process where managers can review timesheets efficiently.
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FAQs
What is positive risk in project management?
In project management, a positive risk is an uncertain event or condition that if it occurs it has a positive impact on one or more project objectives. While traditional risk management focuses on negative risks or threats, modern approaches recognize the importance of identifying and managing positive risks to maximize project success.
Here’s a breakdown of positive risks:
- Focus: Positive risks focus on potential gains and benefits for the project.
- Impact: Realizing a positive risk can lead to outcomes such as exceeding project objectives, reduced costs, improved quality, or increased stakeholder satisfaction.
- Management: Managing positive risks involves strategies to exploit, improve, or share the opportunity.
What is a project risk matrix?
A project risk matrix (also known as a probability and impact matrix) is a visual tool used to assess and prioritize risks based on their likelihood and potential impact. It is a grid where the rows represent the impact of a risk, and the columns represent the probability of its occurrence. Each cell in the matrix represents a combination of impact and probability, and risks are categorized into different levels of priority based on their position in the matrix.
Key features of a risk matrix:
- Visual Representation: This provides a clear and concise overview of project risks.
- Prioritization: It helps to prioritize risks based on their combined impact and probability.
- Resource allocation: it guides resource allocation towards high-priority risks.
- Communication: It facilitates communication and shared understanding of risks among stakeholders.
How to use a risk matrix:
- Identify project risks.
- Assess the impact and probability of each risk.
- Plot each risk on the matrix based on its impact and probability scores.
- Develop risk response strategies for high-priority risks.
When to use a risk management plan?
A risk management plan should be developed early in the project lifecycle, ideally during the planning phase. This should be regularly reviewed and updated throughout the project.
Key situations for utilizing a risk management plan:
- Project initiation: In this case, establish a proactive approach to risk management from the inception.
- Changing project environment: During this scenario, adapt to changes in project scope, requirements, or external factors.
- Critical milestones: Assess risks before and after key project milestones.
- Regular intervals: Team should also conduct periodic risk reviews to identify new risks and monitor existing ones.
- Trigger events: Implement risk response plans when trigger events occur.
What are the key components of a risk management plan?
A risk management plan should include the following components:
- Methodology: It defines the approach and processes for identifying, analyzing, evaluating, and treating risks.
- Roles and responsibilities: It clearly outlines who is responsible for managing what aspects of risk.
- Budget: It clearly suggests allocation of resources for risk management activities.
- Timing: This establishes a schedule for risk assessment and review.
- Risk categories: It defines categories for grouping similar risks (e.g. technical, financial, external).
- Risk register: A document that lists identified risks, their descriptions, potential impact, probability, priority, and assigned owner.
- Risk response: This outlines planned responses for different types of risks (e.g. avoid, mitigate, transfer, accept).
- Contingency plans: It defines actions to be taken if specific risks occur.
- Reporting and communication: It establishes procedures for reporting risk status and communicating risk information to stakeholders.
How to Identify Project Risks?
Identifying project risks is a crucial step in risk management. Several techniques that can be used are:
- Brainstorming: It involves gathering team members and stakeholders to generate a list of potential risks.
- Interviews: It involves conducting one-on-one interviews with subject matter experts to elicit specific risks.
- Checklists: This includes pre-defined checklists of common project risks as a starting point.
- SWOT analysis: It analyzes the project’s strengths, weaknesses, opportunities, and threats to identify potential risks.
- Lessons learned: It includes lessons learned from previous projects to identify recurring risks.
- Document review: This analyzes project documents (e.g. requirements specifications, project plan) to identify potential risks.
