Risk management is one of the most important areas of project management that must be considered. Companies that want to compete with one another have adopted project management as a method of managing their companies. They have had to learn how to define and control project scope, schedule, and cost as baselines, and they have had to learn all of the control elements necessary to make successful projects. But many of these companies have yet to learn to manage the risks involved in managing a project.
A risk is an uncertain event that has a positive or negative effect on at least one project objective. All risks have causes. For example the cause of a risk may be that it is necessary to design the wheel of a bicycle in a bicycle design and manufacturing project. The risk may be that the design of the bicycle wheel takes longer than the time that was allowed for it. All risks have uncertainty associated with them and all risks have an impact associated with them. The impacts can affect the project baselines of cost, schedule, and scope. The risk may also affect activities in multiple areas of the project as well as activities outside of the project.
Risks are justified by the benefits that come as a result of taking them. For example, investors or stockholders in companies take the risk that the company will not be profitable and they could lose their investment. On the other hand they could make a profit and share in the success of the venture. Unless the investors feel that the potential benefits justify the investment expenditure they will simply put their money into another venture. The least-risk investment and the one also with the least benefits is investing in United States Treasury Bills. In project risk there are many things that can go wrong in the course of the project. The potential benefits should justify the risks that are taken.
Recall that one of the principles involved in good project management is establishing three baselines. The cost, schedule, and scope baselines are essential to managing a project. These three constraints on a project serve to define the project and give us the goals that are to be obtained. The cost baseline of the project must represent all of the cost that will be incurred in the project. The scope baseline must represent all of the work that has to be done in the project. The schedule baseline must represent all of the time that it is going to take to do the project.
When I discussed scope, I emphasized the importance of discovering and documenting all of the work that has to be done in the project. The scope of the project must also include the work that must be done to handle the work that was not expected to be necessary. When this work is included in the project plan, it affects the scope and schedule baselines as well.
All of this work has some probability of occurring. In other words, work that has a probability of greater than zero but less than 100 percent of occurring is considered to be a risk. Risks can have a positive or negative effect. They can produce benefits for the project, or they can produce loss for the project. The Guide to the Project Management Body of Knowledge (PMBOK) defines a risk event as ''a discrete occurrence that may affect the project for better or worse.''
Risks can be divided into known and unknown risks. Known risks are those risks that can be identified. Unknown risks are those that cannot be identified. Even though unknown risks are not identified, we can recognize the effect of these unknown risks and we can plan for them. This planning can be accomplished by looking at expert opinion and observations of similar projects, evaluating the risks that occurred there, and adjusting schedules and budgets accordingly.
Was this article helpful?
What you need to know about… Project Management Made Easy! Project management consists of more than just a large building project and can encompass small projects as well. No matter what the size of your project, you need to have some sort of project management. How you manage your project has everything to do with its outcome.