Risk management has become one of the most important aspects of project management. As companies become better at managing projects, the significance of risk management becomes more important. Many companies are not yet adept at determining project cost, schedule, and scope baselines, and they have not yet learned to manage the work that is actually going to have to get done in the project. Until this is done it does not seem worthwhile to consider risk management.
The components of risk identification, probability, and impact must all be considered in order to determine how to deal with a risk. The combination of impact and probability determine the severity of the risk. The severity of a risk determines how it ranks in importance among other risks.
The six steps in risk management—risk management planning, risk identification, risk assessment, risk quantification, risk response planning, and risk monitoring and control—are necessary to manage risk. The steps must be carried out on a continuous basis throughout the project.
Companies and individuals have risk tolerance. They either tend to be gamblers and are willing to take chances to achieve rewards, or they tend to be conservative and less willing to take chances.
Various methods can be used for risk identification. All of the techniques useful for group dynamics are also useful for identifying risks. Risk evaluation must determine the probability of the risk occurring and the impact that it will have if it does. Risks that are either very low in probability or very low in impact need not be considered as a serious threat to the project, even though they may be coupled with high impacts or high probability, respectively.
Expected values for risks are useful in determining the quantitative value of a risk in terms of dollars. The expected value of a risk is the approximate amount of money that could be spent to eliminate the risk.
Once it has been determined that a risk should be dealt with, the proper strategy must be employed. Risks can be avoided by completely eliminating the possibility of the risk through redesign or restructure of the project. Risks can also be transferred by making someone outside the project responsible for the risk. Risks can be mitigated by reducing either their probability or their impact to a level where they become acceptable.
Contingency reserves are monies set aside for dealing with an identified risk when it occurs. The contingency reserve is part of the project budget. Management reserves are monies that are set aside for dealing with unidentified risks when they occur. Management reserves are part of the project budget, but not part of the baseline.
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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.