Risks are unplanned events that can have positive or negative effects on the projects. Most risks are seen as threats to the project's success—but not all risks are bad. For example, let's say there is a 20 percent probability that a project will realize a discount in shipping, which will save the project $15,000. If this risk happens, the project will save money; if the risk doesn't happen, the project will have to spend the $15,000. Risks should be identified as early as possible in the planning process. A person's willingness to accept risk is the utility function (also called the utility theory or risk tolerance level). The Delphi technique can be used to build consensus on project risks.
The only output of the risk planning process is the risk management plan. There are two broad types of risks:
• Business risk The loss of time and finances (where a downside and upside exist)
• Pure risk The loss of life, injury, and theft (where only a downside exists) Risks can be responded to in one of seven methods:
• Avoidance Avoid the risk by planning a different technique to remove the risk from the project.
• Mitigation Reduce the probability or impact of the risk.
• Acceptance The risk's probability or impact may be small enough that the risk can be accepted.
• Transference The risk is not eliminated, but the responsibility and ownership of the risk is transferred to another party (for example, through insurance).
• Exploit Positive risks that are likely to happen can be exploited to take advantage of the conditions the risk may create.
• Sharing Positive risks can be shared with other organizations.
• Enhancing Positive risks that may not occur on their own can be enhanced to increase their probability of occurring.
When a project manager does risk assessment, he'll be doing analysis and then a ranking of the risks. Here are the key terms with these activities:
• Qualitative analysis This approach qualifies the risks for further analysis.
• Quantitative analysis This method assigns numeric values to probability and impact.
• Cardinal scale A numeric ranking.
• Ordinal scale A word ranking (high, medium, low).
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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.