Project Risk Analysis and Management - Essay Example

MANAGING PROJECT RISKS Introduction Project risks management is a process that allows analysis and management of the risks associated with a project. It increases the probability that a project will be successfully completed on the allocated time and costs, and meet set performance goals. Project risks can often be evaluated statistically, more so when empirical data is available. On the other hand, no two projects risks can be evaluated in the same way, particularly when they differ. Often risks emerge for reasons particular to a project, the working and industry environment. Addressing project risks management, therefore, differs from scenarios where empirical statistical data is available to adopt an actuarial approach to the risk analysis and management. Given that projects invariably involve a strong strategic, innovative, engineering or technical content, adopting a systematic approach has proven more effective than an intuitive approach. Project risk analysis and management meets this need (Perry & Simon, 2006). Discussion Defining Risk Risks exist as a result of uncertainty. The implication is that for any project, irrespective of the nature, uncertainties and risks will exist. For instance a new technology that has not yet been proven may be used thereby introducing the uncertainty of whether it will perform to the required standards. All uncertainties result in risks that may cause a failure to: meet the project’s set performance goals; complete the project within the timetable; and operate within the allocated budget (Perry & Simon, 2006). Project Risk Analysis and Management Project risk analysis and management is a process designed to eliminate or mitigate the risks that threaten the accomplishment of a project’s set objectives. Over time the process has emerged an integral part of project management, and not just a set of techniques or tools to be applied in overseeing the project (Project Management Institute, 2007) Risk Analysis Risk analysis focuses on the identification, subjective and objective assessment of risks. There are two stages in risk analysis: qualitative; and quantitative analysis. Qualitative analysis identifies the main risks factors and sources, for instance using brainstorming sessions, interviews and checklists. Qualitative analysis is accompanied by an assessment that assigns subjective labels to the identified risks factors as either high or low based on their occurrence probability and impact. It also identifies the key risks that are then managed in greater detail (Flanagan, Norman & Chapman, 2006). A quantitative risk analysis involves more sophisticated approaches and tools that may include use of computer generated models and software. It involves: assigning time and cost measurement estimates to the identified uncertainty; and probabilistic calculations of the combined uncertainties occurring. Both the qualitative and quantitative risk analysis can be applied with different intensities of exertion that vary from comprehensively detailed to modest. At the beginning of a project, it is recommended that risk analysis be conducted modestly until a climate of acceptability has been developed for the project(Flanagan, Norman & Chapman, 2006). An initial qualitative analysis is essential as it benefits the project in terms of understanding the project nature and problems irrespective of whether a quantitative analysis will be conducted at some later stage. It also functions to highlight the possibility for developing a plan to address a particular risk – risk closure. If carried out correctly, an initial qualitative risk analysis – that involves identifying and assessing risks – would act as an initial and simple quantitative analysis. If for no reason at all, but to save on costs, time and resources in a situation where the three are constrained and conducting both qualitative and quantitative analysis cannot be conducted, qualitative analysis should be conducted.(Flanagan, Norman & Chapman, 2006) Risks analysis necessitates a modification of the decision making procedures. For instance, when quoting project costs and time needed, risk analysis will inflate the figure and introduce ranges rather than the single value figures that would have been presented as estimates if risk analysis had not been introduced (Uher & Loosemore, 2004). Qualitative risk analysis The risk is first identified by: interviewing the project stakeholders; facilitating meetings to brainstorm; and relying on experiences and risks database. The methods of identifying risks are generic and applicable in a majority of projects. Once the risk has been identified, it is subjected to an initial assessment that classifies and groups the risks based on occurrence and impact as either high occurrence probability risk or low occurrence probability risk, and major impact risk or minor impact risk. Initial responses are then prepared for each risk, especially if the risk requires urgent action. The analysis may be terminated at this phase if the applied response effectively eliminates the risk or acceptably mitigates the risk (Keoki, Sears & Clough, 2008). It may be necessary to re-conduct the risk identification phase to identify any consequential secondary risks associated with the application of the solution to the primary risk that had been originally identified. These secondary risks may lead to the response to the primary risk being unsuccessful. The application, which is the qualitative risk analysis phases, is largely dependent on the complexity and size of the project (Ahmed, Kayis & Amornsawadwatana, 2007). Quantitative risk analysis The quantitative risk analysis is conducted immediately following the qualitative risks analysis. It will enable the previously identified risks be quantified against the three primary project assessment criteria: performance; time; and cost. Four basic quantitative analysis approaches have been identified: sensitivity analysis; probabilistic analysis; influence diagrams and decision trees (Chapman & Ward, 2003). Sensitivity analysis determines the effect of changing any of the project variables, based on the risk, on the whole project such as effect of timetable and cost changes on the whole project. It highlights how the risk occurrence can affect the whole project(see figure 1). It could also be used to determine the risk occurrence effects of economic return of the project(Chapman & Ward, 2003). Figure 1. Sensitivity diagram for a manufacturing plant project Probabilistic analysis states the probability distribution of the identified risk and its effect when considered in concert with other risks. Two probabilistic analysis methods are commonly applied: Monte Carlo simulation; and controlled interval and memory method. The Monte Carlo simulation is a probabilistic analysis that involves statistical determination of empirical values that fall within the probability distribution described by three estimates – maximum, minimum and average. The project outcome is derived by combining all the calculated values, for each risk. The calculation is repeated numerous times to obtain a probability distribution of the project outcome (see figures 2& 3). The controlled interval and memory method offers greater precision that the Monte Carlo simulation(Chapman & Ward, 2003). Figure 2. Time probability histogram and S-curve presented using the Monte Carlo simulation Figure 3. Cost probability S-curve using the Monte Carlo simulation Influence diagrams involve constructing models of projects aspects that are subject to the identified risks. They link the project aspects to the economic, time and cost parameters of the project. A decision tree graphically presents the feasible courses of action and possible future outcomes. Each outcome is consigned a probability value representing its possibility of incidence (Modarres, 2006). Risk Management Risk management is the stage of project management at which responses to identified risks are formulated. It begins at the qualitative analysis phase and includes urgent responses to risks whose resolutions are objectively apparent. Duplication between risk analysis and management is a fairly common happening (Pinto, Slevin& English, 2009). Risk management involves: identifying measures and undertaking to would either eliminate or mitigate the identified risks; developing contingency plans to handle risk occurrence; conducting further investigations to address uncertainty by growing the knowledge base; considering transference of the identified risks to insurers and underwriters who are better equipped to handle the risk and ensure that the project is on course even when the risk occurs; considering risk allocation and responsibilities to workers and contractors; and applying possibilities to estimates of costs, time, tolerance and float in programs in the specifications for the project performance(Pinto, Slevin& English, 2009). Risk management uses the information collected and calculated in risk analysis to make decision that improve the probability of the project achieving its performance, time and costs goals by mitigating or eliminating the risk, and monitoring the risk occurrence progression. The information helps in choosing the best response out of a number of feasible options. It may involve amending the project plans to reduce the risk occurrence, for instance the project management could: shift the risk from a critical path; developing a contingency response plan for when the risk occurs; and setting up when systems to inform when the risk occurs (Wang, Dulaimini & Aguria, 2004). Risk management responds in two ways – contingency and immediate response. Contingency response is a prevision plan for action that will only be implement if the adverse effects of the identified risk are realized. Immediate response is a revision of the project plan that either eliminates or mitigates the risk. Response to a risk can take either of five forms: elimination of the risk to ensure that it can never occur; reduction of the risk to using buffers; avoidance of the risk by implementing contingency action plans when the risk occurs; risk transfer through contracts, though it does not eliminate the risk; and risk acceptance that balances the risk against benefits whereby the risk is accepted if the benefits far outweigh its negative effects (Uher & Loosemore, 2004). Risk management begins immediately qualitative risk analysis is concluded and proceeds throughout the project lifecycle. Information gained from the quantitative risk analysis allows for assessments of whether action should be taken and in what form. Project plans are amended based on information provided by both qualitative and quantitative risk analyses (Uher & Loosemore, 2004). Reasons for Managing Project Risks There are a number of reasons for applying risk analysis and management in a project, but the most significant benefit is that it costs far less than it would cost for the risk to occur without a plan in place. They not only serve the project bit all project stakeholders who include workers, contractors, owners and customers. Some of the important benefits of managing project risk include (Flanagan, Norman & Chapman, 2006): An elevated understanding of the project that enables the development of more realistic plans for the project. Realism is in the context of timescales and cost estimates. A better understanding of the project risks and the possibility of occurrence, which ensures that the risk are eliminated, mitigated or allocated to the party that is best equipped to handle them. A better understanding of how project risks con result in better contractual agreements with workers and contractors, and other stakeholders. An independent assessment of the project risks that justifies decisions making approaches and allows for more effective and efficient risk management strategies. A better knowledge of the project risks that allows for contingencies assessment to reflect the risks and discourage acceptance of principally and financially unsound projects. Support to the build-up of statistical data on historical risks, which make up the project risks databases, to aid in better planning and modeling of future projects of a similar nature. Enable superior, but more balanced and sensible, projects risk taking, thereby growing the benefits that can be realized by taking risks in a project. Aiding in the differentiation between bad management and bad luck, and good management and good luck in project management. Benefits realized from project risks analysis and management can be assigned to the project stakeholders who include (Flanagan, Norman & Chapman, 2006): Project managers to whom knowledge of the risks accompanying the project would help them decide on how to prepare capital budgets and allocate capital expenditures. Project owners who would decide of they will get what they want, when they want it and at a cost they are comfortable with from the project. Project contractors and workers who wish to improve their work quality such as completing the project in the allocated time, within the allocated budget and meeting the required performance settings. The costs of project risks analysis and management vary considerably and dependent on the work scope and commitment to the risk analysis and management process. For instance (Project Management Institute, 2007): The costs of the analysis and management, even if high, will always be lower than the actual risk occurrence with a plan in place. The cost incurred is an investment that was brought about by identification of the risk and would have otherwise remained unidentified until the risk occurred and it became too late to react. The time require for risk analysis is dependent on information and data availability. It may take any number of hours or days but the time is considerably reduced if the cost budgeting and preparation have been carried out. Smaller scale and simple projects will take shorted time than larger scale and more complex projects. The resources required to conduct project risk analysis and management would entail a personnel who has experience in using risk analysis and management techniques and applying the different tools. If such a personnel does not exist within the project then one may have to outsource. It is likely that once it has begun, personnel expertise within the project will increase substantially. Conducting Project Risk Analysis and Management Project risks analysis and management is an unceasing and endless process that can be initiated at any stage of a project lifecycle and carried out until the costs exceed potential benefits. It is imperative to note that as the project progresses, the benefits of conducting the risk analysis and management will decrease exponentially thus it is beneficial to conduct them at the earliest stages of the project. These stages include (Perry & Simon, 2006): Conceptualization and feasibility studies stage – atthis stage the risks can be managed at lower costs though there is a possibility that only the more obvious risks may be imagined at this stage. It ensures that the adopted implementation strategy minimizes risks. Project roll-out (commencement) stage – at this stage a review of risk exposure associated with the project can be made and a check conducted to ensure that all possible steps have been taken to mitigate to manage the risk. A quantitative analysis of the risks will provide an overview of whether the project goals and performance objectives can be met given the time and capital available. Tendering and contracting stage – at this stage the contractor can ensure that all the risks have been identified, conduct an assessment of risk exposure and set up a risk contingency plan. Implementation stage – at this stage any new risks can be reviewed and project achievement analysis conducted. New risks are identified and managed as they occur, then matched to project completion time-scale and cost. Conducting Project Risks Analysis and Management All projects can be subjected to risks analysis and management, though the largest application has been in capital intensive projects such as engineering, and oil and gas exploration. For these large projects, they are innovative and exposed to more risks. Smaller project that are not capital intensive, the small budgets may justify ignoring or applying risks analysis and management to a very small degree (Chapman & Ward, 2003). It is clear that while risks analysis and management can be applied in all projects, it is only beneficial to only some of the projects. Some of the projects that have had the most benefits include: projects involving interruption of revenue streams; groundbreaking and new technology projects; capital and investment intensive projects; fast-track projects; contractual, insurance and legal agreements projects; projects addressing sensitive social issues such as relocations and having environmental impact; projects involving stringent safety and regulatory requirements; and projects that have financial, economic and political ramifications(Chapman & Ward, 2003). There are no specific set of circumstances in which project risks analysis and management should be conducted, though repeat projects for which risks analysis had been conducted may be exempt. In the presence of any form of uncertainty, where significant risks are presented by severe constraints, the absence of empirical data may make it difficult to conduct quantitative risk assessment.These circumstance do not take away from the need to conduct rigorous quantitative risk analysis(Chapman & Ward, 2003). It is recommended that project risks analysis and management be conducted by an external and independent consultant to ensure that an unbiased presentation is made, though it could be designated as an internal project function. Whoever is in charge of the risks analysis and management does not matter, whether internal or external party, what matter is that they review the project from an unbiased position, and be closely involved in the empirical analysis process, which forms part of the quantitative risks analysis, to ensure that the results are valid(Chapman & Ward, 2003). Conclusion The number of institutions that apply project risk analysis and management has increased exponentially since the inception of the concept. This is largely due to their realization that it forms an integral part of project management. This knowledge has resulted in the formation of expert and professional consultancies that conduct risk analysis and management, train individuals and advice projects. References Ahmed, A., Kayis, B. &Amornsawadwatana, S. (2007). A review of techniques for riskmanagement in projects. Benchmark International Journal, 14(1), 22–36. Chapman, C. & Ward, S. (2003). Project risk management: Process, techniques and insights, 2nded. Hoboken: John Wiley & Son Publishers. Flanagan, R., Norman, G. & Chapman, R. (2006). Risk management and construction, 2nded.Oxford: Blackwell Publishers. Keoki, S., Sears, A. & Clough, H. (2008). Construction project management – A practicalguide to field construction management, 5thed. Hoboken: John Wiley & Son Publishers. Modarres, M. (2006). Risk analysis in engineering: techniques, tools, and trends. Boka Raton: CRC Press. Perry, J. & Simon, P. (2006). Project Risk Analysis and Management. Buckinghamshire: The Association for Project Management. Pinto, K., Slevin, P. & English, B. (2009). Trust in projects: An empirical assessment ofowner/contractor relation-ships.International Journal of Project Management, 27(6), 638–648. Project Management Institute (2007). Construction extension to the PMBOK Guide, 3rded.Newtown Square: Project Management Institute. Uher, E. & Loosemore, M. (2004). Essentials of construction project management. Sydney:University of New South Wales Press. Wang, Q., Dulaimi, F. & Aguria, Y. (2004). Riskmanagement framework for construction projects in developing countries.Construction Management and Economics, 22, 237-252. Read More