The process of risk management for projects

Contents

I. Introduction
1.1 Purpose of the Paper

II. Main Part
2.1 Different Approaches to Project Risk Management Processes
2.2 Tools for Project Risk Management
2.3 Extending the Project Risk Management Process

III. Conclusion

Bibliography

I. Introduction

In consequence of the steadily increasing demand for projects there is an increasing demand for project risk management. Due to the high complexity of project work and its planning there are many possibilities where risks can endanger the success or even the practicability of a certain project. Hence, there cannot be enough emphasis on project risk planning for the smoothly flow of project progression. Within projects the term risk is defined as “[…] the cumulative effect of the chances of uncertain occurrences adversely affecting project objectives” (Wideman 1992, p. I-4). The thorough examination of possibilities for avoidance, elimination or at least for a significant reduction of these risks should lead to a better performance of the ultimate project.

1.1 Purpose of the Paper

The question why some projects succeed while others fail is important to every business. To strengthen the possible future project success, project risk management has to be effectively applied to every project process. Identifying project risks and appropriately cope with them through the development of adequate strategies is the aim of the project risk management process. Having this in mind, the intention of this term paper is to analyze the process of project risk management. After this short introduction, by thorough study of literature in the second chapter the main steps of different approaches of the risk management process in projects will be indicated and compared (2.1). After that the most common tools to be used within this process will be indicated (2.2), before. Finally, possibilities for the extension of the project risk management process towards a broader management process will be discussed (2.3). In the last chapter a conclusion will be drawn and an answer given to the questions on which are the critical steps towards an effective risk management process and which specific factors have to be focused to overcome the threats concerning management of projects. The work is done on a more general basis to understand the character of the risk management process, giving possibility to an application to many different kinds of projects.

II. Main Part

Project risk management is “[t]he art and science of identifying, assessing and responding to project risk throughout the life of a project and in the best interests of its objectives” (Wideman 1992, p. E-3). Within projects risks become more specific than risks on strategic business or corporate level. Thus, risk assessment has to be involved to a vast extend into the project risk management process (Merna and Merna 2004). The management of project risks should be an integrative function that will be continuously followed during the whole project life cycle. Also the status of risk changes within this life cycle and the project development phase is the most effective starting-point to achieve the greatest impact on the project results (Wideman 1992). Even though the above definition is widely accepted, there still remains controversy in literature on how this process of risk management looks like and, especially, on how many and which phases it includes. Accordingly, in the following section some approaches to project risk management are introduced and the similarities and differences highlighted.

2.1 Different Approaches to Project Risk Management Processes

After a review of literature on project management and project risk management processes, the main finding is that risk management in projects is a formal process that involves some successive actions to be accomplished. This process in its very simplest form consists of three phases, namely risk identification, risk analysis, and risk handling. In the risk identification phase it has to be found out what type of risk is involved. Major possibilities are risks concerning the realization of the process product, risks concerning deadlines, financial risks, risks with personnel, risks of acceptance of clients and stakeholders, risks in the project organization, and risks with the applied proceedings and methods. The second phase includes two separate actions, the risk assessment and the risk classification. An assessment of the existing risks has to be done mainly about the probability of incidence.

After that the causes and the consequences have to be described to become classified. In the end, measures for risk precaution concerning the identified risk factors have to formulated, which is seen as risk handling (Tiemeyer 2004). Figure 1 illustrates this three-phase project risk management process.

Figure 1: Three-phases risk management process structure

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Source: Own depiction based on Tiemeyer (2004).

A more common form of the project risk management process consists of four phases, called identification, assessment, response, and documentation (Wideman 1992). The first phase has to identify all possible risks that may significantly impact the success of the project. As risk combinations are posing greater risk than individual ones, they have to be taken into special consideration.

A risk identification program should be applied to identify all potential risks because those risks that are difficult to detect are the most threatening ones. The second phase assesses the identified range of potential risks due to type, impact and probability, thus, determining their ranking (e.g. Baccarini and Archer (1997) for details on risk ranking) or status. In most cases the risks require a thorough impact analysis. Therefore, risk assessment draws input from all project management functions, such as cost, contract/procurement, human resources, information/communications, project management integration, scope and quality. In the third phase the diminishment of the project risks requires the installation of an adequate system strategy, also taking out insurance against the insurable risks, and at last, it is necessary to plan appropriate activities to handle the remaining ones.

The fourth and last phase consists of documenting the entire process, which is also pivotal for every process in project management. With the important data obtained, a database has to be build in order to be able to continually evaluate the entire project, as well as following future risks. This process is shown in Figure 2.

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