Project Risk Analysis Guide
1. What Is Project Risk Analysis?
Project Risk Analysis is a consistent and often iterative process which enables the systematic examination and evaluation of information on the risks associated with a particular project. It aims to determine what kinds of risk affect the project and how to respond to those risks in an effective manner. If properly undertaken, the analysis process will increase the likelihood of successful completion of the project, in line with time, cost and performance expectations.
Any project is unique, and therefore there is no the same portion of risks and uncertainties affecting different or even similar projects. Sometimes there are common risks to separate projects, so that these risks can be assessed statistically using ample data available. But this way of risk analysis is not comprehensive and complete because of too many assumptions and hypotheses associated.
The manner of dealing with risks in projects therefore depends on situations where there is sufficient data to adopt a feasible and applicable analysis approach. And because most projects are invariably affected by strategic, technical, innovative, economical, human or/and engineering factors, a systematic and consistent process to risk analysis should be developed and utilized. In this context, the project risk analysis has been defined to address this primary requirement.
The purpose of the project risk analysis process is to uncover, describe and assess risks and uncertainties within a project, thus providing a basis for effective problem solving and decision making. People involved in risk analysis and management will benefit from a clear understanding of what threats should be managed and how.
The risk analysis process is continuous and can be started at almost any stage in the lifecycle of a project. Meanwhile, the effectiveness of using the process tends to reduce as the project progresses and comes to an end. There are therefore certain benefits at certain project stages.
Here are the most critical stages during which the project risk analysis process provides the greatest benefits to the management team and stakeholders as well:
- Feasibility Assessment. At this stage, the project is assessed for technical, operational and financial feasibility. Through the feasibility assessment, project risks can be reduced at a relatively low cost. The risk analysis process helps identify and select the most feasible and cost-effective solution for the project.
- Approval. During the approval stage, the project is submitted to the customer (and also sponsor) for review and sanction. The customer can use the findings of a quantitative risk analysis to get a better understanding of the project environment and understand the chance of project success. Risk analysis enables to figure out whether or not the proposed project can be done on time, cost, and performance.
- Negotiations. At this stage, the project along with its solution is to be discussed with the contractor to establish a framework for further contractual relationships. The findings of risk analysis allow ensuring that all risks are identified and appropriate strategies are outlined, so the contractor is able to set risk contingency or determine risk exposure.
- Implementation. The risk analysis process helps to measure the likelihood of project success and improve project performance. The constraints of time, cost and quality can be effectively managed through responding to identified risks as they occur.
The very first step a project manager needs to do in undertaking an effective risk analysis is to gain the right understand that any risk occurs as a consequence of uncertainty. In other words, if there are some uncertain circumstances surrounding a given project, a kind of risk will occur and then affect the project.
Through carrying out a risk analysis, uncertainties within a project can be analyzed and then quantified into the potential for loss that might occur as a result of some event or activity.
Here is an example of uncertainties and risks of various types affecting a particular project:
- The organizational structure and the financial authority are not yet established, or are too complicated and unclear
- There is an increased likelihood of supplier relationships problems
- The implementation methodology is not reviewed and sanctioned yet
- Allocated project resources seem to be insufficient at the required level
There are three key areas of a project that are affected by risks and uncertainties. With improper risk analysis and management, a project can be failed in terms of:
- Budget (allocated financial resources which correlate with cost estimates)
- Time (project due date or completion date)
- Performance (the accomplishment of project tasks measured against preset known standards and objectives)
The risk analysis process is intended to minimize the likelihood of risk occurrence through eliminating uncertainties that may threaten the achievement of a project on time, within budget and as per performance objectives.
The process should be implemented as an integral part of project management, but not just as a series of standalone tools, techniques and actions. It is the matter of project integration management to embed the risk analysis process into the project management framework.