Unit 5 Risk Knowledge Areas
Overview
In this unit, we’ll explore tools that help project managers minimize the impact of risks. Risk management, including mitigation before and during project work, is typically the primary concern for a Project Manager. Project failure isn’t just a possibility; it could jeopardize the entire organization. Hence, careful preparation is crucial.
One highly effective tool available to every project manager is the Risk Register. This document, often created in Excel, catalogues potential risks and outlines predetermined courses of action if any risk is triggered, including assigning ownership of the response strategy. Additionally, it incorporates calculations considering Probability, Impact, and Potential Expenses for each risk to determine a contingency amount for the project budget.
Building the Risk Register presents an excellent opportunity to take preemptive actions to mitigate risks before project work commences. By doing so, it’s possible to reduce both the Probability and Impact of potential risks.
This unit is divided into the following topics:
- Planning for Risk Using a Risk Register
- Identifying Risks from Multiple Sources
- Calculating the Risk Contingency Amount
- Performing an Analysis to Mitigate Risks
Learning Outcomes
When you have completed this unit, you should be able to:
- Develop a plan for risk by establishing a Risk Register
- Identify risks using multiple sources
- Calculate the risk contingency amount
- Perform an analysis of risks for the purpose of mitigation prior to the start of a project
Activity Checklist
Here is a checklist of learning activities you will benefit from in completing this unit. You may find it useful for planning your work.
Learning Activities
- Establishing a Risk Register
- Assigning Probably, Impact, and Potential Expense Values
- Analysing and Mitigating Risk
Assessment
- In this course you demonstrate your understanding of the course learning outcomes in different ways, including papers, projects, discussions and quizzes. Please see the Assessment section in Moodle for assignment details and due dates.
Planning Ahead
Before you examine the topics in this unit, take a moment to watch this video that has been provided by the instructor. This video will introduce each topic and help support your learning. You are encouraged to re-watch this video if you are struggling with any of the concepts you will be learning about in this section.
5.1 Planning for Risk Using a Risk Register
A risk register is a vital tool for project managers, offering a structured approach to identifying, assessing, and managing risks throughout a project’s lifecycle. By systematically documenting potential risks, teams can anticipate and address issues before they become significant problems. This proactive approach enables better risk mitigation strategies to be developed and implemented, ultimately increasing the likelihood of project success.
The risk register facilitates the assessment and prioritization of risks, allowing project managers to evaluate the severity and likelihood of each risk and allocate resources accordingly. This ensures that efforts are focused on addressing the most critical risks first, minimizing their potential impact on project objectives, timelines, and budgets. Additionally, the register serves as a central repository for documenting mitigation strategies and assigning responsibilities, ensuring that everyone involved in the project understands their role in managing risks effectively.
Communication and transparency are enhanced through the use of a risk register, as it provides a clear overview of potential threats and their management strategies. By fostering open communication within the project team and stakeholders, the register promotes collaboration and alignment in understanding the project’s risks. Throughout the project lifecycle, the register facilitates monitoring and control, allowing project managers to track changes in risk levels, assess the effectiveness of mitigation measures, and make adjustments as needed to maintain control over potential threats.
5.2 Identifying Risks From Multiple Sources
Project managers employ a systematic approach to identify, assess, prioritize, and mitigate potential risks that could impact the objectives of a project. To achieve this, they first embark on the identification phase where they collaborate with the project team to brainstorm potential risks emanating from various sources. These sources encompass internal factors like resource constraints, scope changes, and technology issues, as well as external factors such as market fluctuations, regulatory changes, and environmental conditions. Additionally, project-specific sources unique to the project’s context, industry, or stakeholders are also considered. This thorough identification process ensures that risks are comprehensively captured, allowing for a holistic understanding of potential threats.
Following the identification phase, the project manager proceeds to assess the identified risks to gauge their likelihood of occurrence and the potential impact they may have on the project’s objectives. This assessment can be conducted qualitatively, using scales such as low, medium, and high, or quantitatively, employing numerical values and statistical methods. By evaluating risks in this manner, project managers are equipped to prioritize them effectively based on their significance, combining both their likelihood and potential impact. This prioritization allows the project manager to focus resources and attention on managing the most critical risks first, thereby enhancing the project’s overall resilience.
With the prioritized list of risks in hand, the project manager then devises mitigation strategies tailored to address each identified risk. These strategies may involve proactive measures aimed at preventing the risk from materializing, reducing its impact if it does occur, or developing contingency plans to manage it effectively. Proactive risk management ensures that potential issues are addressed pre-emptively, mitigating the likelihood of project disruptions and delays. Throughout the project lifecycle, the project manager continuously monitors the identified risks and their associated mitigation plans. This ongoing monitoring and control process enable the project manager to capture new risks, reassess existing ones as necessary, and adjust mitigation strategies accordingly. By staying vigilant and adaptive, project managers can effectively navigate uncertainties and maintain project momentum.
Considering risks from multiple sources is paramount for project managers for several reasons. Firstly, it ensures comprehensive risk management, covering a wide range of potential threats that could impact the project. Secondly, it provides project managers with a holistic understanding of the project environment, enabling them to make informed decisions and anticipate challenges. Thirdly, proactive risk management helps prevent potential issues from derailing the project or causing delays, ultimately enhancing project success. Lastly, actively managing risks from various sources enhances stakeholder confidence in the project’s success, fostering improved stakeholder satisfaction and support throughout the project lifecycle. In conclusion, considering risks from multiple sources is essential for effective project management, contributing to increased project resilience and success.
Activity: Establishing a Risk Register
For this activity, you are going to consider a scenario – from multiple perspectives – and create a risk register. To do this, you will need to download the following template:
- INSERT TEMPLATE
After familiarizing yourself with the template, read through the following scenario that will be used for the learning activities in this unit:
You have been assigned the project “to move a bank’s corporate office to a location 30km away.”
For this activity, you will consider the “move” from the perspective of various stakeholders. These stakeholders should include:
- CEO
- VP of Operations
- VP of Human Resources
- Head of Customer Service
- A Department Manager
- Custodian/Janitor
- Bank Clerk
- Moving Company Contractor
Consider the Project From the Perspective of Each of These Stakeholders and Draft a List of Potential Risks. These Should Be Recorded Using the Template Provided Above.
Be prepared to share your list with other members of the class.
5.3 Calculating the Risk Contingency Amount
Project managers collaborate closely with stakeholders to identify and evaluate potential risks that could affect the project. Through this process, they assess the likelihood of each risk occurring and the potential financial impact it could have on the project if it were to materialize. This evaluation involves considering various factors such as project scope, timeline, resources, and external influences.
Once the risks are identified and assessed, project managers calculate the risk contingency amount by multiplying the probability of each risk by its potential financial impact. This calculation yields the expected monetary value (EMV) of each risk. The sum of all EMVs represents the total risk exposure for the project.
Incorporating the risk contingency into the project budget is essential for effective project management. By including this amount in the budget, project managers ensure that funds are allocated to address unforeseen events or challenges that may arise during project execution. It allows for proactive risk management by enabling project teams to implement mitigation strategies and allocate resources to manage identified risks effectively.
Furthermore, including the risk contingency in the budget helps prevent cost overruns. By accounting for potential risks upfront, project managers can better control project costs and minimize financial surprises. This transparency regarding the risk contingency amount fosters trust and alignment among project stakeholders. It enables informed decision-making and ensures that stakeholders understand the potential financial implications of identified risks.
Ultimately, incorporating the risk contingency into the project budget increases the likelihood of project success. It provides the necessary resources to address unforeseen challenges without jeopardizing project timelines or objectives. By effectively managing risks and maintaining financial control, project managers enhance the project’s chances of delivering its intended outcomes within the established constraints.
Activity: Assigning Probably, Impact, and Potential Expense Values
Using the template from the previous activity, as well as the list you created of potential risks, your task for this activity is to begin by determining the “probably” of each risk. The range will be 0.1 to 0.9 (if zero, then there is no chance it can happen, therefore not a risk; if 1.0, or 100%, then it WILL happen, and is not a risk – but a ‘given’).
Next, assign an “impact” using the definitions from the “Instructions” tab of the template. After you have assigned an impact, you will add a “Potential Expense” to each risk as well - this is the amount of money that the risk would cost to be “fixed.”
Finally, you will assign a monetary value (dollars?) to each line item in your template. You will see the “Net Impact” formulae to self-populate (column J). Also notice the Risk Contingency amount being calculated as you progress…
Special Note: You will find that AIO combines Impact and Potential Expense in their calculations. This is OK, but it is could prove to best to separate these two numbers in the event you are successful in mitigation because you may only lower the Impact or the Potential Expense. For the sake of this course, we will separate Impact from Potential Expense.
Be prepared to share this work with other members of the class.
5.4 Performing an Analysis To Mitigate Risks
Performing a risk analysis using a risk register is a critical step for project managers to anticipate and mitigate potential issues that could impact the success of their projects. Here’s how a project manager typically performs this analysis:
- Identifying Risks: The project manager, along with the project team, identifies potential risks that could arise during the course of the project. These risks could include anything that might hinder the project’s objectives, such as resource constraints, technical challenges, market changes, or external dependencies.
- Assessing Risks: Once the risks are identified, the project manager assesses each risk based on its likelihood of occurring and the potential impact it could have on the project if it does occur. This assessment helps prioritize which risks need the most attention and resources for mitigation.
- Creating a Risk Register: The project manager compiles all identified risks, along with their likelihood, impact, and any other relevant information, into a risk register. This register serves as a central repository for managing and tracking risks throughout the project lifecycle.
- Mitigating Risks: After the risks are assessed and recorded in the risk register, the project team works to mitigate them. This may involve developing contingency plans, allocating additional resources, adjusting project timelines, or implementing other risk mitigation strategies.
- Prioritizing Risks: It’s common practice to prioritize risks based on their likelihood and impact. The project team may focus on mitigating the most probable risks first, as addressing these can help reduce their probability of occurrence and minimize their potential impact on the project.
- Monitoring and Updating the Risk Register: Throughout the project, the project manager continuously monitors the risk register to track the status of identified risks and any mitigation efforts. As new risks emerge or existing ones evolve, the risk register is updated accordingly to ensure that the project team remains proactive in managing risks.
Performing a risk analysis and creating a risk register prior to the project beginning is essential for several reasons:
Early Identification: By conducting a risk analysis before the project starts, the project manager can identify potential risks early on, allowing the team to develop appropriate mitigation strategies before they escalate into major issues.
Resource Allocation: Knowing the potential risks upfront enables the project manager to allocate resources effectively to address them. This ensures that the team is prepared to handle any challenges that may arise during the project execution.
Cost and Time Savings: Addressing risks before they materialize can help prevent costly delays and budget overruns. By proactively managing risks, the project manager can minimize the impact on the project timeline and budget.
Improved Stakeholder Confidence: Demonstrating proactive risk management practices instills confidence in stakeholders that the project team is prepared to handle unforeseen challenges effectively. This can help maintain stakeholder trust and support throughout the project lifecycle.
While it’s rare that a risk can be completely eliminated (i.e., reduced to a probability of zero), effective risk management involves reducing the likelihood and impact of risks to an acceptable level. By addressing risks early and continuously monitoring them throughout the project, the project manager maximizes the project’s chances of success.
Activity: Analysing and Mitigating Risk
Once again, take a moment to consider the lists you compiled from the previous activities. Spend some time reflecting on how/why the risk might be triggered and what your response strategy might look like for your 10 most likely risks.
Next, analyze your risks and identify ways to mitigate your top five (most expensive) Net Impact line items (in an actual project setting, these actions would occur prior or concurrent to project work).
Finally, review your risk register to ensure the Probability and Impact numbers are not over-stating nor under-stating each line item’s Net Impact - also resulting in over or under-stating the Risk Contingency amount.
Be prepared to share your insights and analysis with other members of the class.
Assessment
Refer to the course schedule for graded assignments you are responsible for submitting. All graded assignments, and their due dates, can be found on the “Assessment” tab.
In addition to any graded assignments you are responsible for submitting, be sure to complete all the Learning Activities that have been provided throughout the content - these are intended to support your understanding of the content.
Checking your Learning
Before you move on to the next unit, you may want to check to make sure that you are able to:
- Develop a plan for risk by establishing a Risk Register
- Identify risks using multiple sources
- Calculate the risk contingency amount
- Perform an analysis of risks for the purpose of mitigation prior to the start of a project