What is Project Risk Management?
In the construction industry, risk is often referred to as the presence of potential or actual threats or opportunities that influence the objectives of a project during construction, commissioning, or at time of use. Risk is also defined as the exposure to the chance of occurrences of events adversely or favorably affecting project objectives as a consequence of uncertainty. Project risk management is a key project process, one that should begin at the earliest stages of the project and carry through until the facility is completed and turned over for operations. Failure to have an effective risk management process indicates that the organization and team are willing to leave a lot of the project to chance.
A risk management process has four iterative stages, as shown in the figure above. Risk identification is the first stage, and simply entails the cataloging of risks that may affect the project in question. This list of risks can be compiled on the basis of general knowledge and experience, combined with a “what can happen?” analysis of the future. In more sophisticated applications, project teams use tools to generate lists of potential risks that they then discuss and vet for better understanding and management of project risk.
The second stage of risk management is the assessment or evaluation of identified risks in terms of potential cost or time impact, should the risk become an event. Project teams can address some of the risks by simply gathering more information, while they can manage others through more active mitigation methods, as outlined below. Teams may also conduct a third stage, called analysis, that involves probabilistic risk analysis methods. One of these methods, known as Monte Carlo simulation, analyzes risk through probability distribution estimates of potential impact. The fourth stage, risk mitigation, is achieved in various ways, such as, for example, currency-hedging and the purchase of insurance. Risk mitigation methods include risk avoidance, retention/acceptance, control/ reduction, transfer/deflection, or application of contingency.
Why Project Risk Management?
Extensive research shows that risk management is a project process that helps the project team have a better chance of achieving cost and schedule objectives. In its 2012 study of probabilistic risk management, CII found that the overall risk management process provides the following benefits:
- enhanced internal collaboration and discussion
- increased ability to manage risks proactively
- ability to make risks more explicit to the project team and decision makers
- increased confidence in project decision-making
- ability to manage project schedules more effectively
Since first studying risk in 1983, CII has engaged hundreds of study participants focused on risk management practices, and literally has studied tens of billions of dollars’ worth of capital projects. These and a number of other studies on “risk” has shown that risk management is a project process that can add value to a project, reducing risks, increasing predictability of estimates, and heading off project disasters.
Decision Support Tools
Use inspired research should lead to techniques, processes, decision support tools and other aids that help address a problem. Over the past 30 years, a number of these tools have been developed by researchers at ASU. Most specifically are the five Project Definition Rating Index suite of tools and well as the Integrated Project Risk Assessment Tool that are all highlighted elsewhere on this site.