Chapter 10. Project Risks
10.1 Project Risk
Risks are an aspect of uncertainty [1]. Therefore, an uncertainty is not equal to a risk. Risks can be measured while uncertainties cannot be. That is, potential outcomes of a risk can be described whereas it wouldn’t be possible to determine the outcomes for uncertainties. Risks can be controlled if response strategies can be defined and monitored during the project. Project team can respond to a risk if the risk triggers are identified and there is an owner of the risk who monitors the risk among other factors. Thus, when the project teams discuss all possible uncertainties in the initiation and planning stages, they determine the occurrence probability and the impact scale. For example, in our m-commerce project, testers may not determine some of the important code errors, which might lead to rework, schedule slippage and cost overruns. Considering the previous projects and lessons learned, we can predict the probability and how it may affect the project if the risk occurs. However, we can never be sure that this tester has malicious intentions to help a strong competitor. This would be an uncertainty, not a risk.
Project risk is an uncertain event or condition that, if occurs, has a positive or negative effect on one or more project objectives [2]. Risks exist in all projects. It is of high importance to keep in mind that a risk does not always create negative outcomes, but can lead to positive outcomes. The subsections 10.1.1 and 10.1.2 below elaborate on both types of risk with examples.
10.1.1 Negative Project Risks
It is the reality that project teams mostly encounter negative risks. These risks might jeopardize the well-being of a project’s progress and lead to failure if they occur. Some examples of a negative project risk are:
- Machines can fail in the middle of a critical activity.
- A vendor may not dispatch raw materials on time, or they may be damaged during a long journey from the vendor’s or supplier’s country to our project’s location.
- A key human resource for an activity may become sick or may find a better job and leave the organization.
- Projects that depend on good weather, such as road construction projects, face risk of delays due to exceptionally wet or windy weather.
- Safety risks are also common on construction projects.
- Changes in the value of local currency during a project affect purchasing power and budgets on projects with large international components.
A short example for negative risks:
A construction company is building a 20-storey building in a Northeastern state, and they are expected to finish it by February. However, the project team is aware of the fact that winter is not a preferred season to carry out construction works, and the adverse weather conditions may disrupt activities leading to schedule delays and cost overruns. This is why the project team should evaluate all the possible risks that may result from inclement weather such as snowstorms. Project team can obtain the long-term historical data and seasonal forecasts from the National Weather Service, and can monitor the daily and weekly weather forecast.
A short example for negative risks:
A construction company is building a 20-storey building in a Northeastern state, and they are expected to finish it by February. However, the project team is aware of the fact that winter is not a preferred season to carry out construction works, and the adverse weather conditions may disrupt activities leading to schedule delays and cost overruns. This is why the project team should evaluate all the possible risks that may result from inclement weather such as snowstorms. Project team can obtain the long-term historical data and seasonal forecasts from the National Weather Service, and can monitor the daily and weekly weather forecast.
10.1.2 Positive Project Risks
Some uncertainties that we are not 100% sure that they may be materialized can make it easier to achieve a project’s objectives. When this type of uncertain happens, the risk is positive and is therefore referred to as an opportunity. Some examples for positive risks can be described below:
- The potential of finding an easier way to do a task
- Acquiring some materials in exchange for lower prices than estimated
- A potential change in organizational process that can accelerate the procurement of some materials
- A new technology that has been developed and can be introduced to the market while we carry out the project
- A grant our organization had applied, which can provide more funds to our project if accepted
As for the five positive risks above, a project manager’s response strategy would be exploit or enhance (among five alternative strategies in total – see 10.5.2) when they occur.
A short example for positive risks:
Company XYZ is thinking of developing a new electric toothbrush which customers are asking for according to the consumer surveys across the USA. Project team prepared all the plans, and estimated that this project will take nine months to finish. At the end of the project, the new toothbrush can be introduced to the market. During the development and testing of various toothbrush types, project team will use a 3D printer to create prototypes. While working on the risk management plan, team has been aware of ongoing research on a new 3D printer that is faster and can print more durable items with more details. Based on the analysis, team found that this new printer can expedite the project. If this positive risk occurs during the project, it can expedite the project by one month resulting in a 8-month project duration. So, project team decided to allocate a contingency reserve for this opportunity. If the 3D printing company can make this new printer available to the market around the fifth month of the project at the latest, project team can purchase it. The estimated cost for this new printer was determined as $25,000. Therefore, this money will be placed as a contingency reserve.
10.1.3 Known-Unknowns and Unknown-Unknowns
As discussed in Chapter 9 for contingency and management reserves, risks can be categorized as known-unknowns or unknown-unknowns. As regards known-unknowns, we can identify these risks in the planning stage, and estimate costs, and additional schedule and resources needed, if they occur. The costs allocated to compensate for managing these risks are named “contingency reserve”. However, it is not always possible for project teams to predict all the risks. Therefore, a management reserve is assigned besides the cost baseline (in which contingency reserves are accounted for). One obvious risk that emerged at the end of 2019 and has had a severe impact on all countries since March 2020 is the COVID-19 pandemic. This pandemic was an unknown-unknown for all the projects across the world. Some projects were able to overcome the issues by using their management reserves besides contingency reserves. However, numerous projects failed although they had contingency and management reserves since the impact of this pandemic exceeded the projects alone.
10.1.4 Individual and Overall Project Risks
Besides the categorization of risks as negative and positive, and as known-unknowns and unknown-unknowns, another categorization would be individual and overall project risks. Individual risks can affect the achievement of project objectives, and disrupt some activities, decisions, components, or deliverables. They can affect only one or some of the activities, but not always the whole project. If a risk has an impact on the project as a whole, this risk is considered an overall project risk. Let’s consider the case study of “Grocery LLC’s M-Commerce Project” (see 4.4.3 for the WBS). One project objective can be formulated as “to complete the elicitation of mobile app requirements as well as budget, schedule and resource estimates on which all the key stakeholders agree”. The activity 2.3 “Review specifications with team and stakeholders” is essential to identify the requirements that address all stakeholders’ expectations and concerns. However, some of the stakeholders may not agree on some of the requirements (see 5.2.2 for all the stakeholders in this project). Priorities of the top management, project sponsor, and product owner might not always overlap with one another. When the project team and team members review risks, they need to consider all possible risks that may affect the activity 2.3 and the overall project. If the conflict among stakeholders affects this objective, and therefore the activity 2.3, this would be counted as an individual project risk. Project team should create a contingency budget and schedule for this activity. If there is a risk of obtaining fund to conduct project activities, this would have an impact on the whole project, and will affect the overall project objective that aims at creating a mobile app. Project team must also develop risk response strategies to tackle with this risk. Besides, project team can determine an acceptable range of negative and positive variations for overall risks.
