Top Methods for Estimating Project Risks

Decision-making is an essential part of being a project manager. Often, each decision comes with a certain tradeoff. To make good ones, evaluate your decision’s direct results and what could happen if things don’t go as planned.

What are Risks?

Risks are unforeseen circumstances that can come out of a certain decision. These can be positive or negative, such as a product underselling versus being sold out. Regardless of the outcome, you should be prepared for any risks that may arise.

The types of risks can include health and safety, quality of life, sustainability, financial, time, reputation, and many others. These can be controlled using risk management, which involves examining events that could happen as a result of your decisions.

Once you know what they are, you’ll then want to perform a risk estimation, or an evaluation of how much the risks will affect your project’s progress and goals.

Important Terms in Risk Management

Risk Assessment

Risk assessment is a part of the risk management process. Its first goal is to identify and study the risk. The last step of risk assessment is risk estimation, which is the evaluation of how much the identified risks can affect your plans.

Risk Tolerance

Risk tolerance is the level of risk your team is willing to take. This will depend on several factors, including resources, company culture, leadership, and more.

When hiring new people, for example. There’s always a negative risk of the new hires doing badly on the job despite a stellar interview. Most companies may be open to taking inexperienced applicants for entry-level positions. Here, risk tolerance is high. However, this risk tolerance may get lower for top-level managers.

Risk Impact

Risk impact is a numerical value that rates how much the risk affects projects and businesses, often described aslow, medium, or high.

Low impact risks are risks that the project can most likely afford to take. Medium impact risks are those that will require resources to manage but are perceived to be easy to contain. High impact risks may require a massive amount of resources to fix, if they’re fixable at all.

Risk Probability

Risk probability is the likelihood of a risk happening. It can be rated as very low, low, medium, high, or very high. They can also be represented through numerical ranges:

  • Very Low: 1 in 100
  • Low: 1 in 10
  • Medium: 1 in 5
  • High: 1 in 2
  • Very High: More than 1 in 2

Methods to Estimate Risk

To evaluate how much risk can impact your project, here are methods you can explore.

Risk Exposure

Risk exposure is the cost of what the project stands to lose in case of negative risk or gain in case of positive risk. This is computed by multiplying the probability of its occurrence by a numerical value that represents how valuable that risk is.

For example, if you decide to invest in new machinery that contributes an additional $150,000 to your production revenue daily and the probability of it having issues is 5%, then your risk exposure is $150,000 x 0.05 = $7,500.

Probability-Impact Matrix

While the risk exposure method presents a straightforward approach to estimating risks, it’s not always that simple. In reality, it’s important to consider the gravity of the issue and how badly it affects production.

While a minor issue may slow a project down a bit, a more serious issue might stop it altogether and prevent production for a day, and a critical issue might put production on hold for two to three days.

As such, the risk exposure will be different depending on the scenario. Here it is illustrated on a probability-impact matrix.

Issue

Probability

Probable Loss

(Failed Production)

Probable Loss

Minor Issue

10%

$18,000.00

$1,800.00

Major Issue

5%

$150,000.00

$7,500.00

Critical Issue 2% $450,000.00

$9,000.00

 

Parametric Estimates

Parametric estimates are established series of impact values, probabilities, and formulas that have been established by subject matter experts. These values may take a large amount of experimentation and statistical analysis to finalize. But once they’re available, a parametric estimate can provide an accurate way of calculating risk.

Risk Scores

Risk scores are assigned by multiplying the numerical value equivalents of an event’s impact and probability.

Risk Score = Impact x Probability

For example, let’s say we assigned these numerical representations for your project risk’s impact and probability:

Value Assignment

Impact

Probability

High

9–10

Very High

5

Medium

4–8

High

4

Low

1–3

Medium

3

Low

2

Very Low

1

 

The risk score of a task that has a high probability of occurring but has medium impact is then computed as: 9 x 3 = 27.

You can then assign values that correspond to how important this risk is to you, in consideration to your risk tolerance.

Here’s an example of a risk score range:

Risk Score Range Sample

40–50

Catastrophic

20–39

Manageable

0–19

Negligible

Risk Scores with Multiple Impacts

For a holistic perspective of a risk’s implications on your project, risk scores with multiple impacts can be a good method to consider. In this type of table, the areas specifically affected by your risks are shown.

For example, let’s say you’re distributing food for an outdoor event, and your client is big on sustainability. You’re now facing a dilemma of using paper plates, or asking your participants to bring their own reusable containers.

The risks that you face here may be related to sustainability versus customer convenience.

Customer Convenience

Environmental

Impact

Probability

Risk Score

Impact

Probability

Risk Score

Paper Plates

7

4

28

9

4

36

Reusable Containers

10

3

30

1

3

3

Paper plates are highly convenient but will have a negative impact on the environment. And reusable containers will help lessen the environmental impact, but not all customers might be willing to do this.

Having risk scores with multiple impacts allows you to evaluate your risks more thoroughly, so you can reach a fair compromise if needed.

Planning and Preparing for Risks

Risks are staples in project management. To make good decisions, avoid looking at situations at face value. Instead, take the time to identify and evaluate possibilities, whether they’re welcome or otherwise. This foresight can help you plan and prepare accordingly.

Hannah Donato

Hannah Donato is a SaaS freelance writer for project management and productivity. Her works help SaaS brands become more relatable with actionable tips and relevant stories. Currently, she’s also an events manager and brand coordinator for a game development company in the Philippines, with four years of experience as a producer for games on multiple platforms.