Common Types of Risk in Project Management

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Every project carries numerous risks that have the potential to affect its final outcome. But this isn’t always a bad thing. There are different types of risk in project management and some can have a positive impact on the project as a whole. Understanding the differences between positive and negative risks—and knowing how to support the positive ones while mitigating the negatives—is an art form that is best learned through hands-on experience.

For novice project managers that don’t know where to begin, this guide provides insight into the most common types of project risk seen in the field of project management today. Moreover, it serves as a great entry point into the practice of risk assessment, management, and mitigation on a professional level.

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Types of Risk in Project Management

Project managers need to overcome various risks in order to ensure the success of their projects. While some of these issues are unique to each work, there are common risks that your team will encounter time and time again.

Operational Risks

Most operational risks stem from problems with day-to-day project operations and activities. Sometimes lumped together with performance risks, operational risks are the result of poor project implementation or issues with procurement, production, or distribution.They typically originate from one of four sources:

  • People: Potential people-oriented issues include undertrained teammates, staffing shortages, and unexpected absences.
  • Internal processes: The specific project processes established by your company could result in some operational risks.
  • Software systems: Modern software comes with a number of inherent risks, including system crashes, disk capacity limitations, cybercrime, and more.
  • External events and activities: Unexpected events, such as power outages or evolving laws and regulations, also pose operational risks.

Strategic Risks

These risks are a result of the strategies used when planning and approaching the project at hand. These could be technological risks, like selecting the wrong project management or CMS software for your team, but there are numerous other strategic risks to consider too. Some of the most common strategic risks include:

  • Failure to anticipate or forecast customer needs
  • Inability to maintain pace with the competitive landscape
  • Unexpected technological changes or updates
  • Lack of ongoing market expansion
  • Sudden or unexpected updates in organizational leadership
  • Unexpected issues with vendors or suppliers

Cost Risks

As the name implies, these risks are centered on project costs. One of the most common project risks, this centers around your project exceeding its allocated budget for one reason or another. Some of these reasons include:

  • Ineffective budgeting
  • Inaccurate resource cost estimations
  • Scope creep
  • Frequent turnover of project team members
  • Unexpected or rising technological costs

Failing to keep your project’s cost risks in check may end up leading to other issues including scheduling and performance risks.

Market Risks

These risks revolve around commodity markets, foreign exchange rates, interest rates, company liquidity, and your competition. Market risks are some of the most difficult risks to mitigate. Not only are these elements subject to change at a moment’s notice, making them incredibly challenging to forecast and predict, but many of them are easily influenced by external factors that are beyond your team’s control.

Scheduling Risks

Generally the result of inept project planning, scheduling risks center on specific tasks, activities, or events that take longer than expected. Scheduling risks can easily lead to other risks, too, such as cost risks, due to the extra time and additional resources required to correct them. In extreme cases, scheduling risks can cause your team to lose any sort of competitive advantage, the inability to properly forecast customer needs, or issues with suppliers—all of which are common strategic risks.

Performance Risks

Often attributed to the entire team rather than a single individual, performance risks refer to the chance that a project won’t produce the desired results. Performance risks can also lead to numerous other risks, including:

  • Cost risks: Projects that don’t produce the desired results sometimes receive additional funding, which creates yet another cost risk to consider.
  • Scheduling risks: These risks can occur when teammates have to work on projects for longer than their projected timelines.

Performance risks can manifest even in successful projects. It’s possible for a team to meet all project deliverables and still fail to produce the desired or intended results, so performance risks really need to be monitored diligently.

Governance Risks

Often one of the easiest risks to manage, governance risk is tied directly to the actions and performance of executive-level board members and managerial personnel. As such, most governance risks are easily mitigated through strategic and continuous stakeholder engagement.

Legal Risks

These project risks are usually a result of legal, contractual, or regulatory obligations, and they can stem from federal or state laws, industry regulations, business competitors, and even employees themselves. In some cases, additional legal risks can be brought up by customers, clients, and end-users.

External Hazard Risks

Sometimes lumped in with operational risks, external hazard risks refer to issues that arise from natural disasters, criminal actions, and labor strikes. Some specific external hazard risks include:

  • Weather events including storms, flooding, earthquakes, hurricanes, and blizzards
  • Criminal activities such as vandalism, terrorism, sabotage, and cybercrime
  • Labor shortages due to strikes, civil unrest, or quarantine policies

Certain external hazard risks are easily mitigated. For example, backup generators can be used to keep everything up and running in case of an unexpected power outage. In the case of terrorism, sabotage, or civil unrest, however, the risks might be far beyond your control as PM.

Project Deferral Risks

These are the risks that stem from failing to complete a project in its entirety. Project deferral risks can actually result from any other type of risk, such as operational, strategic, cost, or scheduling risks.

But project deferral risks often occur when the team is given an extremely limited timeframe to complete the project. For example, failing to complete the project in a timely manner could make it virtually impossible to complete at a later date. In order to mitigate project deferral risks, PMs need to be extra diligent and verify that projects are completed in their entirety and within the established timeline.

How to Identify Potential Risks in Your Projects

Some project risks are easier to identify than others. It’s easily recognizable when a project is running over its allocated budget, for example, but it can be difficult to forecast upcoming technological or regulatory changes. Thankfully, there are several tools that can help simplify, organize, and mitigate project risks.

Risk Register

After brainstorming potential risks with your project teammates and key project stakeholders, take some time to record all of the risks within a risk register. Use as many words as needed to describe each risk, including its likelihood, potential impact, and any possible solutions. If you’re unsure of how to determine risk likelihood and impact ratings, utilize a risk assessment matrix as described below.

Risk Assessment Matrix

Typically created in a 3×3, 4×4, or 5×5 grid, the risk assessment matrix is a visual aide for identifying, categorizing, and tracking project risks. Once the matrix has been created and applied to a specific risk, it’s easy to determine both its likelihood and its potential impact on the project at hand. This helps your entire team when it comes to prioritizing risks and delegating mitigation duties.

SWOT Analysis

An abbreviation for strengths, weaknesses, opportunities, and threats, SWOT is an analytical framework that can easily be applied to any individual project. Not only does it create awareness for a project’s advantages and disadvantages, but it empowers decision-making for senior-level PMs, board members, and stakeholders. Originally developed in the 1960s and 1970s by Albert Humphrey at the Stanford Research Institute, SWOT is often applied to entire business and organizational structures as well.

Monte Carlo Analysis

Often used to forecast highly complex systems and processes, a Monte Carlo analysis runs various simulations in order to analyze their results and develop strategic, actionable insights. The Monte Carlo analysis makes it easy to identify potential roadblocks, create project-specific budgets, and predict budgeting or scheduling risks.

Delphi Technique

Pioneered in the 1960s, the Delphi technique relies on expert opinions to support the decision-making process. It’s regularly used in various industries, disciplines, and professions and is an invaluable tool in the hands of a skilled PM.

How to Address Project Risks

All risks are not equal. In order to properly address and mitigate any specific risk, it’s important to take a unique approach that is tailored to that specific type of risk. Tackling an internal risk, for example, involves a much different process than mitigating an external risk. However, there are a few basic methods for project risk management and mitigation to familiarize yourself with.

  • Risk avoidance: A very real strategy, it’s best to avoid risks whenever possible. There are some risks, however, that are simply unavoidable.
  • Risk retention: Some risks can be accepted and worked around. This is typically done when trying to prevent additional risks down the line or when the risk’s impact is negligible.
  • Sharing risk: In certain cases, risks can be shared—either with another company, another team, or an individual. Instead of assuming technological risks, for example, some companies choose to outsource their IT operations.
  • Transferring risk: Other risks can be transferred to another party. Insuring raw materials for a construction project is a legitimate method for transferring risk to an insurance company.
  • Risk reduction: In cases where a project risk is unpreventable, there are steps your team can take to reduce the severity of its potential impact. Just make sure that this reduction in risk is represented on your risk assessment matrix too.

Frequently Asked Questions

While this comprehensive guide covers the most common risks, including how to identify and address them, there are still questions PMs often struggle to find answers to. Listed below are frequently asked questions about project management risks with answers.

External dependencies, also known as dependency risks, are project risks that specifically depend on someone or something that is outside of the project. There may be an overlap between dependency risks and external risks; however, projects don’t strictly depend on external risks like they do with dependency risks.

A great example centers around cloud-based CRM software. While your project requires the data that is within your CRM, this data can only be accessed while you have access to the cloud. If your internet or electricity goes out in the middle of a project, you’ll no longer be able to access the data within the CRM. The external dependencies here include the CRM itself, your internet connection, and your electricity. Dependency risks can be tied to any sort of software, hardware, people, events, processes, costs, or resources associated with the project at hand.

Effective communication is vital to every relationship—including those between PMs, their teammates, and their clients. Simply put, communication can absolutely mean the difference between a successful and an unsuccessful project.

By establishing clear goals and objectives, project team members know exactly what is expected of them. Consistent reporting allows PMs to monitor progress over the course of time, and stakeholder communications ensure that everyone is kept in the loop at all times.

Financial risk is just one type of project risk faced by PMs today. Thankfully, there are several sound strategies for minimizing and mitigating financial risks within a project.

Start by identifying and assessing all of your financial risks. This is easily done with the aid of a risk matrix or SWOT analysis. Next, update your budget as often as needed. Track and analyze your income and project expenses, as this helps you make the necessary adjustments to your project budget.

Depending on the project, insurance policies or emergency funds can be used to cover any project expenses that run over the budget. A strong quality assurance program ensures that your project meets the necessary standards, which could reduce your financial risks even further.

Addressing Immediate and Long-Term Risks

Properly identifying risks at the beginning of a project goes a long way in managing and mitigating issues through the project lifecycle. For even better results, try to separate potential issues into short- and long-term risks. Not only does this make it easier to prioritize which ones should be addressed first, but it also helps you plan out specific roles and daily tasks for project team members.

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