Types of Risk in Project Management
Table of Contents
- What Is Project Risk?
- What Is Business Risk?
- Most Common Project Risks
- Other Types of Risk
- Project Management Software
- Managing Risks Step-by-Step
What Is Project Risk?
A project risk is any unforeseen thing that might — or might not — occur during a project. A risk isn’t necessarily negative; it’s just an event where the outcome is uncertain. As such, a project risk can have either a negative or positive effect on the project’s objectives.
What Is Business Risk?
Business risks are uncertain factors, internal or external, that threaten the financial health of an organization. Examples of external business risks would be natural disasters or cyberattacks. Internal business risks are threats that come from within the company, such as falling out of compliance, having too much debt, or labor disputes.
Most Common Project Risks
In today’s business landscape, it’s necessary for companies to take risks to reach their goal. Among the risks that arise in every project, some are more common than others.
Cost risk is an escalation of project costs. It is the risk that the project will cost more than the budget allocated for it. Perhaps the most common project risk, cost risk is due to poor budget planning, inaccurate cost estimating, and scope creep. The risk is higher when clients want too much even though the project has few resources only. Cost risk can lead to other project risks such as schedule risk and performance risk.
Schedule risk is the risk that activities will take longer than expected, and is typically the result of poor planning. It’s closely related to cost risk, because slippages in schedule typically increase costs and also delay the outcome of the project, including its benefits. Delays result in missed timelines and a possible loss of competitive advantage. Schedule risk leads to cost risk because longer projects cost more. It can also lead to performance risk, missing the timeline to perform its intended mission.
Performance risk is the risk that the project will fail to produce results consistent with project specifications. This is a common risk that is difficult to attribute to any single party. A project team can deliver the project within budget and schedule and still fail to produce the results and benefits. On the other hand, performance risk can lead to cost risk and schedule risk when the performance of a team or technology results in an increase in cost and duration of the project. In sum, the company lost money and time on a project that failed to deliver.
Other Types of Risk
Governance risk relates to board and management performance with regard to ethics, community stewardship, and company reputation. It is directly related to the behavior of the executives who are project sponsors and stakeholders. This risk is easier to mitigate and manage with proper stakeholder engagement.
Strategic risks are types of performance risks. It results from errors in strategy, such as choosing a technology that does not work as expected. A good example would be choosing a project management software that does not help the project team in their responsibilities but instead takes more of their time to work on the software than on the actual project.
An operational risk includes risks from poor implementation and process problems such as procurement, production, and distribution. It is also a type of performance risk because poor implementation prevented the ideal outcome to happen.
Market risks include competition, foreign exchange, commodity markets, and interest rate risk, as well as liquidity and credit risks. Planning for market risks is difficult and requires expertise because these types of risks are unpredictable. But sound business and financial strategies can help protect the business.
A legal risk arise from legal and regulatory obligations. They can come from contract risks and litigation brought against the organization. Internal legal issues are also legal risks. These are unpredictable and can come from state policies, business competitors, and employees.
External Hazard Risks
Risks associated with external hazards can include risks from storms, floods, and earthquakes. They can also result from vandalism, sabotage, and terrorism. Other sources are labor strikes and civil unrest. All serious incidents can have severe impact on cost and schedule.
Project Deferral Risk
In addition to project risks, project deferral risk is another important risk. Project deferral risk refers to the risks associated with failing to do a project. Like project risk, this risk can arise from any of the risk sources. It can also occur if there is only a limited window of opportunity for conducting a project. Failure to conduct the project now creates a risk that makes it impossible to effectively conduct a project later.
As indicated by these examples, project risks include both internal risks associated with successfully completing each stage of the project, plus risks that are beyond the control of the project team. These latter types include external risks that arise from outside the organization but affect the ultimate value to be derived from the project. In all cases, the seriousness of the risk depends on the nature and magnitude of the possible end consequences and their probabilities.
Project Management Software
Project risks are best avoided and handled by choosing project management software that allows managers to see problems in advance and plan accordingly. The ten project management tools listed below help teams with efficient project collaboration, task management, scheduling, and communication.
Managing Risks Step-by-Step
Risk management is a process that guides the project team to come up with a contingency plan so they will be ready in case risks become actual problems. This simple 5-step outline raises questions to help manage risks:
- Identify risks – what could go wrong?
- Measure the likelihood and impact – how likely will that risk become a problem, and what will be the impact?
- Make a decision – given the risks, do we accept them and continue with the project?
- Come up with potential solutions – knowing and accepting the risks, how can we mitigate them?
- Keep an eye on the risks – which risks are increasing, and is our plan for that risk updated?
Properly identifying risks and analyzing them is an effective way to manage risks. It is crucial to know what the risks are, how likely they are, and what their impact might be. In contrast, inadequate or untimely characterization of risks will always have consequences detrimental to the project. We are happy to announce that we have partnered with Master of Project Academy to bring you a real Risk Management Plan Template you can download. They offer 50 Project Management Templates, and one of them is a Risk Management Plan Template.