Project Risk Measurement and Management | Free Essay Example

Project Risk Measurement and Management

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Introduction

In the recent past, the topic of procurement and project risk management has attracted numerous researchers who seek to unravel the strategies for identifying and mitigating risks. The reason for the fast growth in the research about the stated topic is that many projects have failed because of poor management of risks. The contemporary projects are characterized by intense risks, which necessitate the need for research to advise project managers (PMs) on the best ways to handle them. The risks vary from one project to the other, hence complicating the standardization of the approaches taken by managers to mitigate the issue (Cicmil et al. 2006).

Project risks can be either positive or negative depending on their effect on the project. Positive risks infer the risks whose occurrence results in positive outcomes while the negative ones adversely affect the project execution process. In most cases, the negative risks lead to a delay in the completion of the concerned project, a situation that may lead to cost overruns.

Contemporary PMs are encouraged to formulate sound strategies for mitigating risks during the planning stage. This paper defines the meaning of the term risk while at the same time analyzing the various types of risks associated with contemporary projects. Besides, the paper explores the theoretical and practical risk management strategies to show the reader how the approaches can be used to mitigate risks.

How to define what is meant by Risk?

The term risk refers to any potential factor that may negatively affect the execution of a project by either causing its stoppage or delaying its completion. Risks are a common phenomenon in contemporary projects. They must be mitigated at all costs to successfully execute a project. Risks are problems that have not yet occurred but having high chances that they might occur.

Risks are classified as a problem when they occur. There is a growing trend whereby project managers are recognizing risks before the commencement of a project. As such, the formulate strategies meant to mitigate them. According to Gustavsson (2015), some of the major risks evident in contemporary projects include cost overruns, design constraints, and construction-related risks among others.

The physical risks denote all the uncertainties attached to the construction site. They may include injuries inflicted to the employees by the machines and the equipment used in the construction. In most cases, employees executing the project work with dangerous machines that may inflict injuries on them. Such injuries may incapacitate the workforce, thus reducing their overall output. Next, the risks under the purview of acts of God refer to the dangers that emanate from nature. Such risks are not preventable by the managers or employees.

They include earthquakes and other natural calamities that may cause a stoppage in the operations (Cicmil et al. 2006). For example, heavy rains and floods may delay the delivery of raw materials to the construction site, thus hampering the operations. Design risks refer to the internal risks associated with the project. Risks under this class are linked to an ineffective workforce and poor communication between the stakeholders involved. Communication between the various departments during the project execution process is essential since it facilitates the passage of information regarding the achievements made at each phase.

Successful Management of Risks in Large and Small Projects

Hillson, Grimaldi, and Rafele (2006) claim that one of the surest ways to deal with risks is by clarifying the ownership of such hazards and holding employees to account for failure to take the necessary measures to mitigate them. Ownership in this context refers to the sharing of responsibilities about the risks identified in the planning stage. Each functional manager should be notified of his or her responsibility in mitigating a certain type of risk (Gustavsson 2015).

Managers should also be notified of the consequences of not using the risk management skills that they possess to minimize or even alleviate the risk. However, sharing of risks should be done skilfully to avoid resistance from the staff. Risk managers may feel that they are being subjected to wrongful discrimination and penalties if they fail to mitigate the risks. The ownership trick should not only apply to the negative risks but also the positive ones. Managers who identify opportunities that achieve savings in the form of time or cost should be rewarded to improve their morale.

Cicmil et al. (2006) assert that one way of managing project risks is by identifying them at their earliest stages and communicating the same to the stakeholders involved. Accordingly, the identification of risks should be done at the planning stage whereby all the risks involved are listed based on their probability of occurrence. Planning is the first stage of project execution. It involves the identification of various tasks and the determination of the resources needed to accomplish the identified activities.

Project managers need to identify the risks inherent to a project at the planning stage to facilitate the formulation and implementation of mitigating strategies. To identify the risks for a specific project, a development manager needs to be open-minded. The manager may also hold an open meeting with the stakeholders to attract their views regarding the risks, which are likely to affect the project.

Opinions from experts may help the manager to identify the risks and opportunities that may present in the course of executing the project. It is important to note that new risks emerge during the execution process. Such risks may not be identified at the planning stage. Hence, the project manager should hold constant meetings with all the relevant teams to gain insight into the new risks.

Gustavsson (2015) reveals that most projects fail due to the lack of a proper communication system within the firm. Communication is essential because it allows the sharing of information between the project manager and the executing team. Consequently, an effective communication channel should be established in the firm. The system should allow room for the issuance of orders by the project manager to the employees. It should also allow employees to give feedback regarding such orders.

To ensure that the risks that develop after the planning stage are identified and mitigated, there must be an effective communication channel that facilitates the collection of feedback from employees. Gardiner (2005) confirms that project risks cause delays in the completion of a venture. As a result, they may lead to cost overrun. To mitigate the delays, the PMs need to analyze all the tasks involved using the tree diagram. A tree diagram denotes a type of a chart that identifies all activities, which are involved in the execution of the project. Activities within the critical path must be prioritized for them to be completed before the Latest Finishing Time (LFT).

After the identification of all the tasks involved using the tree diagram, the following step should be to identify the risks associated with each task. Connecting the risks to the tasks helps managers to develop mitigation strategies and to identify the administrators who will implement the tactics. The diagram also helps managers to identify the tasks that can be executed contemporaneously to save time. The timesaving achieved may be used to remedy any delays in the completion of other tasks not within the critical path.

Gasik (2011) argues that the risk managers should not only focus on the threats but also the opportunities presented by certain types of risks. In the past, the project risks had a negative connotation where managers seemed to ignore the positive impacts of risks. However, contemporary risk managers have realized the need to focus on the positives, as opposed to the negatives. The positive risks are uncertain events that could be beneficial to the project. Such risks may fasten the project execution process, thus lessening the completion time. The positives may include opportunities that may help the construction firm to achieve savings in terms of time and cost.

To mitigate the financial risks that emanate from acts of God, the company should acquire an insurance policy that can indemnify it against any additional costs attributable to one of the identified risks. Dinsmore and Cabanis-Brewin (2006) argue that the acquisition of an insurance cover may be a good strategy to mitigate the risk of cost overruns caused by natural occurrences. However, insurance covers only reduce the impact of the risks, as opposed to eliminating them. The argument is grounded on the view that the insurance indemnifies the complainant for the loss after it has already occurred.

To mitigate the risk in the design, and an effective communication system should be established to allow communication between and amongst all the stakeholders involved. Under the system, the functional managers should be answerable to the PM. They should be responsible for the collection of feedback from their subordinates. Line managers should compile a report of the efforts they have made in the implementation of the strategies formulated to mitigate the risks identified. The dossier should be presented to the PM every week. Orders from the PM should be communicated to the staff by the line managers who should also collect feedback and present it to the PM.

The Concept of Risk: How it can be Measured and Ranked

Prompt identification of risks allows managers to develop mitigating strategies to pre-empt their occurrence (Dinsmore & Cabanis-Brewin 2006). With the information regarding the project’s mission, strategies, and goals, the PM together with employees identify all the risks that are likely to affect the project execution at any stage.

During the planning stage, the PM should hold a meeting with the functional managers and the junior staff to deliberate on the risks that can influence the project. All the risks suggested by the stakeholders should be documented for consideration during the prioritization stage. The next meeting should bring together the PM and the functional managers to further examine the challenges.

At this meeting, the original list of risks should be condensed to include only the risks relevant to this project. The functional managers should assist in the prioritization of the risks based on their probability of occurrence and their net loss or gains. Risks, which may result in high losses, are placed at the top of the list while the ones that may lead to less amount of loss are placed at the bottom of the list.

The risks may also be measured according to their likelihood of occurrence. Also, based on this measurement, the risks that are more likely to occur are placed at the top of the list while the ones that are less likely to occur are placed at the bottom of the list. A copy of the condensed risks should be served to each employee for them to suggest ways to mitigate the hazards. Based on the identified risks and the employees’ suggestions, the PM needs to formulate action plans to alleviate or reduce the effect of risks if they occur.

How a Project Risk Management Strategy may be Constructed for a Project

Framework for developing a project management strategy.
Figure 1: Framework for developing a project management strategy. Source: (Hillson, Grimaldi & Rafele 2006)

Based on the framework shown above, the first step in the development of a risk management plan is to identify the purpose of the project. The PM should set a clear mission and communicate the same to all the stakeholders involved in the execution of the project (Hillson, Grimaldi & Rafele 2006). After defining the mission of the project, the PM should formulate strategies in collaboration with other stakeholders to achieve the defined mission.

Just as the project’s mission is communicated to the stakeholders, the strategies should be communicated to all employees who are the immediate executors. Lastly, the PM should set the targets for each subproject to ensure that the overall project achieves the intended goals. Based on the targets set, the PM in collaboration with the employees should identify all the risks that may adversely affect the execution of each subproject. All the proposed risks should be considered to formulate the right mitigating strategies.

The identification of the risks should not stop at the planning stages. Instead, it should be a continuous process. The PM should hold regular meetings with the entire team to identify the risks that develop in the course of executing the project. The meetings should be held every week. They should bring together the PM and the functional managers to deliberate on the achievements made each week. The risks identified should then be subjected to scrutiny to categorize the activities that are likely to be affected by the risks.

This stage should involve the presentation of the entire project activities in a network diagram to identify the activities that are crucial to the success of the project. The critical path analysis helps to identify the positive risks through the identification of the activities that can be performed contemporaneously to achieve savings in terms of time and cost (Gasik 2011). After the identification of all the tasks of the project, the division of labor should be initiated whereby the line managers should be allowed to choose the activities they want to be involved in.

Next, each risk should be assessed to determine the activities it would influence. Managers in charge of the activities that the risk is set to affect should be notified of their responsibility to mitigate them. Contracts that indicate the managers’ liability to the company for failure to deal with the risks should be signed and witnessed by the PM.

Theoretical and Practical Risk Management Strategies

Risk management involves the identification of the risks and the employment of the relevant hazard management skills. Risk apportionment is a common phenomenon in risk management whereby the identified risks are apportioned to the functional managers (Gasik 2011). Under the arrangement, each manager is held responsible for mitigating a certain risk. Failure by the concerned manager to utilize the tools at his or her disposal to mitigate the risks may result in fines to compensate the company for the loss incurred because of his or her negligence. The imposition of such fines helps to increase compliance with the measures set to mitigate risks.

Gardiner (2005) emphasizes the prioritization of risks whereby hazards that have a high probability of occurrence are listed top in the list. The view is informed by the fact that most managers treat all the risks equally, notwithstanding the intensity of each threat. Some risks have a higher impact compared to others, a situation that necessitates the need to prioritize them in a manner whereby threats with a higher magnitude are identified and more resources devoted to lessening them. Risks that are likely to cause cost overrun or delay to the project should be prioritized. Threats that may result in maximum gains to the firm should equally be prioritized. The other types of perils identified at the planning stage should be assessed according to the criteria set by the concerned organization. Such criteria may include the likelihood of occurrence and the impacts of the risks.

Dinsmore and Cabanis-Brewin (2006) assert that the registration of risks is an important component of risk management. It involves documenting the entire hazards identified either in the planning phase or in the execution stage. The documentation of the risks ensures that all dangers are taken care of. It eliminates the chances of forgetting some of the risks during the execution stage of the project. The risk log should include the descriptions, the ownership of the risk, and the mitigating factors. The documentation of the risks coupled with the mitigating strategies may inform future risk management endeavors.

The other strategy that should be adopted by a company to mitigate project risks is the identification of all the activities to be performed and assigning time for each action. The network diagram may be used to identify the tasks and to determine the Earliest Finishing Time (EFT) and the Latest Finishing Time (LFT) (Dinsmore & Cabanis-Brewin 2006). Functional managers should be notified of the timeframes and urged to ensure compliance. Activities falling within the critical path must be prioritized in a manner that they can be completed between the EFT and the LFT.

Those that can be performed contemporaneously should be identified and executed simultaneously. Activities not within the critical path may be delayed to allow room for the execution of those that lie along the critical path. Such delays should only be allowed if the risks under such activities are minimal. Changes in the schedule should only be allowed after the examination of the risks inherent in the specific activity. The PM should be the only person who should authorize the changes in the schedule.

Conclusion

Risk management is an important aspect of project management. It involves the identification of the risks and the formulation of strategies to mitigate them. The intensity of risks varies from one project to the other depending on the number of finances involved and the length of time to completion. Project managers must devise strategies to mitigate the risks to ensure that the project is profitable. Risks can be either positive or negative. The negative types of risks denote the uncertainties that harm the profitability of the project.

They may cause delays in the completion of the venture. On the other hand, the positive risks denote the opportunities that may either facilitate saving in terms of time or cost. This paper has discussed the major risks associated with small and big projects, namely, financial risks, physical risks, design risks, acts of God, and construction-related risks. All the listed types of risks have been explored in detail in this paper. The paper has also explored the mitigating strategies that should be adopted by the PM to minimize their effects on the execution of the project. The risks and the mitigating factors are compared with the literature to verify their relevance in the construction industry.

Reference List

Cicmil, S, Williams, T, Thomas, J & Hodgson, D 2006, ‘Rethinking project management: Researching the actuality of projects’, International Journal of Project Management, vol. 24, no. 8, pp. 675-686.

Dinsmore, P & Cabanis-Brewin, J 2006, The AMA handbook of project management, AMACOM, New York, NY.

Gardiner, P 2005, Project management: A strategic planning approach, Palgrave Macmillan, London, England.

Gasik, S 2011, ‘A model of project knowledge management’, Project Management Journal, vol. 42, no. 3, pp. 23-44.

Gustavsson, T 2015, ‘New boundary spanners: Emerging management roles in collaborative construction projects’, Procedia Economics and Finance, vol. 21, no. 4, pp.146-153.

Hillson, D, Grimaldi, S & Rafele, C 2006, ‘Managing project risks using a cross risk breakdown matrix’, Risk Management, vol. 7, no. 5, pp. 61-76.