5 risks in project management
Organizations with standardized project management operations practice risk management. They do this because they understand the pivotal role that risks play in the success or failure of a project.
What does risk in project management mean?
Risk is a term often used in project management to describe an event or condition that has the potential to negatively affect a project if it occurs. While it’s tempting to believe that all risk is bad, the impact of risk can either be good or bad or both.
The determinant of what qualifies as risk is less associated with outcomes and more with the element of uncertainty. For example, the introduction of new revolutionary technology that cuts the project length in half will still be regarded as a risk in project management irrespective of its benefits to the project. It was unexpected — and that’s what makes it a risk.
Why do project managers care about risk?
Effective risk management strategies enable project managers to evaluate the strengths, weaknesses, opportunities, and dangers that each project faces. They can be prepared to respond to unforeseen situations if they plan ahead.
Types of Project Risks
To effectively manage risk, project managers must identify the type of project risks that are likely to spring up while the project is ongoing.The following is a list of five project risk types that project managers typically make provisions for:
1. Financial Risk
Financial risk encapsulates everything cost and money-related. When working on projects — especially ones with a tight budget — it is not uncommon for project costs to escalate. There’s always the risk that the project costs will be bigger than the original cost estimate. Budget deficits are not the only type of financial risk. Others may include interest rate changes, stakeholder financial troubles, and any other type of change to the financial standing of the stakeholders.
As one of the most common types of project risk, financial risk is almost inevitable. Therefore, it is imperative to make well-calculated plans to deal with them when they happen.
But, to truly understand how to deal with financial risk, project managers must first look at the root causes. Good project managers must ask — What are those things that are likely to cause financial risk?
Some of these causes are:
- Scope creep — This refers to when an ongoing project’s deliverables extend beyond the original plan. For example, a project originally scheduled to have three core features but had to be extended to include seven core features is a classic showing of scope creep.
- Inflation — This happens when economic factors cause project costs to change.
- Poor budget planning and false cost estimations.
How to handle financial risk?
Project managers need to create a financial risk log before every project begins. This log should contain all forms of financial risk that the project management can reasonably predict.
Once the log is prepared, project managers can leverage their intuition and knowledge to predict which financial risk is more likely to occur during a project. The ones more likely to occur need to be reassessed and planned for.
One other tip — it is always best to clarify expectations with key stakeholders right off the bat. It is not uncommon for clients to want more however where the resources are limited — as they always are — any major changes to the project must be backed by additional funding before they can be effected.
2. Schedule Risk
Schedule risk is time-related. The risk relating to time manifests itself when events occur that affect the timeline of the project. It is often the case that time risk leads to the project taking longer than was initially scheduled.
It is a general phenomenon among project managers to feel like they are running a heated race against time because there are some things that you just can’t plan well enough for. Team members may not be performing optimally, stakeholders may become unreachable at one point, additional project deliverables may be requested — or a pandemic might rear its ugly head.
Granted, the last one is a bit less probable than the others in the grand scheme of things. But, the point to note is that in project management, many factors can alter workflow and project deadlines making it essential for project management teams to learn to manage schedule risk.
3. Performance Risk
There is a perceived performance risk when a project is unlikely to produce the desired results. The risk has a direct impact on the company’s overall success. Such a situation may necessitate additional funding, a likely consequence for nonperformance, and the ability to leverage the performance of competitors.
One interesting to note about this type of project risk is that it can exist independently of other risk factors. A project can stay within the budget and be completed on schedule yet fail to hit the right chords. However, where the company decides to retry the project, there’ll be an impact on costs and schedule.
The key to mitigating handling performance risk is effective communication. Clear communication strategies among key stakeholders are very likely to reveal performance lapses and problematic expectations before they get so bad that they lead to a failed project.
4. Operational Risk
Ideally, projects will involve various operations — acquisition of work tools, production, marketing, distribution, supply chains, and a host of operational activities. Operational risk is associated with the probability of one or more of these operational activities becoming dysfunctional.
Operational risk is worsened by a lack of proper supervision over core operations. One example of negative operational risk is the current shortage of semiconductor chips affecting auto industry players. In August 2021, Ford car sales in the United States declined by 33% because of the chip shortage.
Although closely related to performance risk, operational risk is in a class of its own. Operational risk can occur at any time during the project and can be very difficult to mitigate. It is often the failure to mitigate the operational risk that makes negative performance risk more probable.
5. Legal Risk
Legal risk encapsulates any government policy or legislation and internal legal issues that might significantly impact the completion of a project. For example, intellectual property concerns like patent restrictions might alter the progression of a particular project.
To mitigate this type of project risk, project managers need to check in with the legal team to ensure that every project activity is compliant with relevant regulations.
Conclusion
Every type of project risk is intricately weaved together. The occurrence of one unexpected event can affect project schedule, project cost, and eventually project actualization.
It is therefore in the best interests of project managers and their teams to identify, assess and manage these types of project risks so that when they happen, they do not derail the project entirely.
Founder of Uppwise, Gioacchino has solid hands-on, experience and vision in the PPM Market, gained as a startupper and founder of a number of software & cloud-services companies. During the last two years he has lead the company transformation, shifting from the offering of a traditional PPM product to a new suite of SPM, APM and CWM products.