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About Project Risk Management
- What is Project Risk Management?
- Why use Project Risk Management?
- Why projects go over budget
- Why projects go late
- How to bring projects in on time & to budget
What is Project Risk Management?
Project risk management is project management for grown ups.
Most projects lose money through the occurrence of unexpected events. Although unexpected, such events are usually predictable; often the same problems are encountered on project after project.
While some project professionals work to prevent the unexpected, many people working on projects accept such financial losses as something that is normal.
Project risk management does not accept these losses. Project risk management actively identifies risks before they occur, prioritises these risks, and reduces the risks in the most cost effective ways available.
Why use Project Risk Management?
Without guidance, many engineers will work on the tasks they are most familiar with, work that is expected.
Without guidance, many planners will concentrate on ‘the critical path’, not realising that many other paths can be come critical as a result of unexpected events.
Without guidance many QS’s will concentrate on reducing the value of budgeted costs, or maximising the value of compensation events once an unexpected event has occurred. The gains from this approach are often small, and result in confrontational relationships with sub-contractors and clients. These approaches have their own potential long-term financial problems.
Effective project risk management gives meaningful financial costs to unexpected events. These costs are then aggregated and added to the expected out-turn cost of the project.
By doing this, the attention of all parties working on the project are focussed on where money is actually likely to be lost. If this is done in a timely manner, mitigation can be put in place at minimal cost, and the out-turn cost of the project can drop sharply.
Accurate financial risk assessment of projects when tendering can give a much greater confidence in a price offered to a client. As projects become more complex, a contractor that can show effective risk analysis at tender stage is much better placed to convince a client of their competence.
Projects go over budget for a number of reasons:
‘Best-case’ prices are put in the budget, but no allowance is put in for not being able to always achieve the best-case price. Statistically, it is likely that some price will not be best-case, so the out-turn cost rises above the budget.
‘Most-likely’ prices are put in the budget, but it is not appreciated that the distribution of likely prices is heavily skewed towards increasing rather than decreasing. Statistically this means that the likely total cost is higher than the sum of all the ‘most-likely’ prices, so the out-turn cost rises above the budget.
Unexpected events are ignored, fingers are crossed, and it is hoped that risks will not materialise. Statistically, many unexpected events can happen on a project, so a few of them will, so extra costs arise that were not in the budget.
Risks are recognised, but it is assumed that risks with low probability will not occur.
Statistically, if you have a significant number of risks with low probability, then some of these risks will occur, so extra costs arise that were not in the budget.Risks occur that affect the programme, so causing extra spend and liquidated damages.
Projects go late for two main reasons:
As with cost risks, time risk distributions are strongly skewed. It is much more likely that the actual time taken for an activity is longer than the ‘most-likely’ time put in the programme, rather than shorter. Activities are more likely to be late than early. Statistically, these extra times build up over the programme.
More importantly, schedule risk works differently to cost risk. Cost risks tend to average out, some go up, but some come down, there is some averaging at work.
Time risks are different. When any activity has more than one predecessor, that activity can not start until all proceeding activities have finished. The start of the activity is always defined by the latest of its predecessors.
Time risks are always worst case, and so they add up much more aggressively than cost risks. These problems are worst where the programme has a lot of merging branches, usually in the final third of the programme.
When the skewed nature of time risk distributions is combined with the problems of merging branches, it is found that most projects have many potential critical paths.
How to bring projects in on time & to budget
At the beginning of the project:
Identify all possible risks that could affect the project
Quantify the risks in pounds and pence
Add up the total risks in a statistically meaningful way
Quantify the programme activity durations with meaningful risk spreads
Analyse the programme to give a statistically meaningful end date
Calculate the extra costs and liquidated damages if the programme shows a likely over-run.
Add these costs to the cost risk totals
Add this total risk budget to the predicted out-turn cost of the project
Each month during the project:
After the spend to date, review the risk budget as part of the expected spend to completion
Identify any new risks
Check the values of the existing risks
Prioritise the risks according to their financial impact
Put in place mitigation to reduce the risks with the large impacts
Review the critical items on the programme
Put in place mitigation for the items with the biggest time impacts
Most contractors have a monthly managerial process in which the project manager states the spend to date on the project, and the spend to completion. Due to unforeseen events, the spend to completion will often be above the budget cost of the project. The project manager’s superiors will then often take considerable efforts to dissect and criticise the extra expenditure that has been incurred.
The aim of the process as described above is to move this analysis and criticism to a time before the extra expenditure has occurred. If this is done effectively then the extra expenditure can be avoided.
