Risk management

In Finance, it is a technique for measuring, monitoring and controlling the financial risk on a firm's balance sheet. See value at risk.

In project management, a risk is a possible event or circumstance that can have negative influences on a project. Its influence can be on the schedule, the resources, the scope and/or the quality.

When a risk escalates, it becomes a liability. A liability is a negative event or circumstance that is hindering the project.

The primary data needed to do risk management are the following:

• ID: unique identifier for identification in other documents
• description: what is the risk?
• effect: what can happen if the risk becomes a liability?
• precaution: what can prevent the risk from becoming a liability?
• contigency: how to handle the liability?
• risk status: status of the risk: new, ongoing, closed
• risk escalation probability (P): what is the probability of the risk becoming a liability (rating from 0 to 1, for example)
• schedule impact (S): what is the impact of the liability on the project schedule.

In addition, every risk can also have a number of action points associated with it. This is to ensure contingency when the risk becomes a liability.

From the information above and the cost accrual ratio (CAR), i.e., the total average cost per person per time unit, a project manager can calculate

• cost impact (C = CAR * S): the cost associated with the risk if it arises.
• schedule variance due to risk (Rs = P * S): sorting on this value puts the highest risks to the schedule first.
• cost variance due to risk (Rc = P * C): sorting on this value puts the highest risks to the budget first.

Risk in a project or process can be due either to special causes of deviation or common causes of deviation and requires appropriate treatment.

Limitations

On problem with the concept is that everything is a risk because everything could cause delays. Risks to a project potentially include hurricanes and earthquakes, everyone getting the flu, political unrest, and so on. Risk management has little ability to deal with these issues. When these events happen, everyone usually must do planning again.

Nuisance risks sometimes mask important risks. Many business plans and financial statements point out that key corporate offices might die. That is a valid risk. But, dealing with the market is probably a bigger risk. And poor marketing is more likely to occur than the death of officers. The business plans use one risk to obscure the other risk.

See also

• List of project management topics
• Project management
• Earned value management
• critical chain
• precautionary principle
• Value at risk