Every project comes with some amount of inherent risk. Whether it's unexpected supply constraints, errors or delays on the part of key stakeholders or new regulations to comply with, there's a lot that can pop up over the course of a project. Refining operations must deal with crude and feedstock variability, while projects in the water sector need to be ready to adapt to extreme weather events and aging infrastructure. No matter what industry you're in, it's best to always expect the unexpected.
Effective project risk management is essential to complete projects on time, within budget and at a quality standard that meets or exceeds expectations. Let's take a look at how risks can impact your projects – for better or for worse – and how to manage them.
Project risk management involves anticipating project risks, planning for contingencies and adapting project plans when issues and opportunities arise. It relies on identifying risks in advance of a project and taking actions that are proactive, rather than reactive.
There's an important difference between risks, which are yet to happen, and issues, which occur when risks become a reality. Issues may occur whether they're identified as risks at the outset or not. These issues, if not anticipated, can cause minor or significant variations in project outcomes. But with a project risk management process powered by the right platform, teams can adjust project plans with available resources.
The difference between positive and negative risk
It's a common misconception that risks are always negative. They're not: risks are any events that might occur over the course of a project, positive or negative, that differ from baseline assumptions. Some of these might hinder a project, but some may actually help. It's important to also incorporate positive risks, or potential opportunities, into project plans so that teams are poised to take full advantage of them. These can include everything from an unexpected discount or reduction in price for key inputs to finishing a portion of the project in half the expected time.
How risks can impact your project
When risks turn into issues, they can increase costs, delay your schedule or strain your resources:
Costs. Your project's budget is often the first victim when risks become reality. If the land your organization selected for its next mining project proves less diggable than anticipated, the bottom line will suffer. Conversely, a reduction in the price of steel or necessary equipment will boost it. No matter what the risk is, a contingency fund in the budget plan can help mitigate it with a cushion to absorb expenses.
Schedule. Whether it's an unexpected ice storm that delays an in-progress infrastructure project or environmental conditions that your team must resolve before you can begin construction on a new industrial plant, the risks that can impact your project's schedule are seemingly endless. Project managers must assess the risks that might cause delays and then build a realistic schedule that accounts for them.
Resources. Risks like a shortage of labor or supply chain interruptions can impact resource availability in any industry. Project risk management helps you identify and plan for risks that could otherwise leave your team without the resources it needs to get the job done.
5 steps to managing project risk
Project risk management takes the right skills, experience and process. Here's a run-down of how to manage project risk in just 5 steps.
1. Identify risks
The first step is to identify the risks associated with a project. These should include both negative risks that, if not mitigated, might derail a project, as well as opportunities to use for maximum benefit should they occur.
Risk identification requires consulting with relevant stakeholders in a project to draw on their unique expertise and experiences. Any project depends on many parts working together as a whole, from team members on the front lines to project leads to vendors. Although managers often have a great working understanding of their own teams and areas of responsibility, chances are they don't have that same depth of knowledge when it comes to other personnel or aspects of the project. Open lines of communication early and often to get a holistic picture of risk. You can even incorporate the feedback you receive into formal documents that list and describe risks applicable to certain types of projects, saving time and leading to more consistent project outcomes.
2. Build a risk management plan
Once you've identified risks, you're ready to build a risk management plan. This should occur at the outset of a project, well before any issues have a chance to arise. The plan should include a thorough overview of what risks a project involves and an action plan for how the team will deal with the issues. Build in the capability to accept some amount of risk while expecting to work to mitigate others. Every plan involves some acceptance of risk, so you must determine which risks, should they turn into issues, you will prioritize – and how you'll deal with them.
3. Assign owners to risks
During any project, one of the most critical roles of a manager is to delegate tasks among team members. The same goes for a project with a risk management plan – the project manager should identify who will be responsible for each risk. This alerts responsible parties in advance and spreads the load of planning out mitigation strategies. It also facilitates collaboration and efficiency – if multiple issues happen to occur at once, no single person is bogged down trying to handle them all on their own. Individual team members take ownership of their assigned risks and are better prepared to deal with them if they occur.
4. Analyze, prioritize and act
Risks aren't created equal. Some are more probable or more potentially devastating than others. Back your risk assessments with data by adopting a risk management platform that can perform quantitative risk analysis. You can then predict which risks pose the greatest threat to project success. After you've crunched the numbers, take proactive steps to address the risks you've prioritized if the cost-benefit analysis comes down on the side of preventative action.
5. Monitor and adjust
Finally, it's time for the project to begin. You've identified your risks, made a risk management plan, assigned specific risks to team members, analyzed possible outcomes for different scenarios and taken preventative measures where necessary. But your work isn't done. As the project unfolds, you'll want to monitor progress, resource use and other important metrics so you can stay on top of any issues or opportunities that come up.
Your risk management process has prepared you to handle those risks most likely to derail your project with minimum impact while making the most of positive risks that arise. And when identified risks pass by without turning into issues, you can reallocate the applicable portions of your contingency budget for more productive purposes.
Reduce project risk at your organization
Project risk management is the best way to handle the problems that arise during any project while staying ready to tackle opportunities that present themselves. To understand the full risk profile of a project, a manager needs to capture not just the risks of the project itself, but also portfolio- and program-level risks.
Octave Sequence Enterprise (formerly EcoSys) is an enterprise project performance (EPP) solution that helps manage, visualize and communicate risks for your entire organization in a single platform. By integrating risk management with other key project portfolio management and project controls processes, you won't have to flip between tools to get the full picture.
Ready to learn more? Contact us today to schedule a custom demo.