Risk management is a crucial skill for project managers. Over the years, work parameters have changed considerably, and today, work has become increasingly complex.
Project managers often walk the line, managing the risks that the entire team is exposed to. Of course, the upside can be crazy, but there’s also a serious risk of failure.
When Elon Musk bet big on electric cars in 2004, many wrote him off. As we all know, his decision led to great rewards. Obviously, not all projects are as successful, and some can turn into costly failures.
In this article, we’ll explain what project risk is, how to manage it, and offer practical advice for project managers.
What is Project Risk?
Broadly speaking, project risk is defined as the likelihood of an unanticipated event that could affect the project. All projects are exposed to varying levels of risk as they move through different stages.
When evaluating project risk, it’s generally important to look at it from two different perspectives: the project manager and the project sponsor.
The project manager is generally responsible for identifying and mitigating risks – usually looking at specific elements. Anything that could affect the project, for better or worse, requires the project manager’s attention.
For instance, if a probable event in the future is expected to impact the project, the manager needs to record this in a separate document, such as a risk register.
The project sponsor generally evaluates risk using a different approach. They are more concerned with taking a more holistic approach, evaluating the dynamic conditions to determine just how risky the overall project is.
A thorough risk assessment must be conducted periodically to identify any new risks. In general, project managers categorize risk by looking at several key points:
- Risk event: This defines the event that, should it happen, could affect the project.
- Timeframe: The time frame indicates the period in which the event is likely to occur.
- Likelihood/Probability: This indicates the odds of the event occurring.
- Effect: This details how the occurrence will affect the project.
- Risk factors: Any factors that may increase the chance of the event occurring.
The Importance of Managing Risk
Modern work environments are fast-paced, dynamic, and becoming increasingly complicated. Therefore, it’s highly important for project managers to learn the art of risk management.
One of the best ways to manage risk effectively is to begin with a clearly defined scope. When writing the project charter, managers and sponsors need to be as thorough as possible, outlining the vision, the deliverables, the team members involved, and the scope of the project.
This sets the tone for managing risk, as project managers know the parameters they have to work in. In modern work environments, project managers often involve team members to identify various risks.
It’s one of the best ways to accurately plot project risks and prioritize each identified risk. As the project goes through various stages, managers often set up recurring meetings to evaluate risks and change their assessment accordingly.
Negative vs. Positive Risk
As we discussed earlier, risk can either be positive or negative. Negative risk is the one that most people think about when they hear the word “risk”. It’s any risk that negatively impacts the project.
To mitigate the impact of negative risks, project managers usually identify them – and prepare for contingencies. For instance, if a viral illness spreads throughout the team, there’s a risk that certain deadlines will not be met.
This will affect the project negatively. But there are positive risks too. As the name implies, a positive risk is an unexpected event that positively affects the project.
If the team manages to complete the project earlier than expected, it can be defined as a positive risk.
Common Risks that Project Managers Should Know About
There are certain risks that are prevalent in almost all types of projects. Here are a few that every project manager encounters in their career:
1. Scheduling Risks
Scheduling risks are ones that often arise due to improper planning. For instance, if a project will take longer than expected, there’s a risk that deadlines will not be met, throwing the entire schedule out of kilter with other aligned projects.
2. Budget Risks
Budget risks, also known as cost risks, are perhaps the most common. If the original cost estimates are incorrect, or if the managers don’t plan activities properly, there’s a risk of budget overruns.
3. Market Risks
Market risks are usually out of the project manager’s control. They include risks that arise due to changes in interest rates, foreign exchange rates, or due to various activities by the competition.
4. Legal or Compliance Risk
Legal or compliance risk indicates the possibility that a change in regulatory requirements may affect the project. For instance, a change in government regulations could expose the company to increased litigation.
5. Operational Risk
Operational risk includes any risk that may affect ongoing project operations, such as issues with production, team management, or the poor implementation of general policies.
How to Manage Project Risk – Advice for Project Managers
Project managers need to devise comprehensive risk management protocols and create a framework for identifying new risks.
However, that’s easier said than done. Here are some tips on how to manage project risk more effectively.
Regularly Run Risk Assessments
Most projects tend to go through various stages, from discovery to delivery. The risks tend to vary at each stage. This requires project managers to take a more proactive approach if they want to identify any potential risks.
Ideally, project managers should conduct risk assessments at specific intervals. This means evaluating any risks that have already been identified, updating their status, and analyzing and recording any new risks.
Analyze the Effect of Potential Risks
If a potential risk can derail the entire project, it’s important for managers to categorize it and then look for ways to mitigate its effects.
Project managers can also look at various contingency plans or discuss the potential risk with other stakeholders in the project to generate new ideas about how to manage it.
Include the Team in the Risk Management Process
Successful project managers understand the importance of seeking feedback from their team members. Your frontline employees will have an acute understanding of potential risks.
Their experience, understanding, and insights about the project could prove invaluable when you’re conducting risk assessments.
Use a Robust Project Management Tool to Mitigate Risks
The best way to mitigate risk is to use an efficient project management tool. For web developers, freelancers, and agency owners, Atarim is an excellent agency management solution.
Managers can remain on top of projects with Atarim, reviewing timelines, assessing deliverables, and making sure that all communications run through a centralized platform.
In case a potential project risk is identified, managers can quickly account for it and identify steps to mitigate it. It offers a visual dashboard that lets managers easily see what each team member is working on, review communications, and reduce time spent on task management.
You can try Atarim for free today.
Project risk management is a rapidly evolving field. As the nature of work changes, so does the nature of risk. For further reading, we recommend A Comparative Review of Risk Management Standards by Tzvi Raz and David Hillson.
