Risk Assessment in Project Planning - Coursework Example

Project Management Name Institution Date Course Introduction Project management has become more common since in the workplace, several tasks are now undertaken in form of projects. Organization managers are faced with greater need now than any other time in history, to acquire best project management practices and skills to ensure that projects are carried out to the desired completion and specified standards. Managers must, however, understand that all projects will involve some level of risk. Risk management is, therefore, one of the most important skills for the managers if they are to successfully run projects and bring them to successful completion. This paper seeks to investigate these skills with emphasis tools and approaches for management of risks in the project. As will be seen in the paper, managers should employ both qualitative analysis and quantitative analysis approaches to effectively categorise and therefore plan for the response to the projects. Risk assessment in project planning Risk assessment can be described as a systematic process used to describe and quantify risks associated with hazardous substances, action, processes or events (Covello & Merkhoher, 1993). Execution of projects will always be associated with some level of uncertainty. Assessing the risks in a project is therefore very important (Chapman & Ward, 2007). There are several project practices that can greatly assist the manager in assessing the project risk level. As Kendrick (2009) points out, project managers need to realise that much of any type of work in any project is never new. The project managers may therefore use the notes, lessons, and records from already completed projects to lay a road map for the identification, and in several cases, avoidance of many potential problems. They should also conduct thorough project planning in order to understand the challenges that may arise and to anticipate the risks. Kendrick (2009) believes that effective risk management will rely on these ideas. By looking at previous work, past failures may be avoided, while looking forward through project planning enables minimization or complete elimination of possible future problems. Risk management planning is carried out to decide how the risk management activities will be approached and planned. According to Project management Institute (2000), there should be arranged planning meetings where the plan will be developed. This meeting should attended by the project manager, project team leaders and other key stakeholders in the project. From this meeting, there should be developed a risk management plan that will outline the methodology, roles and responsibilities, budget for risk management, timing, scoring and interpretation, thresholds and risk reporting formats as well as tracking techniques (Project management Institute, 2000). Frame (2003) mentions that risk identification is the first step in assessment of the risks. The project team should involve in risk identification where those hazards that might affect the project are determined. This process should be iterative. The risk management team or the project team may perform the first iteration while the second iteration may be made by the entire project team and primary stakeholders. Other independent people may participate in the third iteration. During this process, simple and effective risk responses may be developed and implemented immediately the risk is identified. The identification process will usually involve reviews on project documents, especially the project plan, information gathering, checklists, assumptions analysis and diagramming techniques. Information techniques used ay include interviewing, brainstorming and SWOT analysis. Once the risks and their possible causes have been exhaustively identified, the project manager and the team should examine the qualitative as well as the quantitative effects of the identified risk events, and this is the step of the assessment (Frame, 2003). Risk analysis Risk identification helps project managers with surfacing risk issues that can influence the progress of the project. The process therefore gives the idea of those things to watch out for when doing the job. In most cases, not all the risks identified are significant; some risks are more significant than others and therefore require greater attention. The highly significant ones will always be classified as red zone risks (Frame, 2003). These ones require special attention since their occurrence may cause serious setbacks or they may cause great financial losses. The process of determining the relative significance of the identified risks and arranging them in order of significant is known as risk impact analysis. These listed risks may be sorted from most to least significant by employing assessment of likelihood multiplied by the loss. If the risks identified are not so many, it is possible to quickly arrange them based on few passes of pair-wise comparisons, adjusting the risk event position on the list in the cases where severe events are lower on the list. The highly severe risks will get to the top while the more trivial ones sink to the bottom. More complex projects will, however, require more detailed analysis. Two approaches have been identified in the analysis of project risks: qualitative risk analysis and quantitative risk analysis. Qualitative impact analysis Impact analysis is the attempt to evaluate the consequences of the risks, should they occur. Qualitative methods are not as precise as quantitative methods and they do not use specific numerical values (Kendrick, 2009). The qualitative analysis is used by project managers to evaluate the impacts of the risks by applying a logical reasoning process. The process measures these risk consequences numerically. In the industrial setting, for example, if a grinding machine breaks down, investigations are launched to determine how much production may be lost as a result. In this case, the managers may need to find answers the following questions: how long will it take before the machine is brought back to normal production? What is the dollar value of the losses? The answers to such questions may be the guiding principle to development of risk response strategies. If say this down time costs the company $ 30,000 in a year in lost revenue but it is also known that a new machine will cost the company $ 50, 000 and the machine will likely recover its cost in two years, the company may resolve to buy a backup grinding machine to avoid such production losses. The following tools are commonly applied when conducting qualitative analysis: Scenario building This tool is used to bring together a group of informed people and then have them answer questions and apply their knowledge to describe what will be achieved as a consequence of an action (Frame, 2003). The people involved may create scenarios that will describe the expected outcomes of the different situations and this information can be used to assess the seriousness of the risk. These scenarios may be created from previous experiences or individual knowledge. Likelihood-impact matrix Risks are composed of two components: impact and likelihood. In this process, considerations are made about the possibility or frequency of occurrence of a risk as well as the seriousness of the risk. Once these have been investigated, they are presented in a single chart known as the likelihood – impact matrix. With the likelihood on the vertical axis, different likelihood levels may be identified: low, medium, and high, with a measure of the impact presented on the horizontal axis (see appendix). The grey boxes represent risks that are highly significant while the white boxes represent those that are less significant. The likelihood-impact matrix offers a great way to categorize the risks qualitatively in a project by taking into account their probability of occurrence as well as their consequences. Attribute analysis This is a creative problem solving method that can be used productively when considering possible qualitative risk impacts. This approach was developed as a tool for generating new product ideas. The idea is to visualize a product and predict what it would look like or what it would do if its attributes were changed dramatically. In the construction industry, for example, there are instances when changes are proposed to the original structure design, as a result of financial deliberations or the clients own decision. In such a case, the project manager must take some time and consider the possible consequences of the proposed changes. The new design may present completely new technical challenges or it may mean that new security measures are put in place. The skills employed in these analyses constitute attribute analysis. Quantitative impact analysis This analysis enables project managers develop a more solid sense of physical consequences of the risks. According to the Project management Institute (2000), this process aims at analyzing numerically the probability of all the risks and their consequences on the objectives of the project. The process also investigates the extent of the overall project risk. Techniques such as the Monte Carlo simulation are used as well other skills, like the use of decision tree analysis, sensitivity analysis and interviewing. Sensitivity analysis This method realises that risks have different damaging levels. For simpler project, a quick project plan inspection using the list of risks can be used to identify those risks that are likely to cause the greatest damages. More complex projects will require more detailed analysis. Using a copy of the project database which has been entered into a scheduling tool is a great way to detect those risks that will result in delays. Schedule “what if” analysis employs worst-case estimates to determine the overall project effect for each of the risk identified (Kendrick, 2009). Quantitative Risk Assessment Tables Quantitative efforts also use tables to analyse the seriousness of the risks. This approach uses tables with numerical values and probabilities instead of the categorizations used in qualitative methods. Impact estimations will have to be done in cost, time and effort for each risk followed by an assessment of the overall risk as a product of the estimated impact and the selected probability. This method for sequencing risks, however, has one drawback since for some risks, it may be very difficult to develop accurate consensus for both the probability and impact. Again, impact may be measured in several was, time, money, making it difficult to determine a single acceptable quantitative assessment of the overall risk. These techniques have been applied in several fields and have been used by project managers to estimate the performance of their final products. In aeronautics, for example, engineers build scale model aircrafts and then use these to test aerodynamic properties of the planes in wind tunnels. Again, architects have used tabletop models of new buildings in order to help clients visualize the final building and assess the effectiveness of their designs. All these efforts are aimed at analysing the performance of the final products before they are actually implemented and this kind of modelling risk is commonly put to use by project managers for other types of projects as well (Kendrick, 2009). Risk response planning This is a very important part of the risk assessment and management efforts. During the process, options that will enhance opportunities and reduce threats to the objectives of the project are developed and determined. The process involves identification and assignment of parties or individuals to take responsibilities for all the agreed risk responses. An effectively conducted risk response planning process will determine whether or not the project’s risk increases. A response planning report will include all the information that will be necessary for the implementation of measures to ensure protection against the risks (Brebbia, 2012). The strategies developed may include avoidance or changing project plan, transference of risk consequences to a third party, mitigation and/ or acceptance to proceed with the project plan and deal with the risks when they come. Conclusion As has been seen in the discussion above, risk assessment is very complex; it gets even more complex for large networks of activities in large projects. Assessment of project risks, however, remains one of the most important and critical processes for project managers in planning and execution of the project. Effective risk assessment will help managers predict possible hazards in the project plan and therefore enable them arrange for preventive measure and thus keep the project moving. These processes will also result in significant reduction of accidents, loss of property and minimization of costs. List of Reference Kendrick T, 2009, Identifying and Managing Project Risk: Essential Tools for Failure-Proofing Your Project, Second edition, AMACOM Div American Mgmt Assn, New York Frame JD, 2003, Managing risk in organizations: a guide for managers, Jossey-Bass, San Francisco Brebbia CA, 2012, Risk Analysis VIII, WIT Press, Southampton Project management Institute, 2000, A guide to the project management body of knowledge (PMBOK Guide), Project management Institute, Inc, Pennsylvania Galway L, 2004, Quantitative Risk Analysis for Project Management, Working paper WR-112-RC Covello VT, & Merkhoher MW, 1993, Risk Assessment Methods: Approaches for Assessing Health and Environmental Risks, Springer, New York Chapman C & Ward S, 2007, Project Risk Management: Process, Techniques and Insights, John Wiley & Sons Ltd, West Sussex Appendix: The risk assessment process Likelihood – impact matrix Read More