All projects have risks and the risks have the potential for negatively impacting the project. (I am not referring to opportunity (positive) risk.) You use risk management to determine the risks that are important enough to manage. The following four techniques will help.
Include Budget and Schedule for Unknown Risks
Some organizations allow project managers to create a risk contingency budget at the start of a project to account for budget risk. The risk contingency budget is estimated by multiplying the probability and the cost impact of risks. For example, if a risk has a $1,000 impact to the project and a 20% chance of occurring, you would include 200 ($1,000 * .2) in your risk contingency budget. The full risk contingency budget is calculated by making this calculation across all known risk, and adding a further contingency to account for unknown risks. This technique is also referred to ad Expected Monetary Value (EMV).
You can do the same calculation with schedule risks by multiplying probability by the number of days that are at risk to create a risk contingency buffer at the end of a project.
If your organization does not allow a risk contingency budget and buffer, you would naturally account for risk uncertainly in your base budget estimates. For example, if your base budget is $200,000, but the project is risky, you might estimate the final budget at $250,000 to account for risks.
Ask Team Members and Stakeholders to Help Identify Risks
If team members are familiar with the circumstances of the project, they can take an active role in identifying and evaluating project risks. Joint participation from the team can help identify project risks, lay out effective actions to manage the risk and provide consensus and buy-in for execution.
Weigh the Cost of the Risk Plan Against the Impact of Risk
The activities associated with managing risks have a cost. The project manager should make sure that the effort and cost associated with managing the risks do not exceed the impact to the project if the risk occurs. For high risks, this is normally not the case. However, for medium risks make sure that the costs of managing the risk is not more than the risk impact to the project.
Understand the Risk Tolerance Level in Your Organization
During the risk identification process, you will encounter many risks. Which ones do you think are important enough to manage? The answer says something about your risk tolerance.
Risk tolerance is usually cultural in an organization. Some organizations are bigger risk takers and will accept a higher level of risk on projects. They will also tend to have a higher threshold before they chose to manage a risk. On the other hand, some organizations are more risk-averse. They will tend to accept less risky projects and they will also tend to have a lower threshold to manage risks.
It is important to know your organization's tolerance for risk to make sure you are not undermanaging or overmanaging risks.
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