Risk is an opportunity or a threat in a project which could occur in future and might impact the project objectives. Project Risk Management is one of the important concept from project management perspective. It is mandatory for the project managers to know how to identify the risks, analyze the risks, plan risk responses and monitor and manage the risks throughout the project life cycle.
Project Management February 15, 2024
Risk is defined as an uncertain future condition or event which might have a positive or negative impact on the project objectives. Positive risks are knowns as Opportunities and negative risks are known as Threats. Risk is also referred to as ‘unknown’ as it is uncertain about the occurrence of the risk and the level of impact it would create on the project objectives and deliverables.
Risk is everywhere. It could be present in a project as small as 20 days project delivering a small simple product or service to the client and as large as a an 8-year project delivering a large complex product or service to the client or stakeholders. Risk could have an impact on the individual project objectives such as schedule, cost, quality etc. Sometimes it might impact the project as a whole.
Managing risks effectively is of paramount for the success of the projects. If a project manager has successfully managed Scope, Schedule, Cost, Quality but you didn’t apply effective skills for managing risks in the project, that might also lead to project failure.
Project success is no more based on three constraints of Scope, Schedule and Cost. It has been transformed to a six-constraint model consisting of Scope, Schedule, Cost, Quality, Risk and Benefits.
Managing these all six constraints is mandatory for successfully completing the project objectives.
Risk Management is one of the specialization area or knowledge areas in Project Management.
Project Reserves provide an opportunity to address the risks that might occur in the project life cycle. Reserves could be time and/or money allotted to address the risks related to any aspect of the project.
Reserve Analysis is a process followed to plan Contingency reserves and Management Reserves in the project life cycle. Reserve analysis is performed to assess whether the planned contingency and management reserves are enough to manage the risks or is it needed to revise these reserves.
Some of the risks in the project can be identified by the project team and stakeholders and there can be some risks which cannot be identified and could be emergent risks which might occur at a later date but was never anticipated by the team.
Identified risks are the ones which are identified and documented in the project risk register. Identified risks doesn’t’ mean they have occurred in the project but it means they are anticipated by the team and team has also recorded the risk in the risk artefacts such as risk register and updated the risk responses. Identified risks are also called as ‘Known Risks’ or ‘Known Unknowns’.
E.g. the project manager and team have identified that the equipment no.1 used in the project is old enough and might break down in a couple of weeks. To account for such possible loss or negative risk, the project management team will set aside some reserve in the form of cost in this case. This reserve is known as ‘Contingency Reserve’.
Unidentified risks are the ones which are not identified by the project team and stakeholders but might occur at a later date. Unidentified risks are not part of risk register because they have never been anticipated by the project manager and stakeholders but it is necessary to plan some reserves in terms on time and/or money to address such risks in the project life cycle. Unidentified risks are also called as ‘Unknown Risks’ or ‘Unknown Unknowns’.
E.g. it was never anticipated by the team in the risk identification sessions that the resources supplier would move out from the contract by terminating the contract early due to some business loss in his purview and since the supplier is terminating the contract mid-way through the project, the project management team has to immediately look for using some reserves to address this problem. These reserves are management reserves.
Contingency Reserves are the reserves planned and used for managing identified risks or ‘Known Unknowns’. Management Reserves are used for managing unidentified risks or ‘Emergent Risks’ or ‘Unknown Unknowns’.
Project management team conducts risk identification and risk analysis events as per the frequency defined in their project as per the context of the project. Regularly, the various project stakeholders try to monitor whether the existing or planned contingency reserves are enough for managing the ‘Known Unknowns’ or Identified risks and whether the planned management reserves are enough for managing emergent risks or ‘Unknown Risks’ if any, occurs in the project.
Contingency reserves are part of Cost baseline which are in control of Project Manager and team. Project manager and team can utilize Contingency reserves planned as and when the identified risks occur in the project and they do not need to get approval from any other stakeholder for using these funds/ time to account for the ‘Known Risks’.
Management Reserves are added over and above the cost baseline of the project to obtain the Project budget. Management Reserves are planned, estimated, allocated based on the risk appetite of the stakeholders and organization and various other factors e.g. strategic importance of the project, size of the project, industry it belongs to, complexity of the product or services that the project creates and more.
For applying management reserves, the project manager needs to get the approval from the management by following the change control procedure. Project Manager needs to raise the change request to utilize management reserves for managing an emergent risk in the project and upon approval from the management, Project Manager and team can utilize the management reserves or funds set aside for addressing such ‘Unknown Unknowns.
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