What is project risk?
Project risk can be defined as follows-
'A risk is a combination of constraint
and uncertainty'. The risk may be reduced to an acceptable
level by reducing either uncertainty or constraint, or both.
In practice, few people have the opportunity to reduce constraint,
so most focus on the reduction of uncertainty.
Types of project risk:
Stand-alone risk: this is the risk
of a project when viewed in isolation.
Firm risk: this represents the
contribution of the project to the overall risk of the
Systematic risk: this represents
the risk of the project in the context of the market portfolio.
Measures of risk
The following are the measures of risk
Mean absolute deviation
Coefficient of variation
Project risk management: this can be
defined as follows Project Risk management is the systematic
process of managing an organisation's risk exposures to achieve
its objectives in a manner consistent with public interest,
human safety, environmental factors, and the law. It consists
of the planning, organising, leading, co-ordinating, and controlling
activities undertaken with the intent of providing an efficient
plan that incorporates an acceptable level of loss that minimises
the adverse impact of risk on the organisation's resources,
earnings and cash flows.
There are two stages in the process of Project
Risk Management- Risk Assessment and Risk Control
Risk assessment involves Identifying uncertainties,
Analysing and Prioritising risks.
Risk control involves mitigating risks, Planning
for emergencies, Measuring and controlling.
In order to reduce the loss caused by uncertainties,
the company undertakes the following measures, even before
accepting a project:
Sensitivity analysis - also known
as the what if analysis.
Scenario analysis - looks at various
scenarios and the effect of this on the financials.
Decision tree analysis - a technique
for analysing situations where sequential decision making
in risk is involved.