This week we will look at Project Risk Management. We will first look at the processes from the PMBOK that are applied to project risk management and then the risk in the Chinese construction industry is discussed as an example of the application of risk management theory.
The late Rita Mulcahey was a widely respected teacher and author on project management. In the following video Rita provides an introduction to project risk management, emphasising the adoption of a simple approach:
This emphasis on simplicity is further examined in the next video. The argument that is made here is that complex risk decision making models, developed by theoreticians, are seldom used by practitioners. Instead models are required that simplify the application of the more complex approaches and improve actual decision making in the business world. As we consider project risk management it is important to retain this focus on simplicity. It is also of value to apply this approach in project management more widely:
The PMBOK defines project risk management as including:
“the processes of conducting risk management planning, identification, analysis, response planning, and monitoring and control on a project.”
There are seven major processes in the PMBOK on project risk management:
1. Plan risk management
2. Identify risks
3. Perform qualitative risk analysis
4. Perform quantitative risk analysis
5. Plan risk responses
6. Implement risk responses
7. Monitor risks
The following video shows an example of the application of project risk management in one organisation:
The first major process involves the creation of a risk management plan. In order to do this, project documents are reviewed which can include the project scope statement, cost management plan, schedule and communications management plan. Meetings are held and analysis undertaken to create the plan.
The second major process is the identification of project risks. Project documentation is reviewed, information is gathered on possible project risks and a risk register is created which lists the risks that have been identified.
Qualitative risk analysis is the third major process. It involves scrutinising the risks from the risk register and applying appropriate qualitative tools and techniques to determine the probability of a risk occurring, the impact that it might have and the urgency in addressing it.
The fourth major process is quantitative risk analysis. It is focused on the application of quantitative techniques to assess risk through gathering data on the risks and performing anaylsis on it.
As a result of qualitative and quantitative risk analysis, the risk register will usually be updated. The following video provides further detail on the application of project risk analysis:
Once risk analysis has been undertaken, the response to these risks is planned – the fifth major process from PMBOK. This involves determining the response that will be made to the risk. It is important to note here that there can be positive and negative risks. Positive risks are factors that may benefit the project and cause it to peform better than expected. Strategies are needed for ensuring that these are taken advantage of. Negative risks are threats to the project.
The sixth major process is to implement the risk responses. This is an area that is often problematic in many projects. Risk assessment is conducted and appropriate risks are identified. Suitable responses to the risks are determined and then difficulty emerges with implementing these responses. Often this s due to the cost of the responses – budgetary approval for items that “might” be necessary for successful completion of the project can be a hard sell with project clients. All too often this can result in project failure when a catastrophic risk that dooms the project occurs, which has been identified in the assessment and which a modest cost earlier in the project may have prevented. Insistence on risk expenditures is an necessary, though often difficult, aspect of the project manager’s job.
Finally, as the project proceeds risks need to be monitored – the seventh major process. Audits can be undertaken, analysis can be made of project cost and schedule variance, technical performance measurement can be used, to establish whether risks are occurring and to enable decisions to be made on the response. The video below outlines six possible response types to risk, which are avoidance of risk, loss prevention, loss reduction, separation, duplication and diversification:
Risk management has recieved particular attention due to the current economic climate. The professor in the following video looks at how risk is managed in today’s organisations. She deals with how to handle a crisis, emphasising the need for communication. She highlights the existence of positive and negative risk and outlines strategies for dealing with risk.
Chinese construction projects
This week’s reading reviews risk in Chinese construction projects. It reports a widescale study on the risks that exist in construction in China, applying a risk analysis to the construction industry as a whole. The results of the study are compared to a similar study of the Australian construction industry.
The following video shows a fast frame video of a Chinese construction project to illustrate the article:
Construction projects are generally thought to be high risk. They are one off endeavours that usually extend over a long time period. They involve complicated processes and are highly dependent on the environment that they are completed in. They are expensive and typically involve many stakeholders.
There are many methods to classify risk that have been used in the past. The article is the first study to bring these together. 85 risk factors were identified for the Chinese construction industry and these were ranked in terms of their importance. 25 key factors were identified and these were compared to the Australian situation. The article illustrates the issues in managing international projects, highlighting the differences in project risks that can exist between different national environments. It also highlights the need to consider risks over the duration of the project life cycle.
This week we have looked at project risk, detailing the application of the PMBOK processes for project risk management. Research on risk in the Chinese construction industry was examined as an example of the application of project risk analysis.