Project risk analysis

Project risk analysis is a step in risk management process, a part of project risk assessment. It is a two dimensional analysis where likelihood and consequences of risks (or opportunities) are examined. The step consists of:

• understanding the risks
• analysis of consequences
• analysis of likelihood
• presentation e.g. in risk matrix

Understanding the risks

Risk analysis should lead to better understanding of the risk. It includes consideration of:

• causes,
• sources,
• positive and negative consequences,
• factors that affect consequences,
• factors that affect likelihood,
• affected project objectives.

Each risk can affect multiple objectives, and have multiple consequences.

Consequences analysis

The consequences can be related to:

• project, e.g. costs, time, integrity, staff, health and security, reputation
• product, e.g. reliability, durability, achieving objectives
• surroundings, e.g. politics, local community, natural environment, legislation

The analysis leads to quantification of consequences on scale:

1. insignificant
2. minor
3. moderate
4. major
5. catastrophic

The consequences usually can be presented as a monetary value. Therefore, to each level on the scale a financial impact should be added. The impact value describes how severe will be occurrence of the risk.

Likelihood analysis

The likelihood can be described in percent (100% - the occurrence is certain). The likelihood can be assessed based on data from other project, experts judgement or other sources. If presentation in percent scale is impossible due to lack of data, the likelihood is quantified on scale:

1. rare (e.g. less than once in 40 years)
2. unlikely (e.g. once in 10-40 years)
3. moderate (e.g. once in 1-10 years)
4. likely (e.g. once a year)
5. certain (e.g. several times a year)

Risk level calculation

The risk level is a product of likelihood and consequences.

If consequences are in monetary value and likelihood is in percent, the product of them shows expected impact on the project, e.g.:

• consequences = $40000
• likelihood = 1%
• expected impact value = $40000 * 1% = $400

If the consequences and likelihood are described in 1-5 scale, the product is the risk level, e.g.:

• consequences = level 3
• likelihood = level 2
• risk level = 2 * 3 = 6 (maximum: 25)

In case of multiple consequences of the risk all monetary impact values should be added before calculating expected impact value. In case of using 1-5 scale, usually the highest level of all consequences is used.

Risk matrix

The risks can be presented in risk assessment matrix, where on horizontal axis the consequences are shown and on vertical - the likelihood.

5 certain
4 likely
3 moderate
2 unlikely
1 rare
	1 insignificant	2 minor	3 moderate	4 major	5 catastrophic

Each risk can be shown in the matrix. The green zone is an acceptable risk level, the yellow one is increased risk level, while the red one is unacceptable risk level. The project team should aim at lowering risk level from red zone to yellow and green by decreasing the likelihood od consequences.

The quick and simple approach to risk analysis

The extended analysis should be performed during planning phase. During the project implementation often there is no need for such analysis. Many project managers limit analysis to 3 points scale of likelihood and consequences. It's faster, easier and gives the same effect. However it should be limited to project implementation phase only.

See also:

• Project lifecycle

Advantages of Project risk analysis

Project risk analysis is a necessary step in risk management that helps to identify, analyze, and prioritize potential risks and opportunities. It helps to better understand the project environment and can help to develop a more effective risk management strategy. The advantages of project risk analysis include:

• Improved identification of potential risks and opportunities: By engaging in risk analysis, project managers and stakeholders can identify risks and opportunities that may have been overlooked or underestimated. This can help to create a more comprehensive view of the project environment.
• Better understanding of the project environment: By conducting a risk analysis, stakeholders can gain a better understanding of the project environment, which can help to identify potential risks and opportunities early on in the project.
• Improved risk management strategy: By understanding the project environment and the associated risks, project managers can develop a more effective risk management strategy. This can help to mitigate potential risks and take advantage of potential opportunities.
• Improved decision-making: Through risk analysis, project managers and stakeholders can gain a better understanding of the trade-offs associated with different decisions. This can help to make more informed decisions that lead to better project outcomes.

Limitations of Project risk analysis

Project risk analysis is a step in risk management process, a part of project risk assessment. It is a two dimensional analysis where likelihood and consequences of risks (or opportunities) are examined. It has a number of limitations including:

• Limited scope and data: Due to the limited scope of the analysis, it can provide an incomplete and inaccurate assessment of risk. It is also limited by the quality and availability of data, which can lead to a less informed analysis and decision-making.
• Unforeseen risks: Project risk analysis can overlook potential risks or opportunities that may arise during the project’s execution.
• Assumptions and biases: The analysis is based on assumptions and interpretations of the data collected which can introduce bias and errors into the results.
• Time constraints: Risk analysis can be a lengthy process and can be difficult to complete within the time constraints of a project.
• Cost: Analysis can be expensive to implement and may not be feasible for all projects.

Other approaches related to Project risk analysis

Here are some other approaches related to project risk analysis:

• Risk identification: The process of identifying potential risks that could affect the project. It includes recognizing, analyzing and documenting the risks that could occur during the project.
• Risk assessment: This is the process of evaluating the likelihood and impact of risks on the project. It helps to prioritize risks and determine the strategies for managing them.
• Risk response and management: This is the process of developing strategies to respond to the risks identified. It includes deciding how to respond to the risks, allocating resources, and monitoring the risks.
• Risk monitoring and control: This is the process of monitoring the risks identified and implementing corrective actions if needed. It helps to ensure that the project continues to stay on track.

In summary, project risk analysis is a two-dimensional analysis where the likelihood and consequences of risks (or opportunities) are examined. There are other approaches related to project risk analysis such as risk identification, risk assessment, risk response and management, and risk monitoring and control. These processes help project managers to identify, evaluate, and manage risks to ensure the successful completion of the project.

Project risk analysis — recommended articles

Project risk assessment — Qualitative risk analysis — Evaluation of risk — Risk management process — Risk evaluation — Design risk assessment — Risk response — Project cost management — Risk assessment framework

References

• ISO 31000:2009 Risk Management - Principles and Guidelines, Geneva:ISO
• PMI Standards Committee, & PMI Standards Committee. (1996). A guide to the project management body of knowledge. Project Management Institute.
• Siegelaub, J. M. (2004, January). How PRINCE2 can complement PMBOK and your PMP. In PMI global congress proceedings.

Author: Slawomir Wawak