Evaluation of risk

Evaluation of risk is a last step of risk assessment process and its main purpose is to make a summarized assessment of the net effect of all identified risks in the project. It allows to prioritize actions required to be taken against identified threats and opportunities of risks and to take a decision of the business validity of continuing the project based on risk effectiveness .

Risk evaluation process involves comparing results of risk analysing process with the risk evaluation criteria set by the Project Board. After the level of risk was established in risk analysis, there has to be created rating table for risk evaluation. Such table should contain factors like: risk rating, based on the likelihood of the risk occurring and severity of consequences, short description and needed actions with its execution times. Each risk evaluation should consider:

• the significance of the analyzed activity to the project,
• the amount of risk control activities,
• potential losses to the project,
• profits and opportunities resulting from the risk.

There are 2 main techniques of evaluating the risk in the project :

• Risk models,
• Expected monetary value analysis.

Risk modeling and simulations

Risk modeling and simulations allows to translate specified project uncertainties into its potential impact on objectives of the project. One of the most common model used in evaluation of risks is Monte Carlo simulation, quantitative uncertainty analysis of the risk. Simulation results are presented in the form of a histogram, showing different iterations of the risk in different ambient conditions, simulated for various scenarios (e.g. various probability, costs or time). Repeatedly runned simulations allows to predict the average level of the project risk .

Expected monetary value analysis

Expected monetary value technique provides quick assessment of all the occurring risks in the project to present their combined effect. It calculates average outcome of scenarios that may or may not occur (uncertainty analysis). Expected monetary value is calculated by summing possible outcomes values multiplied by the probability of its occurrence. It is assumed that all the identified threats are expressed in calculations as negative values, while risk opportunities are expressed as positive values.

Expected monetary value technique can be presented as a decision tree analysis (showing results of net path values for different decision nodes and chance nodes) or as a simple table (including e.g. percentage of the likelihood of each risk its impact and based on that its expected value, where sum of all the listed risks expected values gives overall expected monetary value).

Examples of Evaluation of risk

• Cost/Benefit analysis: This is a common tool used in risk evaluation. It involves comparing expected costs associated with mitigating the identified risk to the expected benefit of doing so. This helps to determine whether the risk is worth addressing or if it is better to accept it.
• Risk Rating: This is another common tool used in risk evaluation. It involves assigning a numerical rating to each identified risk based on its potential severity. This helps to prioritize risks, so that the most severe ones can be addressed first.
• Scenario Analysis: This is a tool used to evaluate the impact of different scenarios on a project. This helps to determine the potential consequences of each scenario and to plan accordingly.

Advantages of Evaluation of risk

Evaluation of risk has several advantages:

• It facilitates identifying risks, their potential causes and effects, and then understanding and assessing the risk.
• It helps to prioritize and focus on the most important risks and to develop risk mitigation strategies.
• It provides an estimate of the financial and non-financial impacts of the risks, enabling management to make informed decisions on how to allocate funds and resources to achieve the project objectives.
• It helps to improve communication between the project team and the stakeholders.
• It can reduce the overall project cost by identifying and addressing risks early on.

Limitations of Evaluation of risk

• Evaluation of risk requires a lot of time and resources to be dedicated.
• It is difficult to quantify and measure the impacts of some risks.
• It is hard to determine the probability of occurrence of some risks.
• Some risks may not be identified, which can lead to wrong assessment and decision making.
• It is a challenging task to accurately assess the net effect of all the risks.
• It is difficult to prioritize the risks and come up with the best solution.
• It is often difficult to quantify the financial and non-financial losses due to the risks.
• The risk assessment process can be impacted by external factors, such as changes in the business environment.

Other approaches related to Evaluation of risk

• Qualitative Risk Analysis: This involves analyzing risks based on their likelihood of occurrence and their potential impact. This analysis provides insight into the relative importance of each risk and aids in prioritizing them.
• Quantitative Risk Analysis: This involves using mathematical models to estimate the probability of a risk occurring and the potential financial losses associated with it.
• Risk Response Planning: This involves the development of strategies to reduce or eliminate the risk or to transfer it to another party.
• Risk Monitoring and Control: This involves monitoring risks throughout the project and taking corrective action when necessary.

In conclusion, Evaluation of risk is a necessary step in the risk assessment process, and there are other approaches related to it such as Qualitative Risk Analysis, Quantitative Risk Analysis, Risk Response Planning, and Risk Monitoring and Control. These approaches are essential in helping to prioritize risks, quantify their likelihood and potential losses, develop strategies to manage them, and monitor their progress throughout the project.

Footnotes

Evaluation of risk — recommended articles

Project risk assessment — Project risk analysis — Risk response — Qualitative risk analysis — Design risk assessment — Risk evaluation — Quantitative risk analysis — Risk analysis in project — Risk management methodology

References

• Arnold U., Yildiz Ö. (2015), Economic risk analysis of decentralized renewable energy infrastructures - A Monte Carlo Simulation approach Renewable Energy, Volume 77, Pages 227-239
• Kwan T.W., Leung H.K.N. (2011), A Risk Management Methodology for Project Risk Dependencies IEEE Transactions on Software Engineering, Volume: 37, Issue: 5
• Liu P., Zhang X., Liu W. (2011), A risk evaluation method for the high-tech project investment based on uncertain linguistic variables Technological Forecasting and Social Change Volume 78, Issue 1, January 2011, Pages 40-50
• Office of Government Commerce (2009), Managing Successful Projects with PRINCE2 The Stationery Office
• Project Management Institute (2013), Project Management Institute. A Guide to the Project Management Body of Knowledge (PMBOK® Guide) - Fifth Edition Project Management Institute, Inc., Pensylwania

Author: Natalia Kobos