Risk analysis in project management becomes a very important aspect in the success of a project.
Projects capitalize on resources and opportunities, and from these stem uncertainty, challenges, and risks; in fact, the thing that a project manager wants to deal with last is risk.
Let’s define what risk analysis is in project management, why it is important, and how to execute it in this article.
What is risk analysis in project management
Risk analysis in project management is the structured monitoring of problems that can impact schedules and quality of an ongoing project.
Through risk management, you can clearly pinpoint and define risks, their chances of happening, how to deal with them if they occur, and the steps to take to prevent them.
The success of a project often depends on the quality of the risk analysis since an unexpected event could have consequences, even major ones, in different parts of the work.
While there are two types of analysis – quantitative and qualitative – using one or the other may depend on the needs of your particular project.
Quantitative risk analysis: what it is and how to do it
Quantitative risk analysis is a statistical and numerically calculated examination of the impact of a risk on the overall project.
By quantitatively measuring risks, it helps reduce uncertainty about the success of a project by promoting the development of a risk management plan.
This analysis method may require specific tools, but it is generally objective and accurate.
Here is how it is performed:
- Interview relevant parties to collect information and shape scenarios.
- Sensitivity analysis: assists in identifying risks and defining which may occur most and the effects on the project.
- Expected monetary value analysis: a statistical method that measures the average outcome of probable scenarios by including the cost and gain of each path.
- Modeling and simulation: is a tool that makes use of a model that converts uncertainties into their potential impact on project objectives.
- Plan risk analysis: in this case, the precedence diagram method can be used to see whether the project objective will be completed within a specific date and within cost estimate.
- Expert opinion: Getting expert advice for identifying potential costs and effects on planning, assessing possibilities, interpreting data, and identifying weaknesses and strengths can be invaluable.
Qualitative risk analysis: what it is and how to do it
Qualitative risk analysis calculates the likelihood of a risk to occur.
This helps in determining which risks to focus on based on both the chance of occurrence and the magnitude of their impact on the project.
Qualitative risk analysis typically implies organizing and categorizing risks into a matrix that illustrates the probability, outcome, and impact of each risk on the overall success of the project.
This method is faster than quantitative risk analysis, although it is more subjective.
Here is how it is accomplished:
- Risk probability and impact evaluation: During this stage, each risk that might occur is studied and analyzed relative to its likely effects on the project objectives. Then, each risk is classified according to different levels.
- Impact risk assessment matrix: documented results of risk probability can be described in qualitative terms, such as very high, high, neutral, low, and very low.
- Risk rating is developed using a matrix that represents the risk scales for each risk. The matrix documents the risk likelihood scale between zero chance (rate 0.0) and certainty (rate 1.0), as well as the risk impact scale, which reflects the severity of its influence on the project objective. This matrix helps in improving data quality and makes the management process easier to replicate during the project.
- Risk classification: in this stage, risks are grouped by common causes to determine the most vulnerable areas of the project and to help develop an effective risk response plan.
- Risk urgency evaluation: in some cases, urgency can be combined with risk rating. This is a method used to gauge the extent to which data are useful for risk management, thus generating a final rating
- Expert opinion: it may be helpful to seek the advice of experts, such as people who have recent experience on similar project cases, through interviews or special workshops.
Why is risk analysis in project management important?
- Promotes progress: the project can progress by limiting the number of deviations and setbacks that occur during its life cycle.
- Communicates problems: knowing potential project risks helps the project manager communicate problems to stakeholders.
- Makes risks manageable: risk analysis builds opportunities to prepare for problem management by reducing the negative impact on the project.
Bottom line, risks are a common concern for all projects.
One of the major challenges a project manager faces is not to be overwhelmed by the number or magnitude of possible risks that have been identified.
On the contrary, a good project manager should be skilled enough to focus on the important elements that could threaten the smooth operation of the project and then develop a risk management and response plan.
The risk management process in project management is one of the most important practices in project management and is aimed at ensuring its path towards successful completion.
Through proper project risk management, which also includes using good project management software, a company can ensure successful project completion and also minimize the negative impact of any risks through timely actions.