| Plan for Risk |
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| Written by Joseph Griffin, MBA, MPM, PMP®, GRI | |||||||||
| Tuesday, 14 August 2007 | |||||||||
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Page 1 of 2 Construction Business Owner, September 2007 People manage risk in a variety of ways—some do so in a highly structured manner, while others take a much more laissez-faire approach. Some people think that since you cannot know what will happen, don't worry about it; just deal with it when it happens. Unfortunately, those who manage risk this way will most likely be managing the risk of losing their job. In this context, risk refers to an unforeseen event which causes a deviation from the project plan. Using this definition, risk refers to both positive and negative events. For instance, if the cost of certain materials drops during the course of a project, this is a positive risk event. When negative events take place, it is a negative risk event. It is important that the project manager plan for all possible risk events, both positive and negative, by creating a risk assessment and response plan. The risk assessment and response plan (RARP) attempts to look at all aspects of the project and asks:
Identifying Potential Risks First, develop a list of all the things that could reasonably happen during the project. Obviously, someone could take this to the extreme and list every conceivable event that could affect the project (nuclear war, the world end, etc...). Therefore, when listing items, it is important to consider not only their possibility but also their probability. For instance, I live three hundred miles from the Atlantic Ocean. A tsunami could devastate one of my construction projects, but the likelihood of such an event occurring is unlikely; therefore, the low probability eliminates it from my list of possible risk events. How you go about listing the possible risk events will vary depending on how your company operates and how large the project team is. One way is to hold a brainstorming session. Gather members of the project team, key stakeholders, subject matter experts and possibly customers into a room and ask them to list possible risk events. You can also do this portion virtually, if necessary. It may take some encouragement to get people to speak up if this is a new way of doing things in your work environment. Once you have built a list of the risk events, they should be categorized. You can do this in whatever way is helpful for your project. Determining Probability and Impact Next, assign a probability of occurrence, as well as what the possible impact will be. For instance, depending on the time of year you are starting the project, inclement weather may be a major obstacle for your project. By looking at past weather trends and weather forecasts, you can come up with a number for how this may affect your project. Let's say that by looking at past weather patterns, you learn that it rains an average of three days per week to such an extent that you will have to stop working on the project, and that this weather will last for one month. Let's also say that the month has thirty total days, eight are non-working days (weekend) and twenty-two are working days, approximately 26 and 74 percent, respectively. Therefore, you will most likely lose nine days of work due to rain. Now that you have established the risk event (loss of nine working days), determine the likelihood of this event taking place. Sometimes this can be statistically determined, other times it is an educated guess based upon the information you have. For this example, let's say you feel 80 percent confident you will lose the nine days due to rain. Now that you have estimated the probability of this risk event occurring, you need to determine the impact it will have on your project. You can consider the impact in one of two primary ways: days or dollars. Let's use dollars. Since you are familiar with your project, you believe that the loss of a day will cost you $1,000. Therefore, if this risk event takes place, you stand to lose upwards of $9,000. You will need to follow the above example for each risk event that you identify as a reasonable priority. Not all events listed during the brainstorming session will be as complex as the examples, whereas others may be much more complex. However, if the risk event is given a high priority, then a likelihood of occurrence and an impact needs to be assigned to the event. You can also expedite this process by creating a likelihood scale, such as the one below:
Using a scale such as this one would allow you to more effectively categorize risk events, as well as provide people with an easier way to remember how serious a risk event is without trying to remember exact percentages. Some people even color code the risk events as a visual cue.
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