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Project Risk

What is project risk?

Project risk can be defined as follows-

'A risk is a combination of constraint and uncertainty'. The risk may be reduced to an acceptable level by reducing either uncertainty or constraint, or both. In practice, few people have the opportunity to reduce constraint, so most focus on the reduction of uncertainty.

Types of project risk:

  • Stand-alone risk: this is the risk of a project when viewed in isolation.
  • Firm risk: this represents the contribution of the project to the overall risk of the company.
  • Systematic risk: this represents the risk of the project in the context of the market portfolio.

Measures of risk

The following are the measures of risk

  • Range
  • Mean absolute deviation
  • Coefficient of variation
  • Semi-variation
Project risk management: this can be defined as follows ‘Project Risk management is the systematic process of managing an organisation's risk exposures to achieve its objectives in a manner consistent with public interest, human safety, environmental factors, and the law. It consists of the planning, organising, leading, co-ordinating, and controlling activities undertaken with the intent of providing an efficient plan that incorporates an acceptable level of loss that minimises the adverse impact of risk on the organisation's resources, earnings and cash flows’.

There are two stages in the process of Project Risk Management- Risk Assessment and Risk Control

Risk assessment involves Identifying uncertainties, Analysing and Prioritising risks.

Risk control involves mitigating risks, Planning for emergencies, Measuring and controlling.

In order to reduce the loss caused by uncertainties, the company undertakes the following measures, even before accepting a project:

  • Sensitivity analysis - also known as the ‘what if’ analysis.
  • Scenario analysis - looks at various scenarios and the effect of this on the financials.
  • Decision tree analysis - a technique for analysing situations where sequential decision making in risk is involved.

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