Why does risk exist

A project manager may hire an expert to review the technical plans or the cost estimate on a project to increase the confidence in that plan and reduce the project risk. Assigning highly skilled project personnel to manage the high-risk activities is another risk-reduction method.

Experts managing a high-risk activity can often predict problems and find solutions that prevent the activities from having a negative impact on the project. Some companies reduce risk by forbidding key executives or technology experts to ride on the same airplane. Risk transfer is a risk reduction method that shifts the risk from the project to another party.

The purchase of insurance on certain items is a risk-transfer method. The risk is transferred from the project to the insurance company. A construction project in the Caribbean may purchase hurricane insurance that would cover the cost of a hurricane damaging the construction site.

The purchase of insurance is usually in areas outside the control of the project team. Weather, political unrest, and labour strikes are examples of events that can significantly impact the project and that are outside the control of the project team.

The project risk plan balances the investment of the mitigation against the benefit for the project. The project team often develops an alternative method for accomplishing a project goal when a risk event has been identified that may frustrate the accomplishment of that goal. These plans are called contingency plans.

If a critical piece of equipment is late, the impact on the schedule can be mitigated by making changes to the schedule to accommodate a late equipment delivery. Contingency funds are funds set aside by the project team to address unforeseen events that cause the project costs to increase.

Projects with a high-risk profile will typically have a large contingency budget. Although the amount of contingency allocated in the project budget is a function of the risks identified in the risk analysis process, contingency is typically managed as one line item in the project budget.

Some project managers allocate the contingency budget to the items in the budget that have high risk rather than developing one line item in the budget for contingencies. This approach allows the project team to track the use of contingency against the risk plan. This approach also allocates the responsibility to manage the risk budget to the managers responsible for those line items.

The availability of contingency funds in the line item budget may also increase the use of contingency funds to solve problems rather than finding alternative, less costly solutions.

Most project managers, especially on more complex projects, manage contingency funds at the project level, with approval of the project manager required before contingency funds can be used. Risk is associated with things that are unknown. In the initiation phase of his move, John considers the risk of events that could affect the whole project.

This would certainly incur more risks for the project. He identifies the following risks during the initiation phase that might have a high impact and rates the likelihood of their happening from low to high. John concludes that the medium-risks can be mitigated and the costs from the mitigation would be acceptable in order to get a new job. Once the project is approved and it moves into the planning stage, risks are identified with each major group of activities. A risk breakdown structure RBS can be used to identify increasing levels of detailed risk analysis.

John decides to ask Dion and Carlita for their help during their first planning meeting to identify risks, rate their impact and likelihood, and suggest mitigation plans. They concentrate on the packing phase of the move. They fill out a table of risks, as shown in Table As the project progresses and more information becomes available to the project team, the total risk on the project typically reduces, as activities are performed without loss.

The risk plan needs to be updated with new information and risks checked off that are related to activities that have been performed. Understanding where the risks occur on the project is important information for managing the contingency budget and managing cash reserves. Most organizations develop a plan for financing the project from existing organizational resources, including financing the project through a variety of financial instruments. In most cases, there is a cost to the organization to keep these funds available to the project, including the contingency budget.

As the risks decrease over the length of the project, if the contingency is not used, then the funds set aside by the organization can be used for other purposes. To determine the amount of contingency that can be released, the project team will conduct another risk evaluation and determine the amount of risk remaining on the project. If the risk profile is lower, the project team may release contingency funds back to the parent organization.

If additional risks are uncovered, a new mitigation plan is developed including the possible addition of contingency funds. During the closeout phase, agreements for risk sharing and risk transfer need to be concluded and the risk breakdown structure examined to be sure all the risk events have been avoided or mitigated.

The final estimate of loss due to risk can be made and recorded as part of the project documentation. If a Monte Carlo simulation was done, the result can be compared to the predicted result.

To close out the risk mitigation plan for his move, John examines the risk breakdown structure and risk mitigation plan for items that need to be finalized. He makes a checklist to be sure all the risk mitigation plans are completed, as shown in Table Risk is not allocated evenly over the life of the project.

On projects with a high degree of new technology, the majority of the risks may be in the early phases of the project. On projects with a large equipment budget, the largest amount of risk may be during the procurement of the equipment.

On global projects with a large amount of political risk, the highest portion of risk may be toward the end of the project. Parker, D. International Journal of Productivity and Performance Management 53 1 , 18— Skip to content Main Body. Table The current tenants of his apartment might not move out in time for him to move in by the first day of work at the new job: Medium. The movers might lose his furniture: Low.

Operational Risk. Understand the operational nature of the capabilities you are supporting and the risk to the end users, their missions, and their operations of the capabilities. Typically operational users are willing to accept some level of risk if they are able to accomplish their mission e.

Technical maturity. Work with and leverage industry and academia to understand the technologies being considered for an effort and the likely transition of the technology over time.

One approach is to work with vendors under a non-disclosure agreement to understand the capabilities and where they are going, so that the risk can be assessed. NDI includes commercial-off-the-shelf and government-off-the-shelf items. To manage risk, consider the viability of the NDI provider. Does the provider have market share? Does the provider have appropriate longevity compared to its competitors?

How does the provider address capability problems and release fixes, etc.? What is the user base for the particular NDI? Can the provider demonstrate the NDI, preferably in a setting similar to that of your customer? Can the government use the NDI to create a prototype? All of these factors will help assess the risk of the viability of the NDI and the provider. Acquisition drivers. Emphasize critical capability enablers, particularly those that have limited alternatives.

Evaluate and determine the primary drivers to an acquisition and emphasize their associated risk in formulating risk mitigation recommendations. If a particular aspect of a capability is not critical to its success, its risk should be assessed, but it need not be the primary focus of risk management.

For example, if there is risk to a proposed user interface, but the marketplace has numerous alternatives, the success of the proposed approach is probably less critical to overall success of the capability. On the other hand, an information security feature is likely to be critical.

If only one alternative approach satisfies the need, emphasis should be placed on it. Determine the primary success drivers by evaluating needs and designs, and determining the alternatives that exist. Is a unique solution on the critical path to success? Make sure critical path analyses include the entire system engineering cycle and not just development i. Use capability evolution to manage risk.

If particular requirements are driving implementation of capabilities that are high risk due to unique development, edge-of-the-envelope performance needs, etc. It may be that the need could be postponed, and the development community should assess when it might be satisfied in the future. Help users and developers gauge how much risk and schedule and cost impact a particular capability should assume against the requirements to receive less risky capabilities sooner.

In developing your recommendations, consider technical feasibility and knowledge of related implementation successes and failures to assess the risk of implementing now instead of the future.

In deferring capabilities, take care not to fall into the trap of postponing ultimate failure by trading near-term easy successes for a future of multiple high-risk requirements that may be essential to overall success.

Work closely with the users to establish KPPs. Overall risk of program cancelation can be centered on failure to meet KPPs. Work with the users to ensure the parameters are responsive to mission needs and technically feasible. Seek results of past operations, experiments, performance assessments, and industry implementations to help determine performance feasibility. External and internal dependencies. Having an enterprise perspective can help acquirers, program managers, developers, integrators, and users appreciate risk from dependencies of a development effort.

With the emergence of service-oriented approaches, a program will become more dependent on the availability and operation of services provided by others that they intend to use in their program's development efforts. Work with the developers of services to ensure quality services are being created, and thought has been put into the maintenance and evolution of those services.

Work with the development program staff to assess the services that are available, their quality, and the risk that a program has in using and relying upon the service. Likewise, there is a risk associated with creating the service and not using services from another enterprise effort. Help determine the risks and potential benefits of creating a service internal to the development with possibly a transition to the enterprise service at some future time. They are forms of dependencies in which the value of integrating or interoperating has been judged to override their inherent risks.

Information security. Information security is a risk in nearly every development. Some of this is due to the uniqueness of government needs and requirements in this area. Some of this is because of the inherent difficulties in countering cyber attacks. Create a personalised content profile. Measure ad performance. Select basic ads. Create a personalised ads profile. Select personalised ads. Apply market research to generate audience insights. Measure content performance.

Develop and improve products. List of Partners vendors. Your Money. Personal Finance. Your Practice. Popular Courses. Table of Contents Expand. What Is Risk?

The Basics of Risk. Riskless Securities. Risk and Time Horizons. Morningstar Risk Ratings. Types of Financial Risk. Risk vs. Risk and Diversification. The Bottom Line. Key Takeaways Risk takes on many forms but is broadly categorized as the chance an outcome or investment's actual gain will differ from the expected outcome or return.

Risk includes the possibility of losing some or all of an investment. There are several types of risk and several ways to quantify risk for analytical assessments.

Risk can be reduced using diversification and hedging strategies. Article Sources. Investopedia requires writers to use primary sources to support their work.

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This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. The expected return is the amount of profit or loss an investor can anticipate receiving on an investment over time.

Excess Returns Excess returns are returns achieved above and beyond the return of a proxy. Excess returns will depend on a designated investment return comparison for analysis. What Is a Diversified Fund? A diversified fund is a fund that is broadly diversified across multiple market sectors or geographic regions.

Unsystematic Risk Unsystematic risk is a company or industry-specific hazard that is inherent in each investment. Learn how to reduce unsystematic risks in your investments. What Is a Risk Premium? A risk premium is the return in excess of the risk-free rate of return that an investment is expected to yield. Partner Links. Related Articles. Risk Management What are some examples of risks associated with financial markets? Risk Management Low-Risk vs.

High-Risk Investments: What's the Difference?