What Is Project Risk Management? 5 Steps to Fail-proof Projects

Everything worth doing comes with a risk. Work projects are no exception.

There will always be risks associated with any new uptaking, whether it is developing a new product, improving operations, launching a new marketing campaign, or expanding the business into new markets. 

Companies often invest in project management software to ensure the successful completion of projects while effectively reducing the likelihood of risks interfering with the set goals.

Without proper project risk management, projects are vulnerable to several unexpected issues that may cause losses to the company. Therefore, it’s imperative we discuss project risk management and help you find solutions for what hasn’t happened yet.

Risk vs. issue in project management

Risks and issues in project management represent possible problems that alter project results. Although the two concepts seem similar, they are differentiated based on their nature and the approaches required to address them. 

Risk, in general, is anything that deviates from the original plan. A project risk could negatively impact your progress or deliverables. These events have not occurred yet but could be a potential issue in the future. Risk in project management includes lack of resources, budget constraints, and economic slump. Risk mitigation requires thorough project planning in advance, proper scope management, and taking into consideration the project’s requirements and external environment. 

An issue is an ongoing crisis negatively impacting the project. Examples of issues in project management include budget overruns, missed deadlines, and poor quality. Unline risks, issues do not have a mitigation plan and need immediate action to be resolved. 

A project manager should anticipate risks and know how to solve issues as they occur. Being proactive about risk is the best way to navigate project difficulties and easily course-correct.

Risk types in project management

Despite the utmost care, your project is susceptible to certain risks. Effective project management prevents the project from going off track. Below are the three common risks associated with a project.

• Cost risk is when a project may potentially exceed the granted budget or be left incomplete due to insufficient funds. Poor financial planning, incorrect cost estimation, unforeseen expenses, and scope creep may trigger cost risk. As a mitigation strategy, try to stick to the allocated budget, create a project plan template, and regularly track costs when the project is ongoing.

• Schedule risks arise from poor planning, unexpected delays, constricted resources, and scope creep. It puts the project at risk of not being completed on time. It further negatively affects the overall cost, project benefits, and competitive advantage. Project managers should identify any delays beforehand, have a well-made contingency plan, and closely monitor the progress in real-time.

• Performance risk affects the output of a project. It indicates that a project may not produce the expected results and has low quality or functionality issues. Even with a project meeting its deadlines and cost expectations, low performance puts the business at a huge disadvantage. While the root cause of low performance can’t be identified, certain practices, such as setting clear objectives at the outset of the project and promoting clear communication, can reduce the risks that can cause low performance.

Several other risks, such as technology risk, operational risk, communication risk, external hazards, legal risk, and governance risk, ultimately converge to the above three major risks to a project.

Importance of project risk management

Project risk management is crucial in changing the outcome of a project by addressing any uncertainties that may prove to be a roadblock. 

Risk assessment or risk identification helps identify a project's strengths, weaknesses, and opportunities early on. From there, project managers can develop strategies for successfully delivering the project within budget, timeline, and scope.

It not only mitigates the risks mentioned before but also prepares the team to prioritize important tasks and take on any challenges as they arise. By having a contingency plan in place, teams can make an informed decision and significantly reduce any negative impact on the project. 

Risk management is especially helpful when multiple stakeholders are involved in a project. It enables the team to accommodate unexpected requests and deliver a project meeting the stakeholder's expectations.

In the long run, effective project risk management saves time, money, and resources and gives a competitive advantage to the business.

“The essence of risk management lies in maximizing the areas where we have some control over the outcome while minimizing the areas where we have absolutely no control over the outcome.”

Peter L. Bernstein
American historian and economist

Steps to executing project risk management

As I stated before, project risk management is the process of proactively identifying what could go wrong throughout the duration of a project and planning possible solutions.

Project managers will plan differently for risks depending on the size and scope of their project as well as on the types of risks possible. Larger, more expensive projects might mean increased levels of risk management planning. You may even want to invest in a risk management solution, such as IT risk management software.

Smaller, less time-consuming projects might not need as much preparation and/or mitigation.

Let’s talk about how you can be prepared for risks and reduce the chance that they will negatively impact your project.

1. Flesh out your project charter

What is a project charter? A project charter lays out the essentials of a project. This documentation identifies a project’s scope or scale, defines objectives and deliverables, and outlines key players.

More specifically, a project charter will name the project’s stakeholders and state the authority the project manager has regarding this venture.

Having a detailed project charter will help you identify risks by laying out important details regarding the project as a whole. Don’t overlook this documentation in your attempts to avoid and mitigate project risk.

2. Utilize your project team

Your project team is made up of the key players who you trust to do their own jobs better than you could. So why not utilize their expertise to help determine what risks they foresee within a project?

That’s right, part of project risk management is asking your team for their input. As a project manager, you should be willing to accept feedback, especially when it comes to something as potentially detrimental as project risks.

Ask your team members what risks they foresee not only within their own tasks and responsibilities but within the project as a whole. The more minds you have working on risk management, the more likely you will catch problems before they become an issue.

3. Track risks

It’s one thing to know your risks, but it’s another thing to track them. Tracking potential risks helps you to keep an eye on them throughout the project life cycle. 

When you track risks, you can also denote their level of priority. For example, you might consider a budget more important than a specific deadline.

It’s easier to track risks if you’re not the only one keeping an eye on them. Encourage your project team members to speak up when they think something is going to be an issue. This will help you catch something you may otherwise not have insight into.

4. Create a plan

A risk management plan is the course of action you will take should potential problems become a reality. This can mean sitting down and creating a solution to each singular issue that could arise. It could also mean creating more generalized plans of action should things go wrong. 

A proper risk management plan will denote the difference between negative and positive risks. Yes, some risks can be positive, such as a policy change that benefits the project or a grant applied for that may be passed.

Positive risk or opportunity risk is anything that goes outside of the plan but affects your success positively. These help the project and should be considered as you track and monitor risks.

5. Monitor and respond to risk

Once you’ve determined all potential risks and have executed the project, it’s time to keep an eye on the tracking strategies you put in place and respond to risks when necessary. In other words, the final step is just to put your plan into action.

While it can feel scary, you’ve prepared for this. Nothing should come as a surprise, and you should feel ready to take on whatever comes your way.

Calculate before you create

As I said before, there is an inherent risk in everything. Even trying a new recipe can be dicey. But if you have a well-thought-out plan that catches risk before it becomes a problem, you should have no fear of failure. The risk is worth the reward. 

Are you interested in discovering whether a project is right for your team right now? Learn how to conduct a feasibility study.  

This article was originally published in 2019. The content has been updated with new information.