Developing Project Plan: Risk Considerations

Submitted by Katie.Koukouli… on Tue, 10/11/2022 - 12:20

When developing a project plan by setting project goals and objectives, deliverables and other elements including stakeholders mentioned earlier, it is important also to identify potential risks.

This includes having a risk management strategy to support the project plan.

By the end of this topic, you will understand:

  • What risk and risk objectives are
  • How to identify project risk in context to the risk management process
  • How to identify project risk by using valid and reliable methods.
Sub Topics

Effective risk management enables project teams to fix problems before they eventuate. Although technical challenges are a primary concern, risk management must consider all internal and external sources of expense, scheduling and technical risk. Early risk identification is critical because it can be quicker, less expensive and less disruptive to adjust and correct work efforts during the earlier phases of the project rather than later.

Risk Objectives

The aim of risk management is to detect potential issues before they arise to schedule and invoke risk management activities to minimise adverse impacts on the project throughout its life. Risk management should fix problems that may jeopardise the achievement of project goals. A continuous risk management approach is used to efficiently predict and mitigate the risks that have a vital impact on the project.

How to Identify Project Risk

There are two main two stakeholder groups that are consulted to identify project risk:

Internal stakeholders

  • top management
  • the project team
  • resource managers
  • internal customers

External stakeholders

  • external customers
  • government
  • contractors
  • sub-contractors
  • suppliers

Types of Project Risks

There are several types of risks that can emerge in projects.

  • Risks include:
    • Technical risk
    • Financial
    • Operational
    • Safety
    • Functional
    • Reputational
    • Legal

Typically, the areas to focus on include budget, quality, scope and reputation. When a project is running over budget due to going outside the scope. it can have severe impacts on financial resources. When a tradeoff is made between cost and quality, where quality is compromised, this may also affect the reputation of the organisation.

Ways to Identify Risks Project risk can be identified using different techniques (including: interviews, brainstorming, checklists, analysis and diagramming) summarised below:

Interviews are undertaken with main stakeholders. Each interview must be planned out with specific questions and the results of the interview should be recorded.
Brainstorming is used to identify risks in advance. Questions are posed to a group or team and then the results are documented. Questions may relate to project purpose, timeline, budget, quality or scope.
Checklist are used to identify the most common risks. They are often updated at the end of a project to include lessons learnt. Checklists are a quick and effective way to address standard risks but do not record specific risks that may not have been addressed in the past or are unique to a specific project.
Assumptions are necessities within the project that are often not outlined in project objectives. A lack of documentation around assumptions are often sources of risks within a project. These include the availability of project members, the skills that project members hold, vendor delivery times or the realisation that project schedule dates may change.
Cause and Effect diagrams are a visual tool used to identify the causes of risk and the facts that can give rise to risks. One form of a Cause and Effect is a fishbone diagram, as shown here.

A diagram depicting cause and effect fish bone

There are various ways to identify or detect project risks either in the planning phase or as a project goes live. At the planning stage, we can use tools like SWOT analysis where the threats would be possible risk factors. During project rollout, analysing, monitoring and reporting risk fits with the risk strategy and management plan. Some ways to identify risk include:

  • Accessing experience from past and similar projects
  • Ensuring ongoing consultation and communication with subject matter experts or key knowledge holders Initiating problem-solving sessions with key stakeholders
  • Undertaking premortem scenarios—the scenarios envisage how a project might roll out and anticipated problems or risks to then develop strategies to offset these problems or risks
  • Observational techniques

A risk register can be a useful scenario tool to assist in analysing foreseeable risk.

Further Reading

View an example of a risk register template from Stakeholder Map: ‘Risk Management, Risk Analysis, Templates and Advice’

Risk Management Standards

Risk management standards help organisations to implement strategies that are tried and tested, and proven to figure.

Types of Risk Management Standards

The ISO 31000 risk management standards framework (ISO Guide 73:2009) includes:

  • ISO 31000:2009 Principles and guidelines on implementation
  • ISO/IEC 31010: 2009 Risk management - risk Assessment techniques
  • ISO Guide 73:2009 Risk management - vocabulary

These ISO standards are designed to guide organisations on various strands of risk management. The risk management standards are produced by a number of organisations worldwide.

Further Reading

To access the risk management standards produced by various organisations, you can visit the relevant website. For example, FERMA risk management standard is available via the FERMA website: ‘Federation of European Risk Management Associations’.

A diagram depicting risk management

Project risk management deals with the processes involved in identifying, evaluating and reviewing possible risks, and ultimately, tracking them over the life of a project. Each project has different risks based on the specifics of the work being conducted.

You may not anticipate all potential risks, but planning for as many as possible gives you the greatest chance of success.

A diagram depicting potential risk management

A risk management plan is made up of the following components:

  • Project Background
  • Methodology
  • Roles and responsibilities
  • Timing
  • Risk categories and definitions
  • Risk attitude, appetite, and tolerance
  • Reporting formats

Risk management plans help minimise the impacts of risk and include information gathered from other project management documents such as budgets, schedule activities, risk categories, the probability and impact matrix, and stakeholders’ risk tolerances.

Further Reading

To learn more about Risk Management Plans, read the following article by Harry Hall on the Project Risk Coach website: ‘How to Create a Project Risk Management Plan’

The risk management plan needs to be distributed to relevant parties; in many companies, this is done via a computerised system. Since a part of your risk factors will include the likelihood of something happening to the company’s computer systems, you ought to also ensure that hard copies are created and stored.

Now that you have everyone coming to the same place to receive their copies of the risk management plan, your next step is to keep an accurate log of who has those copies. This log should contain a minimum of:

  • Person’s name
  • Title
  • Department
  • Phone number or extension
  • Office location.

Project Background

creative team working on laptop

Describe how your project supports your company’s strategic plan and why the project is important. Is this project like other projects the company has completed in the past or is this project out of the ordinary (and therefore riskier)? How complex is the project? What parts of the project are the riskiest? How much experience does the team have in managing risks?

Risk Management Considerations in Projects

There are various approaches and methods used to address risk within projects. Project plans need to detail how risk management functions will be allocated across the project including identifying clear roles and responsibilities.

Being time-bound, projects require risk management activities and responsibilities to be included in charts including scheduling of risk-related matters into project meetings.

Project management requires risk analysis including categorising and defining likely types of risks that could impact a project. A detailed list of the risk categories can be included in the risk management plan including information on assumptions made about the probability or likelihood of a risk event occurring.

Projects vary; it may be a new initiative not previously undertaken or an ongoing project where there is sufficient knowledge and experience, so it is relatively straightforward to manage. If projects are not new or complex, then perhaps the risk appetite will see a higher tolerance and accept a level of risk in contrast with a new project with a large stakeholder investment.

High investment and complex projects often see a lower risk appetite (risk averse) and often a project risk is either transferred to other parties or the project is stalled or ceased through being starved of funds, known as budget decrement. If stakeholders do not want to be associated with a project failure, they may cut their losses.

The importance of risk in projects means regular reporting is necessary. Organisations usually have pre-existing templates and reporting on project risks is factored into the project schedule.

The development of a budget involves forecasting and preparing for risks that can affect the project. A finance officer estimates the potential factors that could impact a project and adopts a budget that enables the successful completion of the project. Dynamic Tools are online software programs that collate information to forecast risk using statistical data and spreadsheets. Consultation with a finance officer and application of budgeting software allows strategic planning and modelling of the project to forecast and budget for project costs

Further Reading

Compare budgeting and forecasting software on the Software Advice website: ‘Budgeting and Forecasting Software’

Project cost estimation is a complex process that needs to forecast risks and adequately allocate finance to each task within the project lifecycle. Resource requirements muse be investigated when estimating project costs. Project cost estimation techniques assist the process of accurate cost estimation and allow for variations during the project lifecycle. Project cost estimation techniques include:

Uses relevant historical data to identify precedents to predict future costs
Uses statistical or parametric data to identify the key drivers and calculate the impact that changes have on the project cost
Estimates the cost of individual tasks and calculates the overall cost of the project
Presents three project scenarios (most likely, optimistic and pessimistic) that are calculated in an equation to develop an estimated cost
Determines the degree of contingency allocated to the budget in an effort to address uncertainties in the project
Quantifies quality-related costs in the project. There are four costs of quality: prevention, appraisal, internal failure and external failure

Video

Watch the following YouTube video from Online PM Courses for more information on estimating project costs: ‘How to Estimate Project Costs: A Method for Cost Estimation’.

Project cost estimation is a complex process that requires thorough investigation to calculate realistic and achievable financial parameters over the life of the project. Effective project budgeting facilitates the successful completion of the project without tying up or depleting valuable business funds.

Project Budget Development

All projects require a budget to manage and maximise funds. Large and complex projects can be costly and resource-intensive, especially in time and money. Project managers use budgets to monitor and control project costs, from inception to completion. However, even the most well-defined plans are subject to change. For this reason, project budgets must have provision to adapt or change in response to project needs.

Further Reading

Download an eBook on project budgets from Forecast: ‘Creating a Project Budget’

Factors to consider in developing a project budget include:

Predict the cost of completing a project. The three types of cost estimation are order of magnitude, budget and definitive estimates.
Money set aside for unforeseen circumstances that may occur during the project lifecycle. Calculate budget contingency by using risk analysis or historical data. Otherwise, a contingency of 10% is acceptable.
The process of tracking costs over the project’s lifespan. Monitoring helps keep the project within the allocated budget and identifies if any funding adjustments need to occur

Video

Watch the following YouTube video from Project Management Videos to learn more about project budgets: ‘How to Create a Project Budget’

How to Create a Project Budget - Project Management Training - YouTube

Cost Management Plan

An essential aspect of any project is cost and budgeting. A cost management plan provides the financial requirements for the project: How much money is required; when it is needed; what it is allocated for; and when it will be spent. The purpose of the cost management plan is to manage and control project finances through resource planning, cost estimates and budgets.

The development of an effective cost management plan should include accurate estimation and budget tolerance. Accurate estimate informs budget planning by forecasting and budgeting for potential risks. When risks do occur, a budget tolerance—which is usually 10% of the overall project budget—enables the project manager to make timely cost adjustments. The budget tolerance is agreed at the onset of the project and saves valuable time during the project lifecycle.

Every business has a cash cycle that consists of four phases: Financing, Investing, Operating and Returning. This process is how a company acquires finance to commence, invests funds to develop and operate, and returns the money it owes to creditors and investors.

Create a Cost Management Plan

woman writing with computer
Application of a Work Breakdown Structure to define the hierarchy of the project and its deliverables. Shows where the greatest expenses occur in the project lifecycle. Iterative process that evolves during the project lifecycle.
Different techniques estimate the overall project costs: concept goals, historical data, expert analysis and determinative methods.
A detailed account of cost and allocation for a project. Released in phases to ensure the project achieves its milestones for each budgetary phase.
A benchmark that measures the dollar value performance against the total cost and timeline throughout the project lifecycle.

The cost management plan needs to consider these four phases to build a strategy for the project budget. Types of costs include direct (related to a project budget) and indirect costs (other costs that need to be budgeted for but are not directly related to a project). An example of an indirect cost might be allocating costs for other staff such as HR personnel.

Cost management—also known as cost transparency, cost accounting or spend management—is the primary factor for business success or failure. Funds need allocation at the right time, and in the right amounts, for successful cost management. The cost management plan guides the project management team to manage the project cost-effectively. Documenting project expenses throughout the project lifecycle will assist in managing project costs to ensure project completion within the allocated budget and timeframe.

Project Plan and Project Management Tools

The project management plan is a combination of details including scope, time, budget, resources, quality and performance, milestones and risk planning. These documents can include, scope management plan, work breakdown structure (WBS) for scope management, Gantt chart for time management, and a risk and quality management plan. Project management tools are aids to assist an individual or team to effectively organise work and manage projects and tasks. The term usually refers to project management software you can purchase online or even use for free. Industry current, project management tools include: Wrike Smartsheet.

Developing Project Plans

To develop project plans, follow these six steps:

A diagram depicting developing project plans
Further Reading

The following is a comprehensive guide to the fundamentals of project management from Wrike: ‘Project Management Guide’

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