Best Practices

Project Risk Management: What Is It & How Do You Manage It

Jonathan Friedman
March 17, 2021
Project Risk Management: What Is It & How Do You Manage It

Only 29% of projects are finished on time, and 54% of projects go over budget. Yet, only 60% of companies conduct any project risk management before starting a project.

If you're also experiencing problems managing your company's risk, you need to get a handle on the problem. Ignoring risk isn't an option for a company looking to stay safe and secure.

So, you need to learn about project risk management. Understanding how to account for, control, and minimize risk is vital to protect future projects.

Below is everything we will cover. Feel free to skip ahead.

What is risk management in project management?

Project risk management involves identifying, analyzing, and responding to any of the risks you may encounter when working on a project. By managing risks successfully, you'll help the project stay on the schedule that it was meant to stay on. Plus, you'll have a better chance of meeting the goals associated with the project.

It would be best to make risk management a part of every project you plan. Risk management isn't something that you should wait for.

It has to be included in the plans ahead of time. Otherwise, you could be missing essential details in your project plan.

What is a risk?

If you've never performed project risk management, you might not know precisely what counts as a risk. To clarify, the risk is anything that may (or may not) impact your project's budget, timeline, or performance. 

Keep in mind that risks are things that may impact your project. They may or may not cause any damage, but these are still things that you should look out for.

With smaller projects, risk identification and management are not extensive (although still essential). The larger the project, the more comprehensive and complicated the risk management strategy. Ensure that you're developing a risk management strategy that matches the project's size and goals you're trying to protect.

What is the difference between a "Risk" and an "Issue?"

A risk is a potential problem that may affect your project. An issue is something that has affected your project in some way.

This means that risk becomes an issue when the risk affects the project. Therefore, project risk management is the process of identifying, analyzing, and responding to risks before they become issues.

Once you have an issue on hand, it's more challenging to fix the problem and contain any damage that that issue may cause. In turn, preventing an issue by paying attention to risk is easier to manage.

Types of risk in project management

Because all projects have the same basic outline, there are common types of risk in project management. Below are the most common types.


Types of risk in project management


Larger projects may have other risks involved, but these are the main three types of risks to keep an eye on with any project.

If you're looking at more extensive projects, you should break down your project's components to discover other potential kinds of risks. Here, we've broken down money, timing, and goals (all projects should deal with).

1. Cost risk

A cost risk is any risk that may cause a detriment to a project's budget. If you fear that a project may go over budget, you're facing a cost risk.

The most common kind of cost risk is budget underestimation. As a result, those who composed the budget via cost estimations undershot how much each task within a project would cost.

Cost risks could also happen if a project required more work than the team expected. More work equals more money. That means that the budget is being put into jeopardy yet again.

A cost risk becomes a cost issue when the overall budget is reached too early in the project's timeline. You have a cost risk when you go over budget on the project element, to be precise. You have a cost issue if you meet or exceed the project's budget and start pulling funding from external sources.

2. Schedule risk

Schedule risk is any risk that poses a threat to the project's timeline. This refers to anything that may cause a delay in the project's timeline.

Sometimes, employees cause delays by not completing tasks on time. In other times, higherups cause delays because they didn't give enough time for a task. Unexpected problems delay the project.

Whatever it is, many things can cause delays in a scheduling plan. The best way to negate this is by leaving plenty of room in the schedule and communicating the schedule's expectations with your team.

3. Performance risk

Performance risk is any risk that may affect the project's outcome. As we stated, every project should have goals that the team set. If something threatens to throw those goals off course, you have a performance risk.

Performance risk is a more abstract concept than cost risk or schedule risk. Because goals tend to be less concrete than time and budgets, it is harder for teams to recognize when a plan is being thrown off track.

The best way to fix this problem is to have concrete, SMART goals that you can measure just like time and money. The more quickly you can measure your goals, the more easily you can identify your risk.

Project risk management process

If you want to prevent a risk from becoming an issue, you should follow the project risk management process's six steps. Each step can help you identify, understand, and respond to any threat that may come to your project.

Make sure to follow each step intentionally, as this makes a difference in your overall project management process. You'll find that you're discovering and beating out risks faster and more quickly if you're paying attention to every step.

Project risk management process

1. Identify the risk

The first step in your project risk management process is identifying any potential risks your project may have. You need to discover and pin down any risk that could cause an issue in your project from money to time.

Don't try to solve a problem without identifying the potential issue first. You could end up causing more problems that way. Use the following techniques to identify risks if you're having trouble getting started:

  1. Break your organization down by its different categories (competitive, financial, safety, operational, technological, legal, political, reputational, etc.).
  2. Think pessimistically to find the worst things that could happen.
  3. Consult an expert to see if he/she can find a risk to your company.
  4. Ask employees that work closely with the systems that you're worried about whether or not they suspect any risk.
  5. Research risks that companies like yours have dealt with before.
  6. Consistently ask all of your employees for their feedback.
  7. Look through customer complaints that your company receives.
  8. Use models or software to identify and negate risks.

As you're trying to find potential risks, you should make sure to look at a problem forwards and backward. By playing out all of the possible scenarios in your head, you can get on top of any potential risk.

As you're building your list of potential issues, which is called a risk register, you should make sure that you're only writing down potential problems. Don't write down random occurrences. Ensure that every risk you've noted has a root cause that you can look towards when responding to the risk in the future.

2. Analyze the risk

Now that you've got a potentially long list of potential risks to your project, your next step in the project risk management process is to analyze how much of a risk each item you noted truly is. As you're analyzing each possible event, you should note the risk of your risk register with the list of potential problems you identified.

Most companies have a system, an algorithm, or some other database for determining the risk that a specific factor brings upon a project. However, you could analyze risk yourself if you don't have this kind of database to work with.

All you need to do is figure out how the risk you've identified may affect your project. This includes placing in what ways the risk may affect your project.

If a risk may affect your project's cost and timing, that is riskier than a risk that only affects your project's timing.

As you go down the list and identify the potential outcomes of different risks, you can prioritize those risks. We recommend sticking to a simple ranking system that can separate levels of risk, such as labeling various risks "high risk," "medium risk," or "low risk."

3. Prioritize the risk

If you followed the step before this one, you have composed a ready list for you to prioritize. As a result, the next step in your project risk management process is to identify potential outcomes and potential issues that come with each kind of risk you've identified.


Now, you've got to rank those risks based on how much they may harm the project. Go through your "high risk," "medium risk," and "low risk" categories and rank each risk within the category.

By ranking each risk individually, you know which risks you need to focus on more than others. The chances that are at the top of your list deserve the most attention and the most resources in preventing them.

This being said, there's no way to stop all of the risks towards a project. There are some risks that you may deem as acceptable losses.

For example, you might not care about the project's timing as much as the budget. Therefore, you may not care about a risk that knocks the timeline off one day.

The prioritization process is different for every company and every project because it depends so heavily on what the team cares about at that moment.

4. Own the risk

Now that you know which risks you're going to try to get rid of, your next step in the project risk management process is to assign an owner to those risks. The owner of the risk is the one that is supposed to make sure that the team avoids that risk at all costs.


When you're assigning risks to a particular team member, you need to consider the team member's strengths and weaknesses. If you have someone with an accounting background, you should assign them to risks that may affect a particular project's budget.

By assigning every risk to an individual, you're making sure that those people account for those risks. This leaves no box unchecked. Plus, these individuals can get ready to face an issue if the risk does bring about a problem with the project.

5. Respond to the risk

Once you've assigned the risks to each person, those people should develop backup plans if and when those risks become issues. If they set the plan ahead of time, they'll know exactly what to do if the risk presents a problem.

All you have to do is implement the plan once the person assigned to a risk identifies that it has now become an issue.

6. Monitor the risk

Once you've put a plan in place following a risk becoming an issue, your last step in the project risk management process is to continue monitoring it. As the team member assigned to the issue (previously, a risk) monitors its progress, other team members should keep their eyes on their risks. This ensures that more risks don't become issues.

By monitoring the issue's progress, your teammate ensures that (1) the issue isn't wholly harming the project's progression and (2) the plan you all made to solve the issue was effective.

What is negative risk?

When you think of project risk, a negative risk is probably the kind you were thinking of. When it comes to project management, negative risks include losing data, finishing late, or going over budget.

These are some of the common fears that project risk managers face on a day-to-day basis.

In general, a negative risk is something that negatively impacts your project. Whether it's money, lack of accountability, or some other measurement, a negative risk may cause bad changes to these measurements. This includes spending too much money, taking too much time, and more.

How do I respond to negative risk?

No one likes negative risks. Therefore, responding to negative risks involves avoiding them and mitigating their situations.

If the risk doesn't exist, then there is no negative outcome to worry about.

What is positive risk?

There can be positive changes when it comes to changes in your project's budget or schedule. If you're not following the budget, this could be because you're spending less money than you need to. Likewise, with time, you could finish faster than you anticipated.

These are positive outcomes that could happen because of positive risks. Maybe an item that you need for the project went on sale. Perhaps a team member finished their tasks earlier.

Whatever it is, a positive risk may positively impact your project.

How do I respond to positive risk?

Positive risk is good. It means that your machine is running better than you may have anticipated.

However, if you encounter a certain kind of positive risk repeatedly, this may mean that your planning team is not accounting for something. This could be a team member who works quickly, a new discount that employees get on material that you frequently use in your projects, or other recurring factors.

It's good to have positive risk, but you don't want to misrepresent what your team is capable of. It's good to have deadlines that your team has to strive to meet. In fact, this can be great for team-building.

Should I tell others about project risks?

  

If you're working with the team, your team needs to know about the risks you're identifying, as many project managers are. Not only should they be aware of the risks so that they can help identify and mitigate them, but it's also crucial for them to know about the risks so that the team is motivated to get rid of them.

By making all of your team members involved, you'll be more likely to catch risks, mitigate those risks, and identify future risks.

How do I reduce and manage risk in projects?

The more you work with project risk management, the more you'll learn about efficient project management. You'll want to work to get rid of as many risks as possible.

Risks are normal, but that doesn't mean that you want a long list of them for every single project that your team has.

That's why we've composed a few tips for project risk management to help you reduce the risks that your team will have to juggle. The fewer risks you and your team have the account for, the less likely the existing risks will turn into issues.

1. Make a risk management plan

Every project team needs to have a risk management plan. This is an essential piece of documentation that you should run through before starting any project together.

In this document, you should detail every aspect and step of how your team is expected to address every project's risks. This may include the following factors:

By writing down these expectations, you're (1) creating a cross-functional team for your projects and (2) laying everything out before the project even starts.

2. Keep your risk register updated

You'll likely find more and more risks as you go through your project. Some risks won't even become noticeable until you or one of your teammates notices something while working on the project.

That's why you should keep your risk register updated. If you remember, the risk register is the list of all of the risks your team needs to keep an eye on while working on a particular project. This list also includes the perceived level of risk for each of your listed risks.

3. Understand your potential risks

To truly look at your project's risks, you need to understand each risk to its entity. Don't put any of the following kinds of risks on your risk register:

None of these are actual risks. They are events that could happen, but they aren't risks.

Risks could happen even if every other planned event goes right. If you're counting every little thing that could go wrong during the project's duration, you're adding unnecessary worries to your list.

4. Choose proactivity over reactivity

Don't address a risk once it's happened. Instead, look at how you can prevent a risk from happening in the first place.

The more time and energy you spend on managing risks before they become issues, the better your team will be if and when something goes awry. You'll also be able to reduce the probability of a risk happening if you approach the risk early.

5. Continue improving your project management methods

As you practice and get better over time, you'll build your project management skills, learn better fighting methods, and prevent risks. Nothing replaces experience.

So, don't give up now. There's always more for you to learn. Soon, you'll be passing your expertise on to the next person. 

Conclusion

One of the best tips for project risk management that we can give you is to organize your project step by step. By laying everything out, you and your team members will see signs of risks before they become issues.

Check out our project management software today and see how it changes your tactics.