Menu
Home
Log in / Register
 
Home arrow Business & Finance arrow Project Risk Governance
< Prev   CONTENTS   Next >

Project Risk - A Deeper Perspective

Issues in projects are numerous and interrelated and involve a high degree of subjectiveness in their evaluation. The recent global financial crisis is a good illustration of the impact of risk on these issues. Risk was present in the reckless lending behaviour in the banking sector which, when the risk was triggered, caused millions of mortgage holders to lose substantial sums of money because of the severe devaluations of their real estate. With the benefit of hindsight, many would have wished that they avoided taking out cheap but over-inflated housing loans. The loans were exceeding property valuations and causing foreclosures. The question arises: were the affected mortgage holders aware of the potential risk to their loans and, if so, what was the level of their understanding?

PHENOMENON OR SOCIALLY CONSTRUCTED?

The concept of risk is complex. In respect of its most basic form, Renn (2010) asked the question: is risk a real phenomenon or a social construction? He favours the latter by postulating the view that risk is not an observable phenomenon but originates in the human mind. Risk is created and selected by humans because of their ability to identify risk and to develop an approach to respond to the risk they observe. Ability and response, however, will vary across individuals and even cultures, depending on their perception of risk. Yet risk is integral to all our activities. The OECD refers to this as systemic risk, indicating that risk is embedded in what happens in society, business and so on. It is up to us how we react to the presence of risk; either passively or actively.

POSITIVE AND NEGATIVE PROJECT RISKS

It is usually assumed that risk has a negative connotation; it may be harmful. Negative risk involves understanding potential problems that might occur in the project and how they might impede project success. Negative risk management is like a form of insurance: it is an investment. Countermeasures are identified and funded to avoid or ameliorate such risks. In the previous example of the overseas construction project, the risk manager could have recommended hiring people with overseas project experience to overcome the risk of inexperience.

Positive risks are those that result in good things happening; also called opportunities. The goal of project risk management is to minimise potential negative risks while maximising potential positive risks. A risk strategy for the overseas construction project is to exploit the opportunity to be among the first in the market and hence be awarded further project work in future. The concept of positive risk is generally less well understood, despite the risk/return equation being well-known: the higher the risk the greater the potential return. The payback should be worth the effort and resources put into managing risk. After all, '[undertaking a program is to achieve something new, to take chances, to risk' (Belev 1989:11).

PROJECT RISKS AND BENEFITS

Barkley (2004) identified four scenarios in which the relationship of risk and benefits can be placed. For example, Scenario 2 refers to a situation of high risk but low return and is best suited for research and development projects. The opposite is true for Scenario 3, which is suitable for a project that uses proven technology in order to maximise its returns. The use of Table 7.1 supports the concept of positive risk in that it helps an organisation to identify the type of project most suitable for each type of risk/benefit.

Table 7.1 Project risk/benefit scenarios

Scenario

Project Risk

Project Benefit

Project Suitability

1

high

high

Potential positive risk with a high payoff

2

high

Low

Much uncertainty about the project payoff

3

Low

high

opportunity to make the payoff from the project

4

Low

Low

not worth spending resources on this project

Checklist: Understanding the Nature of Project Risk

• Is the basic definition of project risk understood, viz. an uncertain event or condition?

• Is it accepted that project risk can be controlled and managed?

• Are both internal and external sources of project risks considered?

• is there familiarity with the many types of project risk sources?

• is the concept of the uncertainty spectrum known?

• Is the link between uncertainty and information understood?

• is it accepted that project risk is socially constructed?

• Is it accepted that project risk is embedded in all project activities?

• Is a distinction made between positive and negative project risk?

• Is the relationship between risk and reward understood?

• Are the different degrees of risk/reward identified?

 
Found a mistake? Please highlight the word and press Shift + Enter  
< Prev   CONTENTS   Next >
 
Subjects
Accounting
Business & Finance
Communication
Computer Science
Economics
Education
Engineering
Environment
Geography
Health
History
Language & Literature
Law
Management
Marketing
Philosophy
Political science
Psychology
Religion
Sociology
Travel