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Project Risk and Uncertainty

It is clear from the literature that not everyone has the same level of understanding about the concept of project risk. A major confusion lies in the difference in meanings of uncertainty and risk.

PROBABILITY-BASED APPROACH

Garratt (2007) provided a distinction between uncertainty and risk by referring to the presence or absence of probability. With risk, different outcomes can be estimated according to their probability. For uncertainty, the probabilities themselves are unknown. Complicating the distinction is that project risk is also associated with the risk event or condition, the trigger for the event/ condition to occur, and the estimated impact/outcome. The above conceptual complexity is illustrated in the following hypothetical example.

Checklist: Evaluating Perceptions of Project Risk

• Is it accepted that project risk is identified according to a variety of perceptions?

• Is it understood that project risk is not a standalone concept but determined by its issues?

• Is it accepted that project risk is not 'value free'?

• Is the difficulty of estimating risk probabilities and consequences understood?

• Is the customer view of project risk considered?

• Are the various project risk efficiency strategies considered?

• Is the gap narrowed between what is 'known' and 'unknown' about project risk?

Example of Project Risk Event and Characteristics

The project is the development of a new airport terminal and the key objective is to have a smooth opening day. Part of the project was the installation of an automatic baggage handling system, not used before in other airports in the region. Uncertainty therefore exists about this system. One of the risks is the event of the automatic system breaking down. The probability of this occurring is regarded as high because of the adoption of new technology, and so is the impact since baggage would quickly pile up. The risk itself is triggered by the malfunction of the new system which would result in a negative outcome because travellers would feel frustrated and avoid the airport in future. On the other hand, there could be a positive outcome should the risk event not be triggered. In this case travellers would be pleased since the tediousness of baggage handling is replaced by an automated system. Table 7.2 summarises the two scenarios and shows the different outcomes for negative and positive project risk. It also indicates that probability is not associated with uncertainty but with the risk event/condition.

Table 7.2 Risk events and associated risk characteristics

Concept

Description

Project objective

Smooth opening of airport terminal.

Uncertainty

About the automated baggage handling system.

Negative risk event/condition

Automatic baggage handling system breaks down.

Risk trigger

Malfunction of automated baggage handling system.

Probability

High - new technology.

Impact

High - baggage piling up leading to chaos.

Outcome

Value loss - travellers are frustrated by delays and boycott airport in future.

Positive risk event/condition

Automatic baggage handling system works reliably and efficiently.

Risk trigger

Automated baggage handling system operates as planned.

Outcome

Value gain - travellers are pleased by speed of baggage handling and will prefer airport to others.

CRITICISM OF PROBABILITY-BASED APPROACH

The use of 'probability' to distinguish between risk (presence of probability) and uncertainty (absence of probability) has been termed the 'classic' position and ascribed to Knight (1921, referenced in Garratt 2007). However, this position is not universally accepted. Chapman (2006) argued that the modem economist's view is to use the terms risk and uncertainty interchangeably. He dismisses the differentiation by claiming that it 'is simply a question of whether or not this is a useful thing to do' (p. 309). Management would find the task too difficult and should focus on uncertainty first, 'to define expectations' (p. 309), and then consider risks. Chapman (2006) suggested that organisations develop their own processes to managing project uncertainties and risks, based on their experience or knowledge.

Pender (2001) also challenged the underlying assumptions of the probability-based approach to project risk management by pointing out its limitations when applied in practice. He suggested that project management should have a greater awareness of the shortcomings of the theory. He identified the following assumptions and how they are ameliorated in practice:

• Probability theory is based on randomness while projects are consciously planned. There is nothing random in the way humans act and interact when following accepted best practice in developing a project.

• Statistical aggregates do not apply because each project is unique. Statistics are based on repeatable trials or experiments while the experience gained in one project cannot necessarily be repeated in subsequent projects.

• The future is fundamentally unknown and probability cannot be estimated. Uncertainty exists with projects because of variations in future outcomes for which a probability distribution cannot be constructed. Often, 'future states cannot even be imagined let alone be defined' (Pender 2001: 81).

• Human ability to deal with the probability concept is limited by their information processing capability. It is accepted that we have limited capacity to process information beyond 'seven, plus or minus two' items. Hence, '[i]t is often beyond our capacity to comprehend a complete set of future outcomes (as required by the tools of probability)' (Pender 2001: 81).

• Communication about probabilities between humans is weak because of the imprecision of our language. 'Many occurrences on a project are open to elastic interpretation and the consequence of this fuzziness can only be managed by effective and persistent communications' (Pender 2001: 84).

Besner and Hobbs (2012) examined how effectively project managers responded to project uncertainty. While their study showed that there was a positive correlation between the level of project definition and the use of project risk management practices, they argued that management of project uncertainty requires flexibility beyond the techniques that are currently practised by project teams. 'A risk is by definition a foreseeable quantifiable event, risk management is thus not well suited to the task of managing unforeseeable uncertainty, other tools or approaches are needed' (p. 242). They should provide the necessary flexibility to manage uncertainty.

 
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