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Managing Project Risk

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Contents

1. Inroduction

2. Steps of Project Risk Management

3. Risk Management Tools

4. Associated Articles

5. Reference Documentatioun

6. Breaking a Project into Smaller Constructable Sections (If required)

7. Glossary

    Managing Project Risks Transportation Project Classification
    Capital Improvement Projects Safety Projects Asset Management Projects Maintenance Projects
    1. Introduction x x x x
    2. Steps of Project Risk Management x x x x
    2.1 Identifying Risk x x x x
    2.2 Analyzing Risk x x x x
    2.3 Prioritizing Risk x x x x
    2.4 Assign Ownership x x x x
    2.5 Risk Response x x x x
    2.6 Monitoring and Control x x x x
    3. Risk Management Tools x x x x
    x = Information from the topic may be applicable for the project classification.

    1. Introduction

    The one constant in transportation project management is risk. Risks are uncertain positive or negative events that can affect project delivery. While risks may never materialize, project managers (PMs) and project development teams (PDTs) need a good understanding of what risks could impact different facets of project work and their effects on project delivery. Project risks can affect quality (e.g., of solutions or deliverables), schedules, and/or budgets. Risks that produce negative outcomes can lead to a project’s failure if they are not managed properly. Typically, risks are greater at the beginning of a project because there are more unknowns. As the project progresses, the accuracy of the budget, scope, and schedule increases, which in turn lowers risk (Figure 1).

    Project Risk – An uncertain event or condition that could arise and change the outcome of a project, for better or for worse.  It may be a positive or negative effect on the objectives of the planned work (Project Management Institute, 2004).

    Figure 1 Relationship Between Risk; Accuracy of Budget, Scope, and Schedule; and the Project Timeline

    Figure 1 Relationship Between Risk; Accuracy of Budget, Scope, and Schedule; and the Project Timeline

    The goal of risk management is to deliver a successful project. Even though KYTC does not have a formalized risk management process, the benefits of risk management far exceed the resources needed to identify and manage risk. All projectsMa can benefit from sound risk management.

    To get the most out of risk management processes, PMs and PDTs need to remain focused on project objectives related to scope, schedule, cost, and quality. PMs and PDTs should tailor risk management strategies to project complexity and budget. Complex projects with larger budgets may need more formalized risk planning and documentation.

    This article reviews the tools and procedures PDTs can leverage to minimize project risk. For additional information on the systematic evaluation of risk and strategies for eliminating, minimizing, or mitigating the impacts of risks, consult Waddle et al.’s (2022) report Risk-Based Project Development. This report also contains practical knowledge and tools for implementing risk-based project development.

    2. Steps of Project Risk Management

    PMs can adopt an ongoing risk management process to identify, understand, and respond to negative risks (i.e., threats) and positive risks (i.e., opportunities). Before implementing this process, however, it is important to fully understand KYTC’s practices and how risk management will be conducted for a project. A risk management plan typically has the following steps:

    • Identify risks that could potentially impact the project.
    • Analyzeeach risk to understand contributing factors and potential impacts. Consider the breadth and depth of each threat at this stage to evaluate the severity of each risk in the context of the overall project.
    • Prioritizeproject risks according to urgency, probability, and the severity of their impact(s).
    • Assign Risk Oversight for each identified risk to a PDT member. They will be responsible for addressing that threat or opportunity.
    • Respond to risks to prevent them or minimize and mitigate their impacts.
    • Monitor project risks.

    2.1 Indentifying Risk

    PMs and PDTs need to identify both positive and negative risks. Risks are often perceived as negative or threats (e.g., delay in permit approval), but there are also positive risks or opportunities (e.g., benefiting from a policy change or becoming more efficient with a new technology).

    One way to get a handle on how risk is distributed throughout project development is to break down the project development process into small pieces (or activities) and identify the risks associated with each. PMs should ask all PDT members who have expertise in each of these activities to estimate the likelihood of individual risk materializing and the potential negative (or positive) consequences. A good starting point is identifying risks that impacted previous projects which had a similar scope.

    PDTs need to document risks that could impact the project scope, budget, schedule, quality, and/or commitments. Information collected for each risk may include:

    • Characteristics
    • Potential impacts on scope, cost, schedule, quality, and/or commitments
    • Risk triggers

    Red Flags, including environmental and engineering issues, are location of concern within the study area.

    KYTC often uses the term Red Flags to indicate a potential risk. Red Flags do not necessarily identify locations that must be avoided. Rather, they are locations that entail additional study, coordination, design, right of way, utility relocation, or construction costs. Locations that must be avoided are referred to as fatal flaws.Project location or activity that must be avoided due to the negative impacts it would have on the project.The PM should consult with appropriate subject-matter experts (SMEs) to determine the level of concern for each Red Flag item. Environmental Red Flags and design challenges are often identified in planning and Data Needs Analysis (DNA) studies.

    Appendix 2a of Waddle et al.’s (2022) Risk-Based Project Development lists risks that could affect road projects and what areas they can impact (e.g., scope, cost, schedule, quality).

    2.2 Analyzing Risk

    During risk analysis PMs and PDTs use data on risk probabilities and consequences to determine how risk could influence budgets and schedules. Qualitative risk analysis is reserved for less expensive, less complex projects or to perform an initial screening on projects that would benefit from an in-depth quantitative analysis later in the development process. Beyond analyzing risks individually, PDTs need to consider how risks relate to one another and how individual risks can offset or increase one another’s impacts. Table 1 lists common risk assessment methods.

    Table 1 Risk Assessment Methods for Road Projects
    Qualitative and Quantitative Methods
    Qualitative Quantitative
  1. Brainstorming and project team meetings
  2. Use of simple scales (e.g., 1 – 5; Low, Medium, High) to rate risk probability and impacts
  3. Development of risk matrices to characterize outcomes
  4. Interviews and SME input
  5. Cost Risk Assessment and Cost Estimate Validation workshops
  6. Monte Carlo simulations
  7. Sufficient and appropriate sight distances are provided throughout the project corridor.
    • Probabilistic calculations that use random numbers to draw samples from probability distributions
  8. Probability trees and decision trees
    • Diagrams that show the effects of a sequence of multiple events
  9. Tornado diagrams
    • Diagrams that show the effects of a sequence of multiple events

    Source: Molenaar et al. (2006)

    Documenting risk information in a matrix can help PMs prioritize risks and create a risk management plan that allocates the correct resources and includes appropriate strategies to properly mitigate risks.

    2.3 Prioritizing Risk

    Based on qualitative and/or quantitative analysis, PMs should develop lists that prioritize each risk. If qualitative risk matrices are used, priorities can be assigned based on where risks are located in a matrix (Figure 2). Risks are often prioritized in order of importance by focusing on:

    • Risks that would have the greatest impact on the project
    • Risks that have a higher likelihood of occurring
    Figure 2 Sample Risk Matrix

    Figure 2 Sample Risk Matrix

    PMs and PDTs should be attentive to risk sequencing (i.e., upstream and downstream effects of risk on project development), risk interdependencies (e.g., if one risk materializes does it make other risks more or less likely to occur), and overall impacts (Waddle et al. 2022).

    Attempting to avoid all or most risks raises project costs and typically extends delivery timelines. A key part of project risk management is identifying which risks to focus on. Trying to perfect projects or plan sets raises costs and draws out schedules. Attaining perfection is impossible. As such, PMs and PDTs need to be aware that increasing efforts to avoid all or most risks results in diminishing returns.  Further activity becomes increasingly inefficient and yields few returns.

    2.4 Assign Risk Oversight

    When PMs build their PDTs, they need to include SMEs who will help them identify, monitor, and address risks (see the PMGB article Assembling a Project Development Team). PMs need input from SMEs on topics that have a critical impact on project risk. SMEs ultimately need to reach a consensus estimating the impact of a risk and how to address it.

    2.5 Risk Response

    Risk analysis and risk prioritization inform risk response planning and helps PDTs determine what type of strategy is best suited for handling each risk. For threats (i.e., negative risks) teams must decide whether to (a) avoid, (b) transfer, or (c) mitigate the risk (Waddle et al. 2022):

    • Avoid — Eliminate the risk trigger or adjust project execution to prevent confronting the risk.
    • Transfer — Shift management of the risk to a third party (e.g., a contractor). This may involve a financial commitment, potentially increasing project costs. However, in some cases a third party is more capable of handling the risk and is the best option.
    • Mitigate — Reduce the probability and/or impact of a risk to a specified threshold. This can require additional resource allocations (e.g., staff time, funding).

    For opportunities (i.e., positive risks) teams have to decide whether to (a) exploit, (b) share, or (c) enhance the risk:

    • Exploit — Do everything possible to realize the opportunity as it will benefit the project.
    • Share — Transfer risk ownership to a third party best positioned to maximize the benefits of a risk if it occurs.
    • Enhance — Pursue actions to increase the probability and/or impact of a risk event.

    Another option for both threats and opportunities is acceptance. This is the acknowledgement of a risk without taking immediate action to deal with it — Risks will be handled when they arise.

    PMs should work with the PDT to develop actions or strategies to address each risk. This can be documented in a risk management plan or a risk register. If a risk could significantly increase the project cost or extend the project timeline, the PM should inform KYTC leadership.

    2.6 Monitoring and Control

    Monitoring and control of risk involves:

    • Tracking and documenting response actions taken and their outcomes
    • Evaluating residual risks following responses
    • Identifying new risks
    • Assessing if risk profiles have changed
    • Communicating updates to stakeholders

    The PM is responsible for monitoring risks and reassessing and evaluating a project’s status to know where it is in the project development processes. Ultimately, it falls to the PM to keep a project moving forward. An example of risk monitoring is displayed in Figure 3.

    Figure 3 Monitoring Risk
    Risk Response Strategy Response Actions Responsibility Interval or Milestone Check
    Unexpected geotechnical issues at bridge piers Assessment—high Mitigation The team will conduct further soils exploration and consider alternative pier designs. Project team lead Soil exploration complete Initial pier design complete
    Landowners unwilling to sell at US 555–SH 111 junction Assessment—high Avoidance The team will attempt to design around areas where right-of-way may be an issue. Right-of-way lead Alignment complete
    Local communities pose objections Assessment—medium Mitigation The team will conduct an aggressive public information campaign and inform the public about the safety and efficiency benefits of the project. Public information lead Monthly
    Too many projects in the region for QDOT staff Assessment—medium Acceptance The team will attempt to design the project with agency staff and accept a longer design schedule. Region executive management Monthly

    Figure 3 Monitoring Risk (Molenaar et al., 2006, p30)

    3. Risk Management Tools

    Several tools can help PMs and PDTs identify, document, and monitor risks, including the Excel-based Risk-Based Project Development Excel Tool. After users input the project type, the tool identifies potential risks and strategies for Key Decision Points and Key Execution Points in Project Development. Critical Path MethodIdentifies project tasks, their time for completion, and their dependence on other tasks. The critical path is the longest sequence of activities that must be completed on time for the project to be complete. diagrams can also help PMs monitor risks to the schedule.

    A risk management register lists all the potential risks that could occur during the project execution phase as well as critical information about each. FHWA provides a risk management register template on its website.

    4. Associated Articles

    Project Management Guidebook Intro and Overview

    Project Management Guidebook Assembling a Project Development Team

    Knowledge Book – Time Management for Highway Project Development

    5. Reference Documentation

    KYTC’s Highway Design Manual

    KYTC’s Environmental Analysis Guidance Manual

    Molenaar, K., Diekmann, J., and Ashley, D. (2006). Guide to Risk Assessment and Allocation for Highway Construction Management. Report #FHWA-PL-06-032, Federal Highway Administration, Washington, DC.

    Project Management Institute. (2004). A Guide to Project Management Body of Knowledge (PMBOK® Guide). Project Management Institute, Newton Square, PA.

    Waddle, S., Li, Y., and Van Dyke, C. (2022). Risk-Based Project Development, KTC-22-13/SPR21-609-1F, Kentucky Transportation Center. https://doi.org/10.13023/ktc.rr.2022.13

    Glossary

    The full definitions for terms included in this article (listed below) can be found in the HKP Glossary.

    • Project Risk
    • Red Flags
    • Fatal Flaw
    • Risk Matrix
    • Critical Path Method Diagram
    • Monte Carlo Simulations
    • Tornado Diagram
    • Risk Management Register

    Project Management Guidebook Knowledge Book:

    Access the complete Knowledge Book here:  Project Management Guidebook

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