Risks in the project: an overview

Know the risks in your project!

Risk management plays an enormously important role in project management. The task here is to identify, analyze, control and ultimately minimize risks. Although some risks can be eliminated with a suitable solution strategy, certain risks can never be completely avoided in the project context. Consequently, these must be kept as low as possible.

The better risk management is handled in your project, the greater the probability of success, all other things being equal. It should not be neglected that risk management is not the only decisive factor for project success. For example, the nature of the project or the planning also play a major role here. In addition, risk management in the project should not be a one-time task, but rather an iterative process must be established to continuously identify and appropriately handle emerging risks.

For a goal-oriented handling of risks, it is of great importance to recognize which type of risk plays a role in the respective context and how exactly it can be handled. These are the most common and significant types of risk in the project:

Content:

• Internal vs. external risk
• Cost risk
• Schedule risk
• Performance risk
• Legal risk
• Governance risk
• Strategic risk
• Operational risk
• Market risk
• Force majeure

Internal vs. external risk

Risks can be divided into two categories, internal and external.

Internal risks are defined as having originated within the organization, or within the project environment. This type of risk is easier to control, since the project team can exert a direct influence on the project environment. Nevertheless, internal risks also pose a problem because the risk must first be identified before countermeasures can be taken. This is the critical point in this context.

External risks, on the other hand, originate outside the sphere of influence of the project team. Even if known, these risks are much less controllable. Nevertheless, as a project manager, one is not helplessly at the mercy of these risks. Instead of taking internal measures to adjust planning or resource allocation, the aim is to make oneself less dependent on external factors or to create alternatives so as to minimize the impact. For example, the risk of a tsunami occurring cannot be reduced by effective risk management, but an emergency response plan or appropriate insurance can help to react quickly in an emergency or to minimize the negative consequences.

The origin of the risk thus represents a distinguishing criterion according to which the following risks can be subdivided. It already gives first hints for the handling of the risk.

Cost risk

Cost risk is defined as any eventuality that could lead to the budget plan not being met. If such an event occurs, the budget framework is blown. In this context, a wide range of scenarios is conceivable. One cost risk, for example, may simply be overoptimistic budgeting in the run-up to the project. Creeping changes in the scope of a project - a scenario that is not uncommon in product or software development or even in infrastructure projects - can also lead to an unplanned increase in costs.

This internal risk can be controlled to a certain extent by concrete measures taken by the project team. The examples mentioned can be better managed through more realistic planning and a clear definition of the project scope together with the client.

Schedule risk

Schedule risk is understood as any eventuality that can result in a delay causing the project phases to last longer than planned. Here again, planning can play a decisive role, because a schedule that is too tight also entails risks. In addition, certain tasks can take longer if, for example, a project team member drops out or there are delays in the delivery of required goods.

This risk can also be countered to some extent. Buffer times can be integrated into the planning, additional employees can be scheduled as substitutes, or availability can be clarified at an early stage.

Performance risk

Another internal risk concerns contingencies that may lead to an agreed result not being achieved or not being achieved in sufficient quality, or to a defined service not being provided. This is referred to as performance risk. A lack of performance can also have various causes. Interpersonal tensions or a skillset of employees that does not match the project can lead to a suboptimal result. Miscommunication with the client can also lead to poor performance if only vague information, outdated or even incorrect information is available to the contractor. Often the root of the problem lies in insufficient leadership or in the unavailability or poor quality of resources provided. Such factors need to be analyzed to locate the actual source of poor performance.

Legal risk

Legal risk reflects contingencies that may result in negative legal consequences. These may include a breach of contractual clauses, infringement of applicable patent law, or failure to comply with certain regulatory requirements, such as adherence to data protection guidelines. In most cases, such violations are not intentional. Rather, legal cornerstones are overlooked during the project because they are not directly relevant to the project. This is often due to the sheer number of legal restrictions that are present in the project. For this reason, the legal correctness of progress should be checked again and again during the project in order to avoid legal consequences later on.

Governance risk

Governance risks include all eventualities that entail dangers in the context of the internal organization and management of the project. Both an unsuitable organizational structure and a deficient process organization can ensure that project goals are missed. For example, it is a result of poor governance if tasks, competencies and responsibilities are unclear or incorrectly distributed within the team.

Great attention should be paid to the choice of project management in advance and leadership behavior should also be reviewed during the project.

Strategic risk

Strategic risk refers to the dangers that arise from the long-term planning of your project. Strategy is strongly directional and is present throughout the course of the project. So, if mistakes are made during strategic planning, they form the foundation and are difficult to correct after the fact.

If a company decides to expand in the long term and to open up a new market for this purpose, this is a strategic decision. Whether such a strategy is promising can never be determined with absolute certainty in advance. For example, it could turn out that the company has a very unfavorable cost structure in the market to be developed, but that the customers’ willingness to pay more is not there. As a result, projects in this market are unprofitable for the company. If the strategy, which cannot be easily revised, is nevertheless adhered to and further projects are aligned accordingly, this poses a strategic risk that will eventually lead to huge financial losses.

Operational risk

In contrast to strategic risk, operational risk describes circumstances that can occur in the short term during the implementation of individual tasks or certain measures in the project. Process problems, for example, can lead to delays in the construction of a prototype.

It is extremely difficult to rule out any operational risks in the project. Care should always be taken to ensure that processes are well thought out and that sufficient resources are always available to ensure smooth operations. In addition, the negative effect of operational problems can be reduced by a high degree of agility within the whole company.

Agile methods can help minimize operational risk. The shorter the innovation cycles can be kept, the faster adjustments can be made and changes that pose risks can be responded to.

Market risk

Market risks are aimed at the economic environment in the project. In addition to competition, commodity prices, currency risks, credit risks or interest rate risks play a role. At present, companies are having to contend with sharply higher commodity prices. This is also highly relevant for projects, because fixed budgets increasingly have to be exceeded.

This is also an external risk that can hardly be controlled. It is advisable to limit the time horizon of the project as much as possible. This is because the further in the future the project is completed, the more unpredictable market developments are up to that point. 

Force majeure

Force majeure is defined as an external event that has no operational connection and cannot be averted even by exercising the utmost care. Natural disasters such as floods or earthquakes are often referred to as force majeure. However, armed conflicts or pandemics can also fall into this category. Projects are highly affected by such circumstances. They make it impossible for employees to carry out their work or to get their hands on necessary resources.

The occurrence of such events cannot be prevented, and the company and the project team are often suddenly confronted with the consequences. Nevertheless, the negative consequences can be limited, for example by taking out appropriate insurance. In addition, contractual obligations can be suspended in such a case.

Almost all projects are exposed to a variety of different risks. Categorization can help to manage these in a targeted manner and thus increase the probability of success of the project.