Project risks: example, risk assessment, analysis of possible events

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:54

This article will talk about the risks of the project, examples will be given, as they say - "from life". To manage the process of performing work, the same goals are always set: to save time and invested money. In order to minimize the risks of the project, examples of which are quite numerous, risk management is created, armed with a special methodology. And this is in addition to the fact that the sponsor of the project will see the effectiveness of such work. Any dangerous event is likely to take place, but it is not a fact that its impact on the conduct of work will be necessarily negative. From time to time, the positive risks of the project are also noted. Example: a project suddenly has a real expert who will smash all the work done to smithereens, but in the end will significantly speed up the appearance of results and add quality to them.

How to predict the probability?

Risk is a probabilistic event that can happen either guaranteed or suddenly. It is not so difficult to foresee the guaranteed risks of the project. Example: licensed software almost always rises in price at the end of the year. It is even difficult to call it a risk - it is rather a given that must be taken into account when planning resources.

But there are really dangerous examples of investment project risks that are almost impossible to foresee. For example, a decrease in the solvency of the population and a loss of demand for the products of the project, then it will be necessary to regulate prices or take other rather painful measures.

Any projects related to investments cannot but refer to the future tense, and therefore there is never any certainty in the predicted results. It can be affected by both inflation and the collapse of the economic crisis, as well as any force majeure event: natural disaster, fire, and the like. It makes no sense to expect such an event, but you still need to be ready. Moreover, smaller troubles still necessarily happen as the investment project is implemented.

Examples of risks: competing manufacturers have appeared on the market in a multitude. How to be? Only supply incentives will save the project. Or something happened that was not expected (external changes of any nature can have an impact - from inflationary, political, social, commercial to the sudden appearance of new technologies): there will clearly not be enough funds to continue the project. Here, for sure, it will be necessary to slightly suspend the development of the project with the postponement of the launch for the required period. In short, there is always some risk.

Project risk assessment

The example of predestination given above, when the cost of software increases as planned, is very typical. There are techniques that allow you to evaluate and anticipate many and not so simple situations. Here is an example of a project risk assessment with a specific position selected. Any investment project implies, first of all, the vision of the investor, and not of intermediaries and the entrepreneur implementing the project.

The first step is to consider the macroeconomic situation - both in the host country and in the world as a whole, if the project risks are assessed. An example of the announcement of sanctions is in front of everyone's eyes. If the situation is considered carefully, one can accurately assume how well or poorly the economy will develop.

The following is an analysis of the situation in the industry where the project is supposed to be carried out with risk management. An example of this can be the successfully operating enterprises in our difficult conditions of the global crisis and numerous sanctions, where the necessary marketing research was carried out in time, a detailed analysis of the activities of competitors was made, prices were predicted, their own and others' technologies were analyzed, and all measures were taken to successfully overcome difficulties in the event of a sudden new products from competitors.

The next step is to examine the investment project itself, considering it from the point of view of production. All possible scenarios for implementation are considered, the optimal one is selected where possibleproject risk management. Examples of such work are known to every entrepreneur and project manager, since these are the basics of entrepreneurial activity. However, that's not all. It is impossible to do without a detailed study of commercial and production activities: stocks of materials and raw materials, production technology, as well as sales, production costs and much more.

Specificity and uncertainty

As soon as a project has variability in decisions, as well as in outcomes, it automatically goes into the category of uncertain and risky. Specific examples of project risk analysis may not be given, since each new case is unique, circumstances and conditions are different everywhere. Most often, the creators of the project believe that it is not necessary to calculate the risks for many years ahead - the future management of the enterprise will worry about this. This is not entirely fair, which means it is wrong.

To complete the analysis of the risks of an investment project, using the example of a specific enterprise, it can only be shown that, in addition to determining the risks, the measures necessary to minimize them are outlined. Naturally, each enterprise has both risks and activities that are not similar to those with which the neighbors are racking their brains. However, the concepts of uncertainty and risk are somewhat different from each other. The first is a certain inaccuracy of information or its incompleteness in identifying project risks. Examples usually deal with implementation conditions. And risk is the occurrence in the course of implementation of conditions that necessarily lead to certain negative consequences or forthe entire project, or for individual participants.

This means that uncertainty is an objective characteristic that affects absolutely any participant equally. It can also be a financial risk of the project. Example: The future price of a raw material is not determined. This, of course, will affect many project participants to varying degrees: the price of, for example, fuel will force one of them to abandon the project altogether, while the other will still take the risk. Thus, this risk is much more subjective, although the usual uncertainty caused it.

The impact of risk on the project

Risk is necessarily associated with subsequent negative consequences. Examples of the risks of a social project (and many others): losses, delays in the implementation of the project, and the like. There is another interpretation: it is the possibility of absolutely any deviations - positive or negative - in indicators from the projected values.

Risk, according to this interpretation, is the possibility of danger, an event that will either happen or not. If it happens, there will be options for the consequences: a positive result (for example, profit or any other benefit), a negative result (losses, damage, losses, etc.), a zero result (when the project turned out to be without loss or without profit).

During the analysis of financial or organizational threats, the identification of project risks is of great importance. An example of the most successful opposition to negative conditions of any kind can only be given by a team where documentationall participants are engaged in identifying the characteristics of the risks that pose a threat. Moreover, this process continues constantly, at all stages of the project. First of all, an analysis of the documentation is done - project plans, data on previous contracts, etc.). From here, the first and main inputs appear in the analysis.

Virtually all project documentation can serve as a source of risk information, from product descriptions and assumption targets to historical data. The method of collecting information that is most effective is used. It can be the Delphi method, brainstorming, various polls and the like.

Analysis of checklists is also carried out, which contains a list of risks for such projects. On the Internet, for example, you can find a huge number of them. Next, a register of project risks is formed. The registry examples contain not only a list of detailed risks, but also a list of possible response strategies if risks are identified. And finally, the final analysis is carried out - quantitative and qualitative.

Risk breakdown structure

To identify risks, categorize them and make an analysis, such a hierarchical structure as a risk tree is used. Examples of projects with managed risks show a qualitative analysis, which provides a complete process of identification and systematization to the smallest levels of detail and traceable links with the rest of the project elements. Similar to the work breakdown structure: organizational managementproject, project cost breakdown, project resources, and so on. Only the elements on the tree are sorted by importance and by nature.

Modern project management involves the use of generic templates to break down project risks. The technology for creating such a risk tree is very similar to the technology for splitting work. Hierarchical elements are sometimes replaced by a simple list of expected project risks, more often by a not too complex hierarchical structure of two or three levels.

However, the bottom level is always the quantified risk or the risk description of the project. Examples may show one or more events in the aggregate, but always with visible consequences. The work tree and the risk tree are developed on the material of a variety of decomposition bases. These are importance, priorities, significance, the need for deeper analysis, the nature of the consequences, responses, and so on.

Elements of a project management plan

One of these elements is the project risk register. Examples in business practice can be found everywhere. First of all, it is a document that contains the results of a qualitative and quantitative analysis of risks, as well as a response plan for their consequences, if they occur.

The risk register details all suspected hazards with a detailed description, category, cause, level of likelihood, positive or negative impact on the final goals. Of course, every perceived risk comes withanticipated responses. It also indicates the current state. This is one of the main elements of the project management plan.

A separate stage of risk management is their assessment by the project participants. When large capital investments are made, the level of uncertainty is very high, and probabilistic and statistical methods are clearly insufficient here. Moreover, there is still little initial information in the origins of the project and it is very difficult to foresee unique situations.

Risk Matrix

It is at such moments that game theory comes to the rescue, a separate trend of applied mathematics of the early twentieth century is a methodology where the payoff matrix is applicable using the ideas and methods of game theory, as well as the risk matrix of the project. The examples show the same use of elements of applied mathematics.

With their help, optimal solutions are modeled if any uncertainty arises. For example, one can consider in turn the target actions of one side or another, studying precisely its interests, while all sides are in conflict if their goals are at different poles.

This is a very interesting and even fascinating theory that is constantly used in solving practical problems, a kind of method for finding solutions that come from conflicting interests and rational actions.

The first way to classify risks

It is necessary to distribute risks and classify them from the very beginning of the process of preparing contract documents and building a business plan. What means"classify risks"? This is the usual distribution of them according to certain characteristics and criteria into different groups so that the goals set are achieved. For example, it is advisable to separate risks, predicting the possible result of the impact of each of them on the course of the investment process.

Risks can be net when the result is zero or negative. This includes such cataclysms as an earthquake, tsunami and similar natural factors, fire, flood and other natural shocks, harmful gas emissions and other environmental disasters, regime change in the country, default and many other political reasons that affect the economy as a whole and business of any level, a variety of transport accidents. Some commercial risks are also classified as pure, such as theft, sabotage causing damage to property, equipment breakdowns and other production failures, payment delays, late deliveries of goods in trade risks.

Another group - speculative risks, they are characterized by the possibility of obtaining both positive and negative results. Financial risks are most clearly represented here, since they are an important part of commercial ones. There is a second criterion necessary for classification. This is the reason why the risk has arisen at all. Depending on these reasons, the following types appear: commercial risks, transport, political, environmental and natural risks.

The second way to classify risks

Another way to share riskinvestment project on internal and external. The latter are associated with a not quite stable situation in the economy, as well as the precariousness of economic legislation, insufficiently favorable investment conditions and the inability to freely use profits. External risks associated with the external economy are created by a situation where trade restrictions can be introduced, borders closed and the like.

There is also a high level of external risks with the uncertainty of the political picture and there is a possibility of its sharp deterioration. Does not depend on the will of the investor and any change in climatic conditions, fraught with natural disasters. And of course, there is a huge risk when market conditions fluctuate - exchange rates, prices, GDP and so on.

The internal risks of an investment project can be various factors on a smaller scale, but also with very, very painful consequences. An earthquake does not happen as often as the mistakes of the project participants themselves. For example, if the project documentation is not complete enough or worse, it does not differ in accuracy.

There are always technical and technological risks in production - equipment failure, accidents, marriage and the like. If the project team acts the way Pike, Cancer and Swan did in Krylov's fable, that is, if the initial selection of participants was done incorrectly; if goals are not defined in the team, interests are not focused on the main thing, and the behavior of project participants harms the common cause, there is a risk that the goals set will not be achieved.

It will turn into a huge disasterrisk if priorities change during project implementation, if management support is lost. If the business reputation of the team as a whole or its individual members leaves much to be desired, if there is no accuracy and completeness of financial information, internal risks increase. If product prices or demand, as well as the capabilities of competitors, are not correctly assessed, risks are sure to bring negative consequences.

Third way of classification

Finally, it is possible to classify risks according to their predictability. There are risks that are outwardly unpredictable and outwardly predictable. The first includes unexpected government actions to regulate production, production and design standards, actions in the field of environmental protection, land use, taxation and pricing. And this list can be continued for a long time. Of course, natural disasters affect the degree of risk. But more often - crimes: refusal to do work, threats, intimidation, violence, etc.

Suddenly, a variety of environmental and social causes of risks appear, threatening negative consequences. There are also bankruptcies of contractors, due to which the necessary infrastructure for the implementation of the project is not created on time. There are also major mistakes in setting project priorities.

Outwardly predictable risks also make up a rather extensive list. An example of the most common project risks is the market risk, when opportunities worsen: when raw materials are received, when their cost increases, whenconsumer requirements, with the strengthening of competitors and the loss of their own positions in the market. Here, too, you can list for a long time.

Operational risks are also fairly predictable. Often there are deviations from the main goals, security is violated. It also happens that individual elements of the project cannot be maintained in working order. The social and environmental consequences of emerging risks are always negative. There is a predictable danger of deviations in the inflation rate from those values for which the calculation was made. Quite often, there are currently negative changes in taxation for business.

Conclusions

However, during the implementation of the project, not a single uncertainty of the conditions is given. Therefore, it is necessary to constantly monitor the conditions in which the project is being implemented, it is necessary to adjust the data, work schedules, and also carefully monitor the conditions of the relationship between the project participants. The following situation can be considered an example of risk assessment of an investment project.

Suggesting a fire at a company's office or planning a sudden withdrawal of a sponsor's subsidies would be strange, although the consequences for the business of such a risk look terrible. The probability is low, the risk is at the "yellow" level. But if the software does not arrive on time, the project will suffer greatly. It happens much more often. The risk level is clearly "red". But the main thing is that this risk can be completely avoided during the normal work of the project participants. risk probability -calculation of the possibility of its implementation from 0 to 100%.

When a project is being implemented, one task replaces another, and with them the types of risks also change. Therefore, the analysis should always be present, and the risk map should be transformed as necessary. This is of particular importance at the initial stage of project implementation: the earlier risks are identified, the more opportunities to prepare for them. All this reduces losses.