1.2 Project Risk

Risks are at the core of risk management. This handbook uses the following definition:
“A project risk is an uncertain event that, if it occurs, has a positive or negative effect on the likelihood to achieve project objectives.”

A number of key elements of the definition are explained below:

• Uncertain event: something that may or may not happen, e.g. a team member takes ill or the temperature drops below a certain point making a chemical process impossible.
• Positive or negative effect: project risk can be negative for a project (increased costs, decreased quality etc.), but can also be positive (new valuable product features due to the use of new technology or opening up of a new market segment due to some project adjustments).
• Project objectives: the project goals are at stake if a risk occurs. Severe negative risks can lead to the cancellation of a project. Minor risks may slightly increase the lead time of a project.

The more you know about a risk, the better. The ideal case is that you know exactly what a risk is composed of, how it can affect the project and what efforts are needed to resolve it. In practice, this usually means that a company has gained experience with a specific risk in previous projects. The project team may then deal almost routinely with such a risk.

The other extreme is that a project team is not aware of the existence of a risk. If such a risk occurs, the team is taken by surprise and has little time to respond. Usually they resort to ad hoc responses and make the best of it. Figure 1.1 shows the extent of knowledge of a risk using the metaphor of an iceberg that could be largely hidden below the water level.

Figure 1.1: Risk iceberg, the degree of knowledge of a risk
The better a risk is understood, the better the possibilities are to respond effectively.

The fundamental premise of project risk management is that it is valuable to gain insight into the nature of risks before they take place and pro-actively take action to favorably influence them. The remainder of this handbook describes how to do this in a practical and professional manner.