What is Project Risk?

    2=Planning, PMI-RMP Exam Prep

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If you say the word “risk” to ten people, each person may think of something different— insurance, threats, investments, bets, or potential loss. As we manage project teams, it's critical that you and your team members have a common understanding of what project risk means. Otherwise, people will be confused by your risk management efforts.

what is project risk?

It is no wonder that there is so much confusion about the meaning of risk. Many credible sources provide conflicting definitions. The Merriam Webster dictionary defines risk as “the possibility of loss or injury: peril.”

Risk management standards, guides, and methodologies define risk in many different ways. Some include the possibility of positive risks or opportunities; others do not.

Risk. An uncertain event or condition that, if it occurs, has a positive or negative effect on one or more project objectives. —PMBOK® Guide – Seventh Edition

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As projects start, project managers should work with the project sponsor and key stakeholders to clarify the project objectives or goals. Once the objectives are clear, share how risk management can help to achieve the objectives. Furthermore, provide concrete examples that are relevant to the project at hand.

Next, agree on a definition for project risk. I suggest the risk definition from PMI's Project Management Body of Knowledge (PMBOK® Guide).

PMBOK Definition of Project Risk

So, here is the PMBOK® Guide definition:  "Risk - an uncertain event or condition that, if it occurs, has a positive or negative effect on one or more project objectives" (such as scope, schedule, cost, and quality). Let’s break down this definition of risk:

  • Uncertain event or condition. Risks involve uncertainty. When identifying risks, I ask teams to focus primarily on the uncertain events or conditions that may have the greatest impact on the project, not the trivial things.
  • If it occurs. The uncertain event or condition may or may not occur. If a threat occurs, it becomes an issue or problem. If an opportunity occurs, it becomes a benefit. So, risks are things that may occur; issues and benefits are things that have occurred.
  • Positive effect. When I share the PMBOK® Guide definition, I ask if anything sounds strange. It seems odd that risk can have a positive effect. I provide examples of how “opportunities” or up-side risks can help achieve the project objectives.
  • Negative effect. I do not normally have to spend much time on the negative effect. This is how most people think of risk. I introduce the term “threat” for the downside risks.
  • Project objectives. To bring value to the risk management processes, keep your teams focused on project objectives such as scope, schedule, cost, and quality. The heart of risk management is helping your sponsor and team to achieve their objectives.
  • Minimizing the use of the term risk. Because the term “risk” is often misunderstood, I use the terms threats and opportunities more often. If I am leading an exercise to identify risks, I will ask the participants to identify threats or potential problems first. Then I ask the participants to identify opportunities or potential benefits to the project.

What About Project Opportunities?

Some people argue that including positive effects in the definition creates confusion. If you decide to leave out the positive effects in the definition, decide how you and your team will identify and seize significant opportunities.

The important thing is to obtain agreement with your team about how to define risk. Include the definition in your Risk Management Plan. Clear communication will position your team for greater success.

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