Project Risk Management: Effective Decision Making Strategies

Project risk management involves identifying, assessing, quantifying, modeling, and managing risks that may face a project. Complex projects face the challenge of accurately estimating costs and completion times, or even of failing to deliver outcomes as planned. Even the simplest projects always have some element of risk.

Ways are needed to identify and manage risks to prevent project failure. A risk plan is the way to lessen the chance of adverse outcomes.

The project risk management plan is the fundamental instrument for identifying elements and activities of project risk management, establishing risk breakdown structures, quantifying the extent of risk, and planning a mitigation strategy.

The initial step in planning for project risk management is developing the risk register. A risk register is a detailed inventory of things that could go wrong. The risk register provides a plan to follow the project through completion.

Assigning probabilities and consequences to the many items in the risk register is in itself challenging. Contemporary lessons from cognitive psychology and behavioral economics provide insights into how to do so.

Finally, the project manager must consider the best responses to risk including how to avoid, mitigate, plan contingencies, or transfer the risk. There are many ways to re-organize the project and ownership of risk, as well as adjust how the project objective is achieved.

Once project risks are identified and quantitatively analyzed, the project manager needs to make decisions. Having created probabilistic models of project risks, powerful methods of decision science can be brought to bear in making optimal plans and creating contingencies.

While some strategies can be executed concurrently with proactive management, risk can also be transferred or eliminated using carefully-planned strategies. These methods open the possibility of smarter decisions with more risk-neutral tactics that take advantage of capital markets. Financial approaches to transferring risk by insurance, catastrophe bonding, and other mechanisms is a poorly understood but efficacious method for dealing with unique risks on large and potential consequential projects.

By leveraging the appropriate tools for estimation using Bayesian thinking, classical utility theory, and behavioral economics, the project management executive or project owner can exploit risk to their advantage. The opportunities for construction firms, facility managers, municipal governments, and investors is enormous and growing.