Factors that Determine Project Risk Tolerance
In project management, risk tolerance is the measure of the degree of uncertainty that a stakeholder accepts in respect of the project risk assessment.
The three major stakeholders of a project are the organization that implements the project, the client or the owners of the project, and the project manager. Risk is intangible, or invisible, and as such remains subjective, based on stakeholder perceptions, and as such these three stakeholders rarely share the same view or opinion on the possible outcomes of a project, having divergent views of what constitutes risk and consequently risk tolerance.
The organization’s project risk tolerances usually depends on the extent of financial stability and project diversification. Organizations under pressure financially or under sustained pressure from competition generally have high risk tolerance levels, as the organization is already losing and consequences of failure do not make any difference anyway, whereas the benefits of the risk paying off become huge.
The risk tolerance of the project manager and other members of the project team depends on job security and corporate culture. They generally tend to be risk averse or go by the organization’s stance, for many organizational cultures look down on having a different perception on risk tolerance. This, combined with a failure to communicate any high levels of risk tolerance, may dissuade innovation.
The project owner’s risk tolerance depends on the project objective, which very often may remain at loggerheads with the organization’s risk tolerance levels.