Project risks are possible events that can endanger the planned course or goals of projects, or the degree of uncertainty associated with a project. An effective risk management plan to identify risk tolerance and take remedial action is of critical importance for the smooth implementation of the project.
A stakeholder is anyone who has an interest in the project or remains affected by the project deliverables or output. Although a project has many stakeholders, the ultimate decision on project risks vests with the owner of the project and it remains the owner’s decision on whether to execute the project or not, modify the project, or proceed as planned in response to the risk factors. Other stakeholders who may have a say in determining project risk tolerance include the organization that implements the project, the financiers, and the like.
Risks are intangible and hence subjective. As such, the extent of risk tolerance, and consequently the extent of approval of risk management of the project varies among the stakeholders. A primary challenge of the project manager is to reconcile the risk tolerance of the various stakeholders and secure stakeholder approval of project risk.
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Securing stakeholder approval of project risk depends on the project manager including:
- Identification of the major risk factors associated with the project, their probability of occurrence, and their possible impact.
- Determining the project risk tolerance by understanding the issues and values of each stakeholder, and reconciling the extent to which different stakeholders are willing to take such risks.
- Preparing a project risk management plan and convincing the different stakeholders to accept the same.
The project stakeholders need to take informed decisions related to project risk after a thorough understanding of the project, the risk factors, and implications. The most relevant tools and methods for this purpose include brainstorming, root cause and essential function analysis, repeated risk assessments to include new information, impact and probability analysis, statistical analysis, sensitivity analysis, project simulation, mitigation planning, statistical analysis, risk transfer, risk avoidance, and the like.
The different approaches to secure stakeholder approval of project risk plan include:
- Deploying qualified and competent personnel to undertake the risk management exercise, from external sources if need be and not relying solely on team experience. This helps eliminate gaps in analysis and lack of consistency in project risk assessment and reports, and remains the best way to convince all stakeholders about the project risk and clear misconceptions or divergent risk perceptions.
- Adopting a top-down approach to risk management exercises. In this approach, the sales team first shapes the project based on customer need, and then hands the project over to the project manger, who continues the “selling" process to the other stakeholders.
- An underestimated approach toward securing stakeholder approval for project risk is the project manager’s skill in stakeholder management, especially creating alliance with stakeholders. This depends on maintaining good relationships and striking a rapport with the stakeholders, getting them to trust and like the project manager.
Many projects fail or attract time and cost overruns owing to the failure of the risk management process, and lack of stakeholder approval of project risk remains a primary cause for such failures.
- Egeland, Brad. “Defining Risk Management – Part 5: Risk Tolerance." Retrieved from https://pmtips.net/defining-risk-management-part-5-risk-tolerance/ on 26 October 2010.
- Kwata, Young Hoon, & Scott LaPlace, Kenneth. “Examining Risk Tolerance in Project-Driven Organization." Retrieved from https://home.gwu.edu/~kwak/Risk_Tolerance.pdf on 26 October 2010.
- Board on Infrastructure and the Constructed Environment (BICE). "The Owner’s Role in Project Risk Management." Retrieved from https://www.nap.edu/openbook.php?record_id=11183&page=1 on 6 November 2010
- Projectsmart.co.uk. "Stakeholder Management". Retrieved from https://www.projectsmart.co.uk/stakeholder-management.html on 6 November 2010.