The Importance Of Risk Management Construction Essay

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Risk is something cannot be avoided in life, e.g. it is quite risky if people cross the red light. In a project environment, risks are even more common. A small risk may cause economic loss or even worse causality accidents. How to control and manage risks in a project is of great importance. This essay looks into risk management in a project management. The essay first analyzed and discussed why risk management in a project environment is important; later the essay seeks to illustrate how evaluation is used as a process to minimize risk in a project. At the last section, the essay provides five key recommendations for a project to ensure that risk management is more effective and workable.

The importance of risk management

As defined in ISO31000 (2009), risks refer to the effect of uncertainty on objectives, which could be positive or negative. In a project environment, risks are unavoidable and could occur in every aspect, for example: failures in any phase of the project life-cycle (e.g. design defects), accidents, natural causes and disasters, uncertainty in the market or deliberate attacks from competitors. Any of these risks may cause great damage to the project on cost, quality and time. Therefore, to control and manage those risks is of great importance. According to Hubbard (2009: p46)), risk management is the identification, assessment, and prioritization of risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities. However, the importance of risk management is usually neglected or underestimated in the field of project management. Dr. C. William Ibbs and Dr. Young Hoon Kwak (2000) have carried out an investigation to evaluate the maturity of project management in practice. In this survey, 38 organizations have participated and are divided to 4 groups: engineering & architecture, telecommunition, IT/software development and high-tech manufacturing. Respondent organizations have answered 148 questions to evaluate the maturity of different aspects in project management in their organizations, such as scope, time, cost, quality, human resources, communication, risk, procurement and so on. The rating is from 1 to 5, (5 represent the highest maturity). The survey result shows that Risk Management is areas of low maturity, whose ratings are all below 3. This research shows that all organizations should spent more efforts on project risk management.

Distinctive from crisis management, a good project risk management usually cannot catch people's eyes at the first sight. (Sadgrove, 2005)Though crisis management, obvious threat to project success can be discovered and arise high attention from the management. Compared to risk management, to solve a crisis is more notable and easier to obtain reward from the management. On the contrary, when risk management is very effective, fewer problems would occur and easier to solve. Hence it might be difficult for an outsider to distinguish whether it is the contribution of risk management or good fortune. However, a project team member would always understand only with good risk management, a project can be delivered more smoothly. The importance of risk management to a project also lies in the great benefits that it would bring. Risk management can deepen people's recognition and understanding in a project and risks, help them identify the advantages and disadvantages of different proposals, understand the impact of risks to the project so as to diversify the risks; with risk management, a contingency planning could be complied in a more pertinent way; it can also integrate different measures to deal with risks consequence and become more proactive rather than reactive in project management (Knutson, 2001); in addition, it can provide feedback for future planning and design, so that measures could be taken in planning and design phase to prevent and avoid risks damage; it can help project managers make better decision, which fits the project objective and strategy and reduce risks in a whole to ensure the realization of project objectives. It can also facilitate the execution project organization and management to accumulate related risk documents and data and to improve future project management. (Heldman, 2005)

Evaluation to minimize risk

Evaluation is also adopted by many projects as a process to minimize risk. Evaluation can be applied in the process of risk identification, which can help people understand risk better. The role of risk identification is to find out all possible risk factors or issues faced by the project. (Bartlett, 2004) By using quantitative evaluation methods, project staffs are able to define the occurrence probability and its distribution of all risk factors and issues, as well as its degree of damage or loss that would brought to the project if it happens. (Hopkin, 2012) In addition, evaluation could also be used to evaluate the severity of damage and loss. The severity of damage could be evaluated in two aspects: one is to evaluate the relative severity of different risks. (Heldman, 2005)Based on this evaluation, people are able to distinguish primary risk and secondary risk; the other is to evaluate the absolute severity of damage, which can indicate the consequence of various risks.

Evaluation could be employed in the process of goal planning and scheduling. A reasonable and feasible goal will minimize a lot of potential risks. Many projects will establish a project data base, which includes the actual consequence of all risks impacting the project execution. This database would is broadly used in the goal planning of a project. However, most databases do not include shows detail information of the risk. They are more like a brief introduction of the serious risks. That is to say, the data can reflects the overall consequence of all risks impacts, but cannot show the separate consequence of an individual risks. (Bartlett, 2004) Because every project distinctive, only a dedicated evaluation can shows different influence on project goals correctly. (Hopkin, 2012) An evaluation can makes the goal planning result more reasonable and reliable.

Evaluation should also be applied to evaluate different risk countermeasures. To decide whether a risk countermeasure is applicable, project teams should evaluate it from both its effect and costs. (Knutson, 2001) The effect of a risk countermeasure is reflected in how much it can reduce the risk probability and minimize the severity of loss and damage. (Sadgrove, 2005) There are usually costs for adopting risk countermeasures, which can be measured and evaluated. Through risk evaluation, project team already understands the probability of risk occurrence and its severity of damage. (Hopkin, 2012)Now, with evaluation on risk countermeasure, they can combine the applicability of different countermeasures with risk consequence together to choose the most appropriate countermeasure and form best risk countermeasure portfolio.

Recommendations for risk management

In this part, the author has provided 5 recommendations to ensure that risk management is more effective and workable on the project.

Encourage people to discuss risks openly and frankly. Tim Lister believes the essence of risk management is a talk. However, many factors e.g. political situation, resources limitation may make an open discussion quite difficult. Project managers should try their best to guarantee that project team can discuss openly and honestly on the risks. Once project team members assure they can discuss risks openly without being blamed as a complainer, most of them would be eager to do it. On the other hand, project decision makers should also concerns more on risks, encourage project team to escalate some risks and issues and report to them directly. This can help them be aware of key information of the project so as to make appropriate decisions. (Conrow, 2003) In one word, the management should create an atmosphere or culture that encourages people to disclose risks and problem openly and timely.

Understand the potential risk as early as possible. In general, there are more risks and with bigger influence at early phase of a project. Actions on risk identification and control should be carried out as early as possible, for example, a risk existing in project proposal should be discovered as early as possible, or it may bring fatal damage to the project. Therefore, at the beginning of a project, meetings should be organized among key team members and stakeholders to brainstorm and list potential risks probability and likely consequence. Based on this checklist, preparation for the contingency and countermeasures to avoid damage to the project should be taken accordingly. The time and costs to deal with contingency is also clear to all. The checklist provides a structured way to ensure that all project risks are recognized and evaluated. (Knutson, 2001) If risks could be understood as early as possible, project team can arrange the priority of work, and through planning, some of the risks could already be minimized.

Learn from the past. Hal Mooz, key investor of the Center for Systems Management, said that to minimize risk, experience is indispensible. When people are planning a project, documents of previous projects and experience are often placed in the last position. In fact, they should be place at the first position; because it can help people draft project demands. (Heldman, 2005)Therefore, a risk database should be established to collect experience on project risks and issues. Project team should organize and plan how to promote the application of these data and collect all project risk and problems. Of course, to set up a well-developed data base may require some time; it should be developed step by step. Dedicated persons should be assigned to collect and analyze specific risks, including sorting out questions left over by past, analyze current exposed risks, classify different type of risks and release to stakeholders regularly to ensure that project team could obtain and response to the information timely and rapidly. (Bartlett, 2004)

A risk management team should be formed to take charge of risk management. As Larson and Gray (2011, p.213) highlight, "a risk management team consisting of core team members and other relevant stakeholders" is essential for a project. This team should be able to organize risk management activity regularly in the project team. he or she should also incorporates risk management in daily practice of a project, for example, a risk discussion section in project weekly meeting, monthly meeting and CCB meeting. This team should make sure all related staffs and stakeholders participate in the risk discussion and exchange experience actively and upload this information to risk database and release them in time. Whenever a risk is identified, this team should have a clear description on the cause of risk, condition of occurrence and likely consequence and communicate and confirm countermeasures with people who might be affected by the consequence of the risk.

Make use of risk management tools. There are many tools are broadly used in risk management, for example, The Monte Carlo simulation. The Monte Carlo simulation is a mathematical method of stochastic simulation. This method is used to analyze and access the probability distribution of variables in of future changes such as risk probability of occurrence, the causes of risk, the losses or opportunity caused or brought by risks. (Sadgrove, 2005) Nobody would require a project manager to do calculus. However, if he or she can use tools in Monte Carlo simulation, and generate possible result with these tools, it would be quite helpful. Professional tools can make risks management process easier and more efficient. More importantly, a scientific calculation and analysis can make one's opinion more objective and authoritative. (Conrow, 2003)


Through the above discussion, this essay has explained to the readers why risk management is important in a project environment. Risk management is a great facilitator of project success. It can help the project teams minimize negative risk and take advantage of positive risk. It has positive effect on project selection, defining project scopes, compiling realistic schedule and cost estimation. It could also help stakeholders understand the core of the project, help project members identify advantages and disadvantages and integrate other project management skills. However, to implement a successful risk management is not an easy task. Effective risk management needs the involvement of all project related staffs and department, which includes project team members, high level management, clients, project manager as coordinator and recorder. The organization should provide a clear procedure, tools and resources for risk management. The success of risk management relays on a corporate culture that encourage employees to communicate openly and pertinently on the risks at any time. This is very important. Through communication, the damage of negative risks to the project could be eased, while the positive risk with opportunities could arise more attention.