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What is Project Risk Management?

By Osmand Vitez
Updated May 17, 2024
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Project risk management is the assessment process a company goes through to evaluate the various projects in their business operations. Project management involves the specific activities of planning, organizing and controlling the resources necessary to achieve business goals. In many cases, projects have a few common restraints. These include restraints for project scope, time and budget. Project risk management attempts to identify the individual factors in each constraint and limit the negative impact of each one on the project.

Breaking down large business operations into specific projects allows a company to take a focused approach for completing tasks and activities. Individual projects also allow for a natural separation of duties among employees, in addition to limiting the overall risk exposure for the company. For example, operating projects based on the expected rate of return ensures the company will not risk spending too much capital on projects with significant risk levels. Project risk management will most often require an organization to hire an individual or create a department to supervise and control risk management.

The project scope involves specific tasks a company must complete to produce a good or deliver a service. Project risk management will typically require a company’s management team to review the number of tasks and sequential order to determine if the company’s overall production chain is too long for completing activities. This can result in a competitor producing goods and services quicker, resulting in higher market share for this organization.

Time is another essential piece of project risk management. Companies that cannot complete projects on time run the risk of cost overruns and wasted resources. This will ultimately lead to a reduction in profit for the project and possibly delay future projects, resulting in lower profits for future operating periods. The amount of time to switch a company’s equipment to a different project or retool for a new product line can also be a factor in this constraint of project management.

Budgets are another focus for project risk management. Companies often use a budget as a road map to help them track variances and control costs. Owners and managers may even use a budget to create a stop limit for expenses. This allows for a natural defense to mitigate the effects of risky projects. When capital runs low, the project must undergo changes or an evaluation to determine how it will recoup costs for the company. Budgets also allow for companies to take an historical approach to managing projects. Owners and managers can review past project performance and determine how to manage risk.

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