Project Risk Management: A Guide to Mitigating Risks in 5 Steps

Between the risk of data security breaches, economic uncertainty, competitor activities, and operational disasters, the success of your projects is not a guaranteed thing. Indeed, there are plenty of factors that might put your projects at risk of failure.

Fortunately, the practice of project risk management can save the day. 

In fact, by investing time in evaluating project risks and making a risk management plan, you can vastly increase the chance of projects coming in on time and on budget even if you hit bumps in the road.

Not sure where to start?  

Let’s take you through the nitty-gritty of project risk management including a 5-step risk management process. Here’s what we’ll cover: 

• What is project risk management?
• Why is project risk management important?
• Types of common project risks to watch out for
• How to manage project risk in 5 steps
• Bottom line on handling risks in project management

What is project risk management?

Project risk management involves identifying and preparing for potential risks to a project’s success. These risks vary from project to project, and can surface at any stage of the project lifecycle. 

The impact:

• Delays to the defined project timeline
• Negative impact on project performance and outcome
• Reduced team productivity and unsatisfied stakeholders 

As much as we'd like to, it’s not possible to completely eliminate risk. However, by proactively identifying risks and devising strategies to mitigate them, you can minimize potential risks and save projects from completely derailing. 

Why is project risk management important?

Project risk management is important because failure to manage risks is…well, very risky. 

Risk events can completely knock a project off course. And the outcomes of unmanaged risk range from the inconvenient – like project delays – to the downright disastrous – like loss of life. 

So there’s an operational, financial, and moral obligation to identify and manage risks appropriately. Failure to do so is incredibly irresponsible. 

Here are some of the things project risk management lets you do.  

Avoid avoidable project threats

Project risk management is an early warning system for anything that threatens the success of your project. Using the step-by-step project risk management process we’ve outlined below, you’ll be able to spot and mitigate avoidable risks. 

Improve project performance 

‍Effective risk management anticipates potential problems, bottlenecks, and other sources of delay and expense, then proactively addresses these issues. This reduces the likelihood of cost overruns, schedule delays, and quality issues. It helps projects stay on track and achieve their objectives more efficiently.

Optimize resource allocation 

Resources are a major cost and risk in project delivery. Risk management processes support more accurate resource planning. They provide a framework for prioritizing resources according to risk ratings, to ensure resources are deployed effectively. And they encourage proper capacity planning and scenario planning, to be prepared for Plans A, B and C.

Enhance decision-making and agility 

Risk management helps you make better-informed decisions by assessing the project from a variety of angles and different scenarios. As you’ll see below, it engages expert opinions and sources of data to help predict what might happen and make appropriate plans. This helps you respond to unplanned events with greater speed, confidence, and agility.

Types of common project risks to watch out for

Each project comes with its challenges — bringing a unique set of risks. However, there are certain categories of risk that you need to consider for any project:

1. Resource risk

Resources are integral to project success – whether they’re human resources, materials or equipment. There are lots of resource risks that can hit a project where it hurts – in terms of budget, schedule, or outcomes. 

• Staff shortages – Poor resource capacity planning, sickness, or unexpected staff turnover can create staff shortages that cause delays.
• Incomplete or incompatible staff skills – Skills shortages or poor skills management can reduce productivity and performance, leading to sup-par project outcomes.
• Equipment unavailability – If essential equipment or technology is unavailable – for example, due to maintenance or outage - that can cause delays.
• Cost overruns – Unexpected increases in costs can negatively impact budgets and cash flow. For example, increased cost of materials or human resources.

When making your resource risk mitigation plan, consider all the potential resource constraints that can disrupt the continued supply of staff and materials for the project.

2. Cost/financial risk

There’s no guarantee of a project’s financial success without a reliable budget estimate. 

Even so, cost overruns that threaten success commonly occur due to: 

• Inadequate project scope – An inadequate project scope risks inaccurate cost estimates. For example, underestimating the amount of materials required for construction projects can result in budget shortfalls during implementation.
• Inaccurate estimation of costs – Poor supply cost estimations or fluctuations in those costs can cause projects to go significantly over budget.
• Inaccurate resource allocations – Failure to properly assess and forecast resource demand can lead to overspend on wages (as well as project delays).
• Outdated procurement procedures –  Procurement processes should leverage cost-saving opportunities such as early payment discounts. But outdated supplier agreements and slow processes can lead to excessive costs. 

As you create your project cost plan, make sure you allow for contingency costs. Contingency costs show up when unexpected but high-impact events impede a project’s progress. 

Ensure you have a plan to reserve funds to cover contingency costs and keep the project moving to completion.

3. Scope changes

Deviations from a project's original scope and layout often lead to major delays and additional costs. 

Factors that typically lead to scope changes include: 

• A lack of consensus on scope – When stakeholders have different expectations of project objectives or deliverables, it can lead to scope changes. If these changes aren’t properly managed, it leads to scope creep, and insidious increase in project scope that increases project cost and duration.
• Unclear change management processes  – Scope creep can be contained with a formal change management process. However, many projects lack this mechanism.

To mitigate these risks, project managers need to build consensus on the project scope during the project planning process – and implement change management processes during the project lifecycle.

4. Operational risks

Operational risks encompass a wide range of threats that can disrupt business operations and project execution.

There are so many risks within this category that the list below should be considered illustrative rather than exhaustive. You’ll need to work out threats that are specific to your current project. Don’t worry – we’ve got tips on how to do that below.

• Data loss – A very real modern risk is data loss – either through inadequate data management and back-up, or malicious activity. For example, a cyberattack that results in a customer data breach could create serious legal and reputational risk. 
• Safety risks – Some projects include occupational safety risks, the risk of people being injured in the delivery of the project. There is an obvious moral requirement to protect staff against these risks. Failure to do so can also result in legal penalties, as well as delays to project delivery. 
• Shortages of critical staff – Projects rely on the availability of critical resources. If these resources are lost or unavailable, projects can be delayed. This risk can be mitigated with appropriate capacity and scenario planning, project scoping and resource planning. 
• External risks – External factors such as natural disasters, supply chain disruptions, or regulatory changes can impact the availability of essential services and infrastructure. For example, if a project relies on third-party vendors for critical services and one of them experiences a service outage, it could disrupt project activities and timelines.
  

5. Market risks

Market risks arise from external factors that affect the demand, pricing, and competitiveness of products or services. For example:

• Credit risks – Non-payment by customers or default on financial obligations can impact project cash flow and profitability. For example, if a major client declares bankruptcy, it could strain project finances.
• Competitor risks – Actions by competitors can influence market dynamics and project viability. For instance, if a competitor introduces a product that captures market share before yours is launched, it may mean your project needs adjustments to development and positioning.
• Fluctuations in commodity prices – Volatility in commodity prices – such as oil, metals, or agricultural products – can impact project costs and profitability. For instance, if a project requires specific raw materials, any price increase could threaten the cash flow and profitability of a project.

Certain market risks are unavoidable, meaning there's not much you can mitigate them during the risk management process. 

On the flip side, several market risks are more easily evaded. For instance, those caused by inaccurate assessment of market conditions such as demand, pricing, and availability.

6. Project performance risk

Performance risk is centered around the project outcome and a failure to deliver the anticipated results lowers performance. 

Performance risks result from:

• Poor oversight – Inadequate monitoring and project control can result in deviation from project goals, deliverables, budget, and schedule.
• Underuse of tracking tools – Tracking tools help project managers monitor performance in a timely and effective way. Failure to use these tools can cause projects to stray from their intended path.
• Poor coordination between project teams – Poor communication and collaboration can lead to misunderstandings, errors, delays and deviations.

You can easily foresee performance risks but a failure to account for them can impact your company in the long run — giving competitors an edge in the market.

7. Technological risks

Modern projects are accompanied by an array of technological risks – due to internal factors and external actors. Project managers need to be vigilant to the severity of technological risk and draw on expert input to help mitigate it. 

• Malware – This includes any software used maliciously to compromise computer systems and data integrity – such as viruses, worms, and trojans. 
• Ransomware – Malicious software that encrypts files so criminals can demand payment for restoration. This can causes data loss and significant operational downtime.
• Phishing – Deceptive tactics trick individuals into revealing sensitive information, leading to identity theft and financial fraud.
• Password theft – Stolen credentials can grant attackers access to sensitive data and systems.
• Infrastructure vulnerabilities – Weaknesses in IT infrastructure – like unpatched software, or misconfigured networks – expose systems to criminal exploitation.
• Compliance and updates – Non-compliance with regulations or neglecting software updates increases the risk of breaches and system failures.
• Equipment monitoring – Inadequate monitoring of IT equipment results in undetected issues and service disruptions.
  

If you’re reading this as a non-technical person, you’ll understand the need to engage tech experts to mitigate these types of risks.

Other potential technological risks include a lack of timely infrastructure installations, compliant and updated software systems, equipment monitoring, and a shortage of reliable support systems.

8. Adverse events

Adverse events pose significant risks to businesses and require proactive risk management. These are the sort of risks you think will never happen. But, unfortunately, they do. Things like the COVID pandemic lockdowns and resulting staff and supply chain disruption. And let’s not forget that time global trade was plunged into chaos because one container ship got stuck in the Suez Canal…

• Climate change – Climate change can lead to extreme weather events that impact operations – damaging infrastructure through flooding, forest fires, or high winds, for example. 
• Infrastructure disruption – It isn’t just weather that can disrupt infrastructure. Other sources of disruption include poor maintenance, natural disasters, protests, and criminal activity.
• Supply chain disruptions – Adverse events can disrupt global supply chains, leading to shortages of raw materials and finished goods.
• Resource availability – Resource availability can be affected by all of the events above, impacting costs, schedules, and operational efficiencies.

The current climate change crisis poses an ominous threat to businesses and livelihoods. In fact, no risk registry is complete without a climate risk and disaster management process.

A resilient project risk management plan includes backup and recovery planning to handle adverse events and ensure business continuity. 

For example, data centers may backup data at multiple geographical locations, so that services can continue uninterrupted even if one of the centers is offline.

How to manage project risk in 5 steps

A comprehensive risk management process focuses on identifying and assessing risks and then taking steps to control and mitigate them. 

Use these five steps to set up a project risk management process in your organization: 

1. Identify risks and create a project risk register

The first step in project risk management is to identify and log your project risks.

There are lots of methods you can use to identify project risks, including:

• Risk checklists – Using a list of common risks known for specific types of project as a starting point 
• Brainstorming sessions – Thinking up potential risks with project stakeholders and delivery experts
• SWOT analysis – A framework for assessing the Strengths, Weaknesses, Opportunities, and Threats associated with a project
• Historic data analysis – Analyzing past project performance to identify any patterns or occurrences of risk 

Using a broad range of techniques is a good idea because they can surface different types of risk. 

Once you’ve identified your project risks, you need to log them somewhere central. This is typically called a project risk register. 

A project risk register is a central record of project risks, their likelihood, severity, and more. It is available for all project stakeholders to consult and is used by project managers to monitor and mitigate risk.

It typically includes:

• Description of the risk – The name of the risk and a short description
• Risk owner – Who’s responsible for monitoring and managing the risk
• Risk category – Whether the risk is operational, technical, financial, etc.
• Risk likelihood – The probability of the risk, ranked from low to high
• Risk impact –  The severity of the potential risk 
• Risk rating – A rating that combines the likelihood and impact of the risk, to help prioritize them
• Risk response – Whether you plan to mitigate, avoid, transfer or accept the risk (more on this below)
• Management plan – How you’ll mitigate and manage the risk
• Contingency plan – What you’ll do if the risk happens and derails your plans‍
• Dependencies – Any other activities related to the risk that could also be affected

2. Complete a risk analysis

As described above, analyzing and ranking risks is a key part of completing your risk register. 

There are a variety of techniques you can use to assess and rate project risk. Here are a few to consider.

• The Delphi technique – This technique engages a panel of anonymous experts to personally assess and prioritize project risks. It uses multiple rounds of feedback to bring diverse opinions together and build consensus on the highest priority risks.
• Scenario analysis – This is the process of analyzing different hypothetical scenarios, to understand how different risks could impact project outcomes. It’s about planning for the ‘what ifs’ and having a Plan B, C, and beyond.
• Monte Carlo simulation – This uses probability modeling techniques to simulate the impact of different risks on project outcomes.

Once you’ve analyzed your risks, you need to rank and prioritize them based on their likelihood and impact. This is typically expressed as a risk matrix, heatmap, or using descriptors like low, medium, and high risk. 

This helps you prioritize your risk mitigation, management, and response approach. For example, you may monitor high-risk factors more frequently and respond to them more quickly than lower-risk events.

3. Develop a risk response plan

Once you've identified, evaluated, and ranked project risks, you need to develop a plan to mitigate the risk.

The first step is to decide whether you are going to avoid, mitigate, transfer, or accept the risk.

• Avoid – Take actions and change project plans to eliminate the risk completely
• Mitigate – Implement proactive measures to reduce the likelihood or impact of the risk
• Transfer – Shift the risk to a third party, such as through insurance or outsourcing
• Accept – Acknowledge and tolerate the risk without taking further action
  

Once you’ve decided your approach to each risk, you need to develop specific actions in relation to them. For example, how will you change your plan? What proactive steps will you take? Who is responsible and when?

For example, as a response to potential resource risk, project managers can work out resource allocation strategies to ensure resources are available at the right place and at the right time at each stage of project performance.

Don’t forget, these steps need monitoring to ensure your mitigation plans are put into action...  

4. Monitor risks as the project progresses

There are a lot of ways you can monitor project risks – some of which are automated, which is extremely helpful in a busy, complex project. Here are some best practices for monitoring project risk.

• ‍Have regular risk status update meetings – Set up regular meetings to review the risk register and discuss any changes or developments. Communication with project stakeholders is key to risk management – at every stage of the process.
• ‍Use risk dashboards – A risk dashboard is a visual representation of the ranking and status of project risks. Heatmaps etc. help you quickly see and understand a project’s risk profile.
• ‍Set up automated alerts – Set up alerts to be notified when the status of a risk is changed on the risk register, or a new risk is added.‍
• Establish and monitor KRIs – We’ve all heard of KPIs but what are KRIs? KRIs are Key Risk Indicators. They are early warnings of risk. For example, schedule slippage or resource overutilization. Monitor these to spot risk events brewing.

5. Schedule regular reviews to adapt your plans if needed

Finally, a risk management plan needs regular reviews and updates to fortify the risk management process.

A risk review involves the project manager and members across different teams who meet to:

• Evaluate and improve the risk response plan
• Identify any bottlenecks in its implementation
• And, make sure rigorous risk control processes are in place

A risk review process recognizes the changing scope of a project and identifies areas of shifts so that project implementations can be protected from risk scenarios.

Bottom line on handling risks in project management

Project risk management planning is complex. It involves multiple stakeholders and includes complex internal and external variables.

While the process of developing a resilient risk management strategy is time-consuming, the reality is that it's just not worth avoiding it. 

If something goes wrong, having the right risk management in place can be key to ensuring that the project can get completed regardless.

So do future you a favor and get your risk management plan in place.

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• Project and resource planning
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• And more

Take control of your resource risk – and unlock your resources’ full potential – with Runn.

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