Risk management framework: Risk Types

risk types
risk types

This article is part of the Risk Response Development process. This is considered to be a activity inside that process. To understand the full picture please read this article first and follow the links provided to navigate the post.

Some of the most common methods for handling risks are discussed below. Hope you find the information relevant and helpful. If you have any questions or comments please post them below.

Let’s get started!

Risk Types: Technical Risks

Technical risks are problematic; they can often be the kind that cause the project to be shut down. What if the system or process does not work?

Contingency or backup plans are made for those possibilities that are foreseen.

For example, Carrier Transicold was involved in developing a new Phoenix refrigeration unit for truck-trailer applications.

This new unit was to use rounded panels made of bonded metals, which at the time was new technology for Transicold. Furthermore, one of its competitors had tried unsuccessfully to incorporate similar bonded metals in their products.

The project team was eager to make the new technology work, but it wasn’t until the very end of the project that they were able to get the new adhesives to bond adequately to complete the project.

Throughout the project, the team maintained a welded-panel fabrication approach just in case they were unsuccessful.

If this contingency approach had been needed, it would have increased production costs, but the project still would have been completed on time.

In addition to backup strategies, project managers need to develop methods quickly assess whether technical uncertainties can be resolved.

The use of sophisticated CAD programs has greatly helped resolve design problems. At the same time, Smith and Reinertsen, in their book Developing Products in Half the Time argue that there is no substitute for making something and seeing how it works, feels, or looks.

They suggest that one should first identify the high-risk technical areas, then build models or design experiments to resolve the risk as quickly as possible.

By isolating and testing the key technical questions early on in a project, project feasibility can be quickly determined and necessary adjustments made such as reworking the process or in some cases closing down the project.

Risk Types: Schedule Risks

Often organizations will defer the threat of a project coming in late until it surfaces. Here contingency funds are set aside to expedite or “crash” the project to get it back on track.

Crashing, or reducing project duration, is accomplished by shortening (compressing) one or more activities on the critical path. This comes with additional costs and risk.

Techniques for managing this situation are discussed in this article: Accelerating Project Completion. Some contingency plans can avoid costly procedures.

For example, schedules can be altered by working activities in parallel or using start to-start lag relationships. Also, using the best people tor high-risk tasks can relieve or lessen the chance of some risk events occurring.

Risk Types: Cost Risks

Projects of long duration need some contingency or price changes—which usually upward. The important point to remember when reviewing price is to avoid the trap of using one lump sum to cover price risks.

For example, if inflation has been running about 3 percent, some managers add 3 percent for resources used in the project.

This lump-sum approach does not address exactly where price protection is needed and fails to provide for tracking and control.

On cost sensitive projects, price risks should be evaluated item by item. Some purchases and contracts will not change over the life of the project. Those that may change should be identified and estimates made of the magnitude of change. This approach ensures control of the contingency funds as the project is implemented.

Risk Types: Funding Risks

What if the funding for the project is cut by 25 percent or completion projections indicate that costs will greatly exceed available funds? What are the chances of the project being canceled before completion? Seasoned project managers recognize that a complete risk assessment must include an evaluation of funding supply.

This is especially true for publicly funded projects.

Case in point was the ill-fated RAH-66 Comanche helicopter which was being developed for the U.S. Army Sikorsky Aircraft Corp. and Boeing Co. Eight billion dollars had been invested to develop a new age combat and reconnaissance helicopter, when in February 2004, the Defense Department recommended that the project be canceled. The cancellation reflected a need to cut costs and a switch toward using unmanned aircraft for surveillance as well as attack missions.

Just as government projects are subject to changes in strategy and political agenda, business firms frequently undergo changes in priorities and top management. The pet projects of the new CEO replace the pet projects of the former CEO. Resources become tight and one way to fund new projects is to cancel other projects.

Severe budget cuts or lack of adequate funding can have a devastating effect on a project. Typically, when such a fate occurs, there is a need to scale back the scope of the project to what is possible. “All-or-nothing projects” are ripe targets to budget cutters.

This was the case of the Comanche helicopter once the decision was made to move away from manned reconnaissance aircraft. Here the “chunk-ability” of the project can be an advantage.

For example, freeway projects can fall short of the original intentions but still add value for each mile completed. On a much smaller scale, similar funding risks may exist for more mundane projects.

For example, a building contractor may find that due to a sudden down-turn in the stock market the owners can no longer afford to build their house.

Or an IS consulting firm may be left empty handed when a client files bankruptcy. In the former case the contractor may have as a contingency selling the house on the open market, while unfortunately the consulting firm will haw join the long line of creditors.

The Risk Types article is part of a much larger post on risk management. If you have landed on this article directly from a search engine I would recommend you head to this article Risk Management Guide, where you can get the full picture on how I have organized the series and have the the correct sequence.


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