Risk Analysis

Risk Analysis

Risk analysis process is an important connection between systematic identification of risks and rational management of the significant risks. The risk analysis process aims to evaluate the consequences associated with risks and to assess the impact of risk by using risk analysis and measurement techniques (Flanagan and Norman, 1993).

The aim behind risk analysis is a precise and objective calculation of risk, to the extent that this is possible, it allows the decision making process to be more certain (Estate Management Manual, 2002).

The purpose of risk analysis is that it attempts to capture all feasible options and to analyze the various outcomes of any decision. For building projects, clients are mainly interested in the most likely price, but projects do have cost over-runs and, too frequently, the ‘what if’ question is not asked (Flanagan and Norman, 1993).

Risk analysis involves assessing the identified risks. This first requires that the risks are quantified in terms of their effect on cost, time or revenue.

They can be analyzed by measuring their effects on the economic parameters of the project or process. In terms of risk response, three general types of response can be identified (Estate Management Manual, 2002):

1. Risk avoidance or reduction.
2. Risk transfer.
3. Risk retention”.

“The use of risk analysis gives an insight into what happens if the project does not proceed according to plan. When active minds are applied to the best available data in a structured and systematic way, there will be a clearer vision of the risks than would have been achieved by intuition alone (Flanagan and Norman, 1993)”.

“The importance of risk analysis to help project managers control cost that is relatively simple to apply, can be used throughout the life cycle of a construction project, accounts for the tendency of construction professionals to apply risk in linguistic terms, and apply their experience (Bender and Ayyub, 2001)”.

Methods of Risk Analysis

Analysis of risks are of two (2) types Quantitative or Qualitative in nature depending on the amount of information available (APM, 2000). Qualitative analysis focuses on identification together with assessment of risk, and quantitative analysis focuses on the evaluation of risk (Chapman, 2001). Then table below, summarize the various techinque used for risk analysis.

Qualitative Analysis

“This is based on a descriptive or nominal scale to describe risk events and their consequences. This analysis is mainly used in an initial evaluation of risks or for a rapid assessment. It can also be used when there is little knowledge about probability and/or impact. This method allows to identify the individual risks events with the most significant influence on project objectives. The risk events which are assessed as high priority may be further analyzed using quantitative risk analysis methods”.

“Lowe, (2002) introduced a definition for the qualitative assessment of risk involves the identification of a hierarchy of risks, their scope, factors that cause them to occur and potential dependencies. The hierarchy is based on the probability of the event and the impact on the project. In qualitative risk analysis risk management acts as a means to registering the properties of each risk (Kuismanen et al, 2002). Qualitative risk analysis assesses the importance of the identified risks and develops prioritized lists of these risks for further analysis or direct mitigation. The management team assesses each identified risk for its probability of occurring and its impact on project objectives. Sometimes experts or functional units assess the risks in their respective fields and share these assessments with the team (Office of project management process improvement, 2003). Components of risk analysis were introduced by Kindinger and Darby (2000):

1. List activities, tasks, or elements that make up the project.
2. Identify applicable risk factors.
3. Develop risk-ranking scale for each risk factor.
4. Rank risk for each activity for each risk activity.
5. Document the results and identify potential risk-reduction actions.

Uses of Qualitative Risk Analysis Results

Qualitative risk analysis results are used to aid the project management team in three important ways (Kindinger and Darby, 2000):

1. The qualitative risk analysis factor rankings for each project activity provide a first-order prioritization of project risks before the application of risk reduction actions.
2. The more meaningful, result from conducting a qualitative risk analysis is the identification of possible risk-reduction actions responding to the identified risk factors. Risk reduction recommendations are often       straightforward to make when the risk issue is identified.
3. The final use of the qualitative risk analysis is the development of input distributions for qualitative and quantitative risk modeling. The integrated qualitative and quantitative risk analysis is shown below”.