Risk management - Human relations - benefits
Human relations - benefits
There are many BENEFITS from RISK ASSESMENT, it is just a case of communication and making sure everyone understands the issues, how the data is collated and how the results are interpreted.
Pressure
Some individuals cope very well with pressure and even thrive on it, but some do not.
Risk assessment is a mechanism to share the knowledge of the risks involved.
Once everyone understands these there is a feeling of relief from individuals responsible for the tasks.
Timing
He who hesitates is lost. Sometimes if you wait too long for all the data to come in it may be too late to act.
This could cost you money and / or present you with considerable delays.
Bid and budget control
Early assessment will tell you whether you are going to be in a position to make a bid (if you are a contractor, which is usually based on the risk assessment by the client).
From the client’s perspective an early and accurate risk assessment will speed up any tendering processes and allow you to set a more realistic budget.
This may well be based upon setting a budget with a 20% risk of it being exceeded [see Monte Carlo risk distribution].
Ongoing plan
There is no reason why the plan can not be up and running during the risk assessment. If a budget has already been set the risk assessment will tell you, with a degree of confidence, what the risk is in exceeding that budget. Naturally, the ideal situation is to have input from the risk assessment into the base plan.
High risk focus
If you know where the high risk areas are then you can be much more confident in allotting your resource to deal with these first.
The risks will need to be categorised so that responses can be focussed.
[see The Risk Management Process].
Plan confidence
Without risk assessment there is always an element of doubt whether the budget will be exceeded. Risk assessment can help alleviate these doubts.
Of course there may be some aspects of the plan where there is absolutely no doubt as to the cost (possible but unlikely) but this will certainly not apply to the whole plan.
Price v Costs
Naturally, when you put in a bid (as a contractor) for a project this is the PRICE that you will be charging your customer.
See also the sections on ‘fixed price’ and ‘cost plus fixed fee’ contracts [see The contractor].
This PRICE will be (in simple terms) a sum of:
COST OF WORK + PROFIT = CUSTOMER PRICE.
The ‘cost of work’ is your (as the contractor) total budget that you have allowed internally to complete the project.
If you exceed this you begin to eat into your profit margin. There will be a BREAK EVEN POINT where you will make zero profit and then you will be into a loss making situation.
This may not be a problem necessarily if you are using the project as a loss leader in order to secure future work but in the main is not a desirable feature of running a project.
From a client’s viewpoint there are pros and cons in ‘fixed price’ and ‘Cost plus fixed fee’ contracts together with incentive based contracts.
We know that even risk assessment is not an exact science. It requires the input of experienced human beings to make it work.
However, any risk assessment may be better than none at all.
One problem encountered will be that the input is based upon the knowledge and experience of the individuals.
If this is flawed, won’t the risk assessment output also be of little use?
The key point is that risk assessment allows a range of possible costs (for example in the 3 point estimate) which is not available by just stating the cost will be X.
If we are talking about just one work package where:
- All goes better than planned = < budget cost
- All goes as planned = on budget cost
- Unplanned events occur = > budget cost
This may be easy to assess and the chances of any unforeseen events happening may be slim.
However, over many ‘tasks’, at a particular level in the planning, a risk will materialise.
Risk assessment is a mechanism of getting a good idea of the impact of possible ‘uncertain events’.
Note: Don’t get confused with a risk materialising and an ‘unplanned’ event. You should assume that the ‘risk’, naturally, have been identified but you hope they will not occur.
However, you allow for them either as proactive (activities in the base plan) or reactive responses (contingency plans).
In the case of an ‘unplanned’ event it must have been unforeseen and will thus raise an ‘issue’. An issue will need some sort of decision (e.g. to carry out activities to mitigate its affect) to prevent a detrimental affect on the project.
Client
It may be that the client insists on a bid price (from a contractor) that is backed up with a risk assessment.
This will give the client a degree of confidence that the price is accurate and that there will be little cost over runs.
Naturally, a contractor would be very reluctant to give the client any information concerning their cost estimates but the risk assessment that drives the SCHEDULE and therefore the completion date will be a very valuable tool. The client will want his product on time and if the risk assessment says that there is a very good chance that this will happen he will look upon your bid much more favourably.
Stakeholder
For example, if you are trying to raise finance for a project then banks etc. will view your efforts in a more favourable light with a risk assessment.
Having carried out the risk assessment and arrived at the LIKELIHOOD v TOTAL COST graph what can we get from it?
This and contingency are covered next [see Budget vs Contingency].