Project Estimation (3 of 3) – Risk

November 9, 2010

An important and sometimes overlooked aspect of project esimation is determing the risk associated with the project.  There is a natural tendency to simply estimate the time and cost associated with the project – assuming everything goes well. OK, perhaps, we pad our estimate a bit for uncertainty. But how much? Or ultimately, how can we be more precise in our risk assessment?

The Game of Risk

Project risk comes in a variety of forms. There can be risk associated with ‘newness’ of the project or technology. Risk can come from the lack of specifications or reliance on the customer (e.g. provide necessary parts, time on manufacturing line, ….)

So, for a sizeable project, you want to identify the risks and define their potential impact. Then, determine the possible costs of those risks in much the same way as estimating the costs of the project itself.  Finally, you can analyze the probability of the risks – individually and collectively.

Mitgating Your Risks

After your analysis, you will want to mitigate the substantial risks. For instance, you can:

  1. Minimize the risk – Do a feasibility or pilot study to reduce uncertainty.
  2. Transfer or share risk – Don’t be afraid to consult with the client and inform them of potential risks. Just like a doctors shares the potential risks of a surgery.
  3. Share risk – You may be able to find a way to share the risk. For instance, provided a fixed bid for the project + variable cost for the identified risk as pricing model.
  4. Accept or avoid risk – Ultimately, you may have to accept the risk in order to get the project.

Acceptable Risk

I know of some Alliance Partners who have established acceptable risk factors. For instance, what is the ratio of risk to total project cost. Or, the owners may even have cumulative project risk vs. annual revenue. At some point, you need to know, when to say ‘no’, this project is just too risky.