7
2
Risk concePts
Although the terms risk and uncertainty are often used interchange-
ably, they are not the same. Risk is dened as the “cumulative eect
of the probability of uncertain occurrences that may positively or
negatively aect project objectives” (Ward 2008, 353). is is unlike
uncertainty, which considers only the event and where the probability
is completely unknown. e traditional view says that risk is a situa-
tion where an event may happen and the frequency of occurrence can
be evaluated based on a probability distribution of past occurrences or
environmental considerations. Although that observation has limited
utility in project management, it does distinguish between risk and
uncertainty. With risk, there is a sense of the relative level of event
probability. With uncertainty, however, that probability is completely
unknown.
To understand whether an event is truly “risky,” the project man-
ager must understand the potential eects resulting from its occur-
rence or nonoccurrence. Determining risk in this manner requires
judgment. For example, although an event may have a low likelihood
of occurring, the consequences, if it does occur, can be catastrophic.
A commercial airline ight illustrates this type of situation: Although
the probability of a crash is low, the consequences are generally grave.
Although many people feel uncomfortable about ying because of the
consequences of failure, most people do not consider ying a high risk.
is example also emphasizes the principle that risk greatly depends
on individual perception.
e nature of any given risk is composed of three fundamental ele-
ments: the event, the probability, and the severity (or impact) (see
Figure 2.1). e event is the description of the risk as it may occur.
Event descriptions are crucial. e probability and impact of a plane
crash at the gate are far dierent from the probability and impact of
a plane crash from an altitude of 30,000 feet. us, risk managers
8
risk ManageMent
must explore the nature of the risk event itself before they can begin
to examine risk probability and impact. Without a clear denition of
the risk event, ascertaining probability and impact become far more
dicult. As a rule, risk events should be described in full sentences. A
template for such a sentence can be as simple as: (Event) may happen
to the project, causing (impact to the project objectives). Such a con-
sistent approach to the risk denition aords a much easier journey
through the remainder of the risk process.
After the risk event has been dened, we must establish the poten-
tial severity of its impact. How badly could it hurt the objective? Only
when we have a sense of the degree of impact under consideration can
probability be assessed. Statistical data and probability theory play
important roles in determining this variable. However, because proj-
ects in the traditional project environment are unique, it is sometimes
dicult to ascertain whether an applicable historical record for com-
parison exists.
In most organizations and for most projects, there is little disagree-
ment about the level of risk if the variables are classied as follows:
Low risk
Low risk
High risk
Increasing risk
1.0
0
Severity of the consequence (impact)
Probability of occurrence
Moderate
risk
Figure 2.1 Concept of risk.

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