In the PMI PMBOK guide, Risk is defined as always in the future and is an uncertain event or condition that, if it occurs, has an effect on at least one project objective (usually in the area of budget, schedule or quality).

Risk is the scourge of project management as it is the only ‘unplanned’ event that the project team must try to first, identify, and secondly, determine the effect of this uncertainty on the overall project or organizational goals then thirdly, attempt a strategy to minimize the impact.  Risk is managed throughout the project life cycle and each risk is placed into the project Risk Register.  (See below example of Risk Register)

HOW TO CALCULATE RISK?
Each risk must be assigned a negative dollar value that indicates what the impact would be if the risk occurs (becomes a ‘realized’ risk) and this negative dollar amount is called the Impact Cost.  After this, the Probability of Occurrence (in percent) for the risk needs to be determined based on the Likelihood Factor (LF) which relates to the probability the risk will occur.  Consequence Factor (CF) relates to the Severity as it relates to cost, schedule or quality.  There are numerous scientific ways to assign Probability of Occurrence and Severity and they can become highly involved but a simple method is to use the Probability and Impact Model shown in Figure 1 that can be scaled to match your project.   Assign a 1-6 value for LF which gives increasing % of probability of occurrence (1=10%, 2=25%, 3=50%, 4=75%, 5=90%, 6=100% or Realized).  Assign 1-5 value for CF matching the impact ranges to cost, schedule or quality.

For severity think stoplight: Green, Yellow and Red.  Example: If LF is 4 then probability of occurrence is 75% and if CF is 2 then severity (LF x CF) would equal 8 which is yellow in the model.    Finally for each risk, you need to multiply the Impact Cost by the Probability of Occurrence to obtain the Factored Cost.  The Factored Cost is a negative value that indicates the present known cost of the risk and this is the number leadership will be very interested in discussing as a mitigation plan with an implementation deadline that will be needed to describe how  LF or CF are to be reduced in the future.  (See below example of Probability and Impact Model)

OPPORTUNITY RISK
Along with project risk there can be opportunity.  Opportunity enhances the project’s performance with regard to budget, schedule or quality.   Opportunity should be managed similarly as risk in the risk register with one big exception, opportunity has a positive impact (cost) on your project!  Plans to achieve the opportunity should also be included in the risk register.  Opportunity does not have severity calculated.

SO, WHAT DO WE DO NOW!
When all risks and opportunities (the R’s & O’s) have been identified in the risk register as in the example in Figure 2, the total Factored Risk and the total Factored Opportunities are added together to determine the total project Factored Risk.  If the result is positive, wonderful, you’re doing a great job; however, if negative there will be a concern by leadership and stakeholders.  Typically, program managers will hold back a certain amount of the project funds for unplanned events and this funding is called Management Reserve (MR).  Corporate leadership will want to make sure that the available MR is sufficient to cover the total project Factored Risk and if there isn’t sufficient funding then project managers can expect to have much more ‘help’ with their project.  Remember risk is the scourge of project management so attack it at all times!

Bio:

Frank Harris is a PMI certified Project Management Professional, PMP, with over 6 years management experience as a strategic member of corporate leadership teams in Defense related industries.  He obtained a Bachelor of Science in Electrical Engineering from the University of Texas at Arlington in 1989 and honorably served for six years in the U.S. Navy as an Electronics Technician.  Using his technical background in product development, manufacturing, process control, quality standards and business acquisition, Frank has been at the forefront of each company that he worked to become a positive impact for their respective market.  Using these unique skills, Frank moved from engineering and into becoming a successful Project Manager with a ‘big picture’ view obtaining his PMP certification in 2012.  To know more about Frank, you can follow him on LinkedIn at www.linkedin.com/pub/frank-harris-pmp/10/2b7/997