How to Develop a Risk Management Plan

Risk management should begin early during the project managment cycle.

Risk management plans attempt to minimize potential negative consequences while maximizing potential positive consequences. Developing a risk management plan should be viewed as an investment by the small-business owner because maximizing positive outcomes ultimately boosts the bottom line. The process of developing a risk management plan includes identifying the risk, analyzing it, preparing to take steps to counter it, and finally, countering it. Incorporating a risk management plan into any project undertaken will help solve problems before they arise.

Difficulty:

Moderate

Instructions

Things You'll Need

• Spreadsheet application such as MS Excel

1. Identify the risk. For example, a civil engineering project is contracted by the city to build a road with a sidewalk that intersects with a railroad track. The risk is the potential harm of trains coming into contact with people and vehicles.

2. Analyze the risk. Use all available data to make an assessment to determine how significant the risk is. Continuing the example, the civil engineering firm gathers data on railroad crossings and determines that the significance of the potential harm to people and property is severe to catastrophic if a person or vehicle remains on the crossing while a train went by.

3. Mitigate the risk. This is the action that will be taken to offset the risk from occurring. Continuing the example, the engineering firm decides that standard crossing gates are insufficient for this railroad crossing. The firm decides that it will install gates that can break away if a vehicle is trapped within them when they go down.

4. Monitor the risk to assess if there are any changes. This step is dynamic because when a plan is implemented it is often difficult to account for every risk. For example, if during construction of the railroad crossing, the engineering firm discovers that at night a nightclub situated near the railroad track produces so much noise that the audio alert to signal an approaching train cannot be heard by pedestrians who are crossing the tracks.

5. Respond to the risk. In this example, the firm responds to the nightclub problem by increasing the number of visual warnings and increases the volume level on the audio alerts.

Tips & Warnings

• If you use Excel you can have one tab displaying all the active risks and when risk items are closed out they can be moved to a second worksheet in another tab that you can call "Retired".

• A simple formula Project Managers use to quantify risk is the probability of the event occurring multiplied by its potential dollar value. For example there is a 50% chance that it may happen and if it does the impact to the budget is $5000 (.5 x 5000 = 2500) The Event Monetary Value is $2,500.

• Some Project Managers create what is known as a "threshold" in their Risk Management Plan. A typical threshold is a risk issue or event that when quantified exceeds a dollar value of X or schedule impact of Y. If that threshold is met the activities to monitor and control the response to the risk are placed in the project schedule.

• Risks occur throughout the life of the project so always be on the lookout.

References

• Carlosconsulting.com: Creating a Risk Management Plan
• Hrsa.gov: Developing a Risk Managment Plan; A Step by Step Approach