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Project Management 101: How to Effectively Measure Project Risks?

Effective risk management is essential for organizations today that face uncertain and often risky corporate environment. Without effective management of the risks, no project can complete successfully. The onslaught of changing market dynamics creates increased difficulties for project managers to ensure that all the project objectives are met within the specified time and budget.

In order to ensure successful project outcome, it is essential that project managers focus on handling risks inherent in the project. And the first step in handling the risks is through devising an effective way to measure those risks.

Here we will reveal some of the effective ways project managers can effectively measure risks.

1. Quantifying the Risks

Project managers can measure risks relating to a project in different ways. One way to measure the risk is to quantify them in terms of costs. The fact is that the project cost is one of the key indicators of success. Everything ultimately boils down to money.

Once the risks are quantified in terms of cash equivalents, it can be ranked objectively. The ranking can be based on the extent of the expected loss amount. This expected loss can be based on the likelihood of its occurrence i.e. event probability x total cost of the event. Charting the quantified risks can help a project manager to see how they compare. This information can prove invaluable when preparing a risk management plan.

2. 5×5 Ordinal Scale

Another important technique to measure project risk is the 5×5 ordinal scale. This tool is used by NASA Engineering and Safety Center (NESC) to measure the risk when making decisions with respect to safety concerns.

The 5×5 ordinal scale can effectively measure both the probability and impact of the risks. It allows a project manager to identify high, medium, and low impact risks. The information can help in deciding which risks require greater consideration given the impact on project outcomes.

After identifying the risks, they are fed into a matrix that maps out the risks, its impact, and probability. High impact risks are marked in red. These require high management attention and substantial action to resolve the problem. Medium risks are marked in yellow that have some impact on performance, cost, or project schedule. Finally, low risks are marked in green. They entail minimum impact and normal management oversight is sufficient to minimize the risks.

3. Risk Data Trends

Trends identified through historical analysis of data can also help in measuring the risks. However, this technique requires the availability of precise data for qualitative risk analysis. A project manager needs to question the reality and reliability of the data that are used to identify the trends.

Once the data quality is established, it can be analyzed to gain insightful trends that will be useful in risk analysis. The trends can help a project manager to identify risks that are inherent to a project, and take appropriate risk control measures.

The above three are the most effective ways to measure project risks. Once the risks are identified project managers should create an effective risk management plan to address each risk. In this respect, an online work management software can prove invaluable in effective planning of the projects.