How to Manage Project Risk: A 5-Step Guide

Key takeaways

• To manage project risk, you’ll identify potential risks, assess their impact and priority level, formulate a risk mitigation plan, and set up a continuous risk monitoring process.

• Project risk management is the process of identifying, assessing, and addressing potential events that could positively or negatively affect a project’s objectives, costs, or timeline.

• Risk management in project management is important for identifying and anticipating risks, making informed decisions, and allocating resources to reduce vulnerabilities.

A risk register in project management is a chart that lists project risks, their priority levels, mitigation plans, and other key details, often created using project management software or a spreadsheet. Learn more about common project risks, along with effective risk management strategies and tools, in the following article.

If you’re ready to start preparing for a project management role, consider pursuing the Microsoft Project Management Professional Certificate. You’ll have the opportunity to learn project management terminology, methodologies, and best practices so that you can apply them effectively in real-world scenarios. Upon completion, in as little as four months, you’ll also earn a shareable certificate for your resume.

What is risk management in project management?

In project management, risk is any potential event that can impact your project, positively or negatively, and risk management is the process of identifying and dealing with these events before or as they happen. Risk can come in many different forms, such as employee sickness, inclement weather, unexpected costs, and transportation delays.

Project risk is an uncertain condition that could affect the project’s objectives. A positive risk can be a contractor meeting delivery goals earlier than planned, while a negative risk can be ill-defined project objectives that affect the project scope later on.

All projects have inherent risks. The ability to anticipate and shepherd a project through risk is therefore one of the most important skills project managers are expected to have.

Why is project risk management important?

Project risk management is important because it enables project managers to identify and anticipate risks, develop a risk management plan, make informed decisions, and allocate resources accordingly. The key to a successful project lies in thoughtful planning and management. However, despite careful development, all projects carry some level of risk. Furthermore, the unique risks of each project can make it challenging to transfer lessons learned from one to the next. A continuous risk management process is one way to tackle unexpected project risks. In this way, project managers can reduce the likelihood of unforeseen vulnerabilities that lead to unsuccessful projects, budget overruns, and delays in completion, helping build trust with stakeholders and minimize stress on team members.

How is project risk management different from risk mitigation?

The risk management process entails planning for and anticipating risks, whereas risk mitigation has a narrower scope. Risk management is an overarching, systematic risk framework that considers risk mitigation, risk deflection, and contingency planning in enterprise- or project-wide contexts. Risk mitigation strategies, on the other hand, address risk when it happens. Risk mitigation involves creating a targeted action plan to handle already identified risks; for example, strategies to minimize human error in health care settings.

Risk categories in project management

Project risks can affect the time and resources required to bring a project to completion. Risks can be internal (within the control of the project team) or external (outside of the project team's control. Note the following types of risks and examples:

• Financial risks can include issues such as rising costs, inaccurate budget forecasts, increases in labor and materials, low sales, and challenges in securing funding.

• Strategic risks result from errors in strategy, such as choosing a project management methodology that doesn't work for the project, basing efforts on a company culture that needs updating, experiencing high employee turnover, or investing in technology that is difficult or expensive to use.

• Performance risks result from team members' missed deadlines, delays, undefined goals and key performance indicators (KPIs), insufficient or outdated market research, and scope creep (when initial goals expand or shift away from a project’s original intentions).

• External risks occur outside of the project team's control, such as changing laws and regulations, market volatility, inclement weather, vendors' missed deadlines, labor strikes, civil unrest, vandalism or damage, and supply chain issues.

• Positive risks (opportunities) are unexpected but have a positive effect on your project, such as finishing tasks earlier than expected or under budget, outperforming original goals, becoming more efficient with a new tool, or benefiting from a policy change.

• Industry-specific risks are unique to different industries and affect which risk mitigation strategies will be most effective, such as data privacy risks in the IT sector, safety hazards in the construction industry, and compliance risks in health care.

What is the most common project risk in project management?

A common project risk is scope creep. Adding unplanned project tasks, changing the project’s objectives mid-course, or incorporating new stakeholder requests are all examples of scope creep. The longer a project lasts, the more likely it is to experience scope creep.

How to manage project risk

Understanding common risk management processes and risk mitigation strategies can help you drive successful project outcomes. The risk management process helps you plan for and anticipate risks, while mitigation strategies offer tools to deal with them if they do happen.

The risk management process, or lifecycle, is a structured way of tackling risks that can happen in your project. Though you’ll find some slight variation, the risk management process, or lifecycle, generally follows the steps listed below. This process helps address both positive and negative risks.

1. Identify risks.

The first step to getting a grasp on potential risks is knowing what they are. In this step, you’ll identify individual risks that might affect your project by making a list in a spreadsheet or document of risks that might arise. Examples of common project risks include implementing a new technology program for the project, having a poorly defined project objective or deliverable, and not having adequate measures to protect the health and safety of project team members.

Use your own project management expertise and consult similar past projects to see what challenges you might expect. You’ll also want stakeholders, team members, and subject matter experts to generate ideas with you; they may bring fresh insights that can help strengthen your perspective.

2. Analyze potential risk impact.

In the risk analysis stage, you’ll explore the probability of each risk occurring, as well as the potential impact each risk will have on your project. You could begin putting this list of risks in a risk register, a chart that lays out each risk, followed by information like priority level and mitigation plans. You can record both qualitative and quantitative information.

3. Assign priority to risks.

In this stage, you’ll assign priority to risks by using the probability and impact of each risk to determine their risk levels. This means assigning each risk a high, medium, or low priority based on the factors you’ve determined. Evaluating your risks gives your team the chance to see where to focus their energy in mitigating risk.

4. Mitigate risks.

Develop a plan to mitigate each risk and record it in your risk register. The four most common ways to mitigate risks include avoiding, accepting, reducing, and transferring. Deciding which approach to use for each risk isn’t an exact science, and you’ll have to use your judgment and expertise to determine which is best:

• Avoid: While you can’t avoid every risk, do so when you can. Plan to avoid a risk when the probability of it happening is high. Has a partner vendor gained a reputation for providing low-quality work? Try to find a different one. Are you planning an event during the rainy season? Move the event indoors or to a sunnier season.

• Accept: Accepting risks can make sense if they have a low chance of happening and will have a low impact on your project. Ultimately, if the risk does happen, it shouldn’t derail your project. Say you’ve ordered sunflower arrangements for a conference, but the florist mentions a small chance of running short and having to replace some with tulips. Since the probability of risk is low and having tulips instead of sunflowers won’t upend the event, you might accept the risk instead of troubling yourself to find a new florist.

• Reduce: Reducing risk means changing elements in your plan to minimize the probability of the risk happening or its potential impact on your project. Medium and high risks are good candidates to reduce. Reducing usually requires some effort or investment. For example, a project manager could hire new team members if the team is falling behind on work. This might also mean including risk-reduction tactics in your project plan. Time buffers for complex or time-sensitive tasks can allow you some flexibility if work starts to fall behind. Having a contingency budget can help absorb unexpected costs if they arise.

• Transfer: Transferring risk entails shifting it to another party outside your project. This can mean obtaining an insurance policy or outsourcing parts of the work to a third party. The risk might still occur, but the direct impact on your project will be absorbed by somebody outside of your project.

5. Monitor risks.

In the last step, set up a process to monitor each risk as your project begins. Assigning team members to keep an eye on specific risks and mitigate them ensures you’ll have a constant sense of where the risks are and how likely they are to happen, so you'll be ready to tackle them if they occur.

Risk management is an important part of project management because risk is almost inevitable in any project. Listen to Stanton, a program manager at YouTube, talk about his experience managing risk throughout his career in the video below.

Tools for risk management 

Tools can provide structure for your team’s thoughts and efforts and serve as a point of reference throughout a project. The following are a few tools you might consider using in your risk management process.

• Risk management plan: A risk management plan is generally a living document that contains all information related to risk in your project. This can contain an executive summary, your risk register, mitigation plans, risk owners, and any other information pertaining to risk. Project managers may update the document as the project progresses and needs fluctuate.

• Risk register: A risk register, also known as a risk matrix, is a chart that contains all the risks associated with a project, as well as their priority levels, mitigation plans, and other important details. You can turn to project management software to compile risk registers. You may also choose to create your own in a spreadsheet.

Below is what a risk register might look like as a project team prepares a company's offsite event.

Read more: 12 Project Management Books for Beginners

Take your skills further with these structured resources

Keep up with in-demand skills and tools in your industry through Career Chat, our weekly LinkedIn newsletter. If you want to explore further, use these free resources to review essential project management terms, trends, and career paths:

• Bookmark for quick access: Project Management Terms and Definitions

• Watch on YouTube: AI Quick Tip: Streamline Project Management with Your AI Assistant

• Take the quiz: Project Management Career Quiz: Is It Right for You? Find Your Role

Accelerate your career growth with a Coursera Plus subscription. When you enroll in either the monthly or annual option, you’ll get access to over 10,000 courses.

Build job-ready skills with Coursera Plus

Start 7-day free trial

• 
• 
• 
• 

Start 7-day free trial