Project risk is defined as the chance of an event happening which would cause the actual project circumstances to differ from those assumed when forecasting project benefits and costs. Risk is an inherent part of any project, and to ensure a successful project outcome, risk must be effectively managed. Depending on the amount of information available, risk can be measured qualitatively or quantitatively.
Generally, there are three types of project risks and five ways of dealing with them. The types of project risks can be described as:
1. Variable risks: risks that represent movements in the project budget line items. It is known with 100 per cent certainty that the estimate for this type of risk will not be totally correct.
2. Estimable discrete events: discrete events that may or may not happen. They are identifiable specifically as risks in advance. Essentially all the risks in the risk matrix are estimable discrete events, identified as known unknowns.
3. Unknown unknowns: risks that are not in the risk matrix because they are not foreseen by the project team, but they do happen and do have an impact on the project.
Five approaches to dealing with project risks include:
1. Avoidance
2. Transfer
3. Mitigation
4. Acceptance
5. Creating a contingency fund
Risk avoidance would likely lead to project scope changes or even canceling a project and is usually not desirable. Optimizing the other methods is a major goal of a PPP, and is achieved by evaluating the nature of the project risks in detail and allocating them to the parties best able to manage them. If a private partner is deemed better able to mitigate a risk, responsibility for the activity related to that risk would be transferred to them entirely. In addition to transferring risk, approaches to optimizing risk allocation include sharing responsibility for certain risk, and having the public sector retain risks where there is no advantage to transferring or sharing it. The desired outcome of this process is to price the overall project, including the estimated cost of the risks, based on this optimized, or efficient, risk allocation. The end result is to reduce the overall cost of a project on this risk-adjusted basis.