Wednesday, May 7, 2008

Potential Risks to Cost Estimation

When developing your project cost estimates, do you take potential risks into consideration? Risks are uncertain occurrences that can affect the outcome of a project.

Since they can have a significant effect on project costs, risks are an important input when developing your project cost estimates. Risks can be divided into two types: internal and external.
  • Internal risks are occurrences within the company that can affect the project cost. These can include labor shortages, poor planning, or low productivity.
  • External risks are generally outside influences that the company can do little to control. These can include supply delays, material costs, or natural disasters.
Identifying risks as either internal or external is a very basic way to organize them. Project managers who are developing cost estimates must specifically identify as many project risks as possible to plan for their effects on project costs. Internal and external risks can be separated into the following five categories.

1. Predictable risks
Predictable risks are manageable by the project team, but their extent and direction is uncertain. These risks can include market shifts, late shipments, cost and availability of materials, currency changes, inflation, and taxation.

2. Unpredictable risks
Unpredictable risks are unforeseeable and are beyond the control or influence of the project team. Unpredictable risks include vandalism, sabotage, natural hazards or disasters, and surprise actions taken by governments.

3. Technical risks
Technical risks are associated with the use and application of technology. Some of these risks can be controlled by the project team. Technical risks can include changes in technology, technical performance, and software design.

4. Non-technical risks
Non-technical risks are other events that can affect costs but are not directly related to technology. Human resource issues, schedule delays, inadequate planning, and management difficulties are all non-technical risks.

5. Legal risks
Legal risks relate to or are concerned with the law. Legal risks that could affect project costs include licenses, patent rights, contracts, and lawsuits.

Identifying and planning for potential project risks is an important input to cost estimating. Including risks will help project teams develop accurate cost estimates and keep their projects on track.

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