Page 204 - Global Project Management Handbook

MANAGING RISKS AND UNCERTAINTY IN MAJOR PROJECTS 9-9

MANAGEMENT OF RISK AND UNCERTAINTY

In order to fully grasp the reality of risk management in this context, a distinction needs
to be made between two broad types of risks. First, there are risks that can be anticipated,
and second, there are risks that merge over time and cannot be easily anticipated. The
expressions known-unknown and unknown-unknown can be used to describe each. Risk
management as it is practiced in the project management community is a methodology
for dealing with anticipated risks. However, the specific dynamics of projects in this new
global environment require different and more explicit methods for managing both antici-
pated and emergent risk.
Economists have made the distinction between these two types of risk for some time.
(Knight, 1921; Keynes, 1973; Adams, 1995, all quoted in Froud, 2003) For these authors,
a risk is a future event or state that, if it materializes, will have a negative or positive
impact on the project. The future event is not completely known but at least can be identi-
fied or modeled. With enough effort, the probability of occurrence and the potential
impact on the project can be forecasted. This definition and treatment of risk are identical
to those found in the field of project management.
Uncertainty refers to the possibility of emergent indeterminate events. Under condi-
tions of low uncertainty, approximate forecasts still can be made. High uncertainty entails
conditions of indeterminacy where future events are neither identifiable nor amenable to
calculation. The strategies for managing risks and uncertainty are quite different.
Traditionally, the project management community has focused on what economists have
called risk and has tended not to deal explicitly with uncertain emergent and unforeseen
events.
The results of the IMEC show that large, complex projects face an average of four major
unexpected and potentially catastrophic risk events despite the systematic application of
very good risk management practice. Examples of emergent events are (1) a partner’s
bankruptcy, (2) a radical drop in demand triggered by a distant cause, (3) a noncoopera-
tive attitude by ministerial officials, and (4) a political turnaround.
The emergent risks can be both endogenous, or internal to the project, and exogenous,
coming from the project environment. The significant exposure to emergent risk has
many causes: (1) duration and scope of projects, (2) large number of stakeholders with
diverse and often conflicting interests, (3) their visibility, (4) the irreversibility of many
decisions, and (5) the systemic effects found in such large complex projects.

For instance, concession and BOT projects have even more exposure because their
financial viability depends on a revenue stream going out as much as 35 years. It is not
possible to anticipate all the major events over a 10-year period and even less so for a
35-year period. The scope of these projects includes many different dimensions in terms
of both their technical content and the areas of responsibility that must be managed.
The management of risk and uncertainty in the face of this dynamic unfolding has to
go much beyond risk management as it is traditionally conceptualized and practiced in
the field of project management. Risks and opportunities appear over the 10-year period
during which the dynamics of projects unfold. Risks and uncertainties can be regrouped
under such categories as (1) market, (2) institutional, and (3) design and construction.
Risk can emerge endogenously or crop up exogenously.

Sociopolitical Impacts
Large projects tend to produce large economic, environmental, and sociopolitical impacts,
both positive and negative. These impacts will affect a wide variety of stakeholders with