IBIMA Publishing

Journal of Eastern Europe Research in Business and Economics

[Link]
Vol. 2018 (2018), Article ID 790198, 11 pages
DOI: 10.5171/2018.790198

Research Article

Risk Management Methods in Projects

Petr Rehacek and Blanka Bazsova

VŠB-Technical University of Ostrava, Faculty of Economics, Ostrava, Czech Republic

Correspondence should be addressed to: Petr Rehacek; perehacek@[Link]

Received date: 2 October 2017; Accepted date: 27 November 2017; Published date: 22 May 2018

Academic Editor: Lucian-Ionel Cioca

Copyright © 2018. Petr Rehacek and Blanka Bazsova. Distributed under Creative Commons
CC-BY 4.0

Abstract

The risks cause cost and time overruns in all types of projects and the risk management
methods should be implemented in all types of projects. The paper presents risk assessment
methods which aim to identify, analyze and evaluate the risks associated with the projects.
Especially construction objects life cycle is full of various risks. Risks come from many sources:
temporary project team that is collected from different companies, construction site, changes in
customer preferences, etc. Moreover, the size and complexity of reality and surrounding are
increasing which adds to the risks. The object risks can be identified and evaluated by using the
Pareto analysis, Saaty´s matrix or decision tree. We can assess uncertain events or conditions
which have a positive or negative effect on at least one construction project objective.

Keywords: evaluation, management, methods, project, risk

Introduction making is very important in the management

of projects, such as risk assessment results in
The risk factor in construction business is huge and important projects, contractor and
very high. Construction objects are unique supplier selection, etc. Each project manager
and built mostly only once. Risk management should have a basic knowledge about risks
is a concept which is used in all industries, associated to a project and how to handle
from IT related business, automobile or them. Risk management should be conducted
pharmaceutical industry, to the construction on all projects. The degree, level of detail,
sector. Each industry has developed their sophistication of tools, and amount of time
own risk management standards, but the and resources applied to risk management
general ideas of the concept usually remain should be in proportion to the characteristics
the same regardless of the sector. Decision- of the project under management and the

______________

Cite this Article as: Petr Rehacek and Blanka Bazsova (2018)," Risk Management Methods in Projects ",
Journal of Eastern Europe Research in Business and Economics, Vol. 2018 (2018), Article ID 790198,
DOI: 10.5171/2018.790198
Journal of Eastern Europe Research in Business and Economics 2
_____________________________________________________________________________

value that they can add to the outcome. Thus,

a large project that provides value to an Economic risks. There is inconstancy of
important customer would theoretically economy in the country, repayment situation
require more resources, time, and attention in manufacture sphere, inflation and funding.
to risk management than would a smaller, Considering the current economic situation,
short-term, internal project that can be this result can be reasonably expected
conducted in the background with a flexible (Tvaronavičienė and Grybaitė, 2007).
deadline.
Social risks are the growing importance to
The principles of risk management should be any effort at risk allocation. It is an area in
appropriately applied based on the specifics which political and social pressures from
of a project and the organizational parties having little interest in a project but
environment. Risk management provides having a great impact on such a project
benefits when it is implemented according to greatly influence its outcome. The impact of
good practice principles and with the financial aid on the social and economic
organizational commitment to taking the development of the region is analyzed by
decisions and performing actions in an open Ginevičius and Podvezko (2009), risk
and unbiased manner. communication in organizations is analyzed
by Conchie and Burns (2008).
The risk management process is extreme and
important. Risk measure includes risk level Weather risk. Except for extremely
determination of each objective and the risk abnormal conditions, it is a risk for the
analysis estimation by applying various contractor to assume, as its impact on
approaches and technology. Risk control construction methods can be assessed by the
process evaluates performance of risk contractor.
control. Risk identification is the first and
main step of risk management process. It is Project risks methodology is described in
describing the competitiveness conditions PMI book and IPMA Competence Baseline
and the clarification of risk and uncertainty Rehacek (2017b). The specific criteria such
factors (Rutkauskas, 2008; Zayed et al., as recognizing the value of Risk Management,
2008), recognition of potential sources of individual commitment (responsibility),
risk and uncertainty event responsibilities. open and honest communication,
According to Zavadskas et al. (2008), the organizational commitment, risk effort scaled
project risks can be divided into three groups to project and integration with Project
- external risks, project risks and internal Management are included in each risk
risks. External risks are those risks that are management process (PMI, 2013). The
beyond the control of the project relationship between project risks and IT
management team. Internal risks can be brought many authors (Ropponen and
divided according to the party who might be Lyytinen 1997, 2000; Yetton et al. 2000;
the originator of risk events such as Kwak and Stoddard 2004; Na et al. 2004;
stakeholders, designer, contractor, etc. There Zwikael and Globerson 2006; Han et al. 2007;
are various classification ways of risk Jiang et al. 2009). Many studies pointed out
management methods. External risks the hard side of the impact of the risk
(environmental criteria) involve political management on the project success.
risk, economic risk, social risk and weather Monteiro de Carvalho and Rabechini Jr.
risk. Brought examined the impact of risk
management on project performance. They
Political risks are changes in government pointed out the importance of soft skills. The
laws of legislative system, regulations and main groups of criteria of the construction
policy and improper administration system, projects risks belong to:
etc. (Li and Liao, 2007).

______________

Petr Rehacek and Blanka Bazsova (2018), Journal of Eastern Europe Research in Business and
Economics, DOI:10.5171/2018.790198
3 Journal of Eastern Europe Research in Business and Economics
____________________________________________________________________________

1. Time risk Work quality. Deflective work is considered

2. Cost risk a significant risk factor in this category
3. Work quality because not only does it result in
4. Construction risk construction delays and additional cost to the
5. Technological risk contractor but it easily leads to disputes on
the liability for the deflection.
Time risk can be determined by appraisal of Construction risk. The risks are involved in
the delay at construction, technology and for construction delay, changes in the work and
all works. construction technology.

Cost risk. The cost of opportunity product Technological risk. Designing errors, lack of
grows due to neglecting management technologies, management errors, shortage
(Zavadskas et al., 2008). of the qualified labour.

1 1 3 5 7
1 1 3 3 5
1 1 1 3 3
= 3 3
1 1 1 1 3
5 3 3
[1]

1 1 1 1 1
7 5 3 3

If we use Saaty´s matrix to assess the weight of the particular type of risk. The
importance of these risks, we can achieve the highest weight has the time and cost risk (see
results shown in Table 1. According to the table 1).
expert ´s assessment we can calculate the

Table 1: Types of risk evaluated by using Saaty´s matrix (own calculation)

Geomean Weight
Time risk 2.5365 0.386
Cost risk 2.1411 0.326
Work of 1.0000 0.152
quality
Construction 0.5818 0.088
risk
Technological 0.3165 0.048
risk

Pareto analysis is based on the principle them in depth and eliminate them to
that 80-95% of the problems are caused by a minimize their impact. The other causes
small number of causes of 5-20%. These were later named by Juran to a useful
causes were formulated by Pareto; he majority. It is based on the 80/20 rule, which
described them as a vital minority. For these means that 80% of the problems are caused
reasons, it is necessary to focus, analyze by 20% of the causes. We have to create a

______________

Petr Rehacek and Blanka Bazsova (2018), Journal of Eastern Europe Research in Business and
Economics, DOI:10.5171/2018.790198
Journal of Eastern Europe Research in Business and Economics 4
_____________________________________________________________________________

cumulative number of deficiencies and a The authors made the similar survey in 2017.
cumulative number of deficiencies in The information provided Attn Consulting
percentage. Diagram is made of two charts - Company. The survey revealed the main risks
histogram and Lorenz curve. A graphical parameters, which are connected with the
representation of Pareto´s claim, sometimes projects. The results are displayed on table 2
called the 80/20 rule, is Pareto diagram. and figure 1, which have shown that most
Pareto diagram is a diagram that helps to companies rated the severity of the 5 most
analyze causes that cause a problem. From serious types of risk.
the Pareto diagram it is possible to
determine vital causes, respectively factors The most serious risks in a project-based
that need to focus on solving the problem. organization include:
This diagram is composed of a bar graph and
a Lorenz curve. The column graph is a 1. Risk of non-compliance with
cumulative number, Lorenz curve of relative delivery date
frequency. To determine vital factors is a 2. Risk of non-compliance with
significant factor of the average factor (50%) workflows
that can be found on the Lorenz curve. Those 3. Risk of unforeseen costs
factors above the average are a vital 4. Risk of non-payment of invoices by
minority. (Bazsova, 2014). customers
5. The risk of adverse weather
A survey provided in 2016 with the 6. Risk of current and ex-employees
managers of the SME showed the biggest 7. Risk of hackers
frequency of the risk at the adverse weather. 8. Risk of competitors
9.
Table 2: The most serious types of risks from the survey

Type of risk Frequency

Risk of non-compliance with delivery date 200
Risk of non-compliance with workflows 186
Risk of unforeseen costs 159
Risk of non-payment of invoices by costumers 148
Risk of the adverse weather 108
Risk of competitors 49
Risk of hackers 11
Risk of current-and ex-employees 2
Total number of cases 863
Average 107.875
Median 128
Std. Deviation 73.2076456

______________

Petr Rehacek and Blanka Bazsova (2018), Journal of Eastern Europe Research in Business and
Economics, DOI:10.5171/2018.790198
5 Journal of Eastern Europe Research in Business and Economics
____________________________________________________________________________

Fig. 1: Pareto diagram (own calculation)

Pareto diagram showed that the importance proper for the contractor to assume (Fisk,
is at the first 3 types of risk: the risk of non 2003).
compliance with the delivery datedate, the risk of
non compliance with workflows and the risk Project member risk. Team risk refers to
of unforeseen costs. (see Fig. 2) issues associated with the project team
members,
embers, which can increase the uncertainty
Internal (Intrinsic) Risks: of a project’s outcome, such as team member
turnover, staffing build up, insufficient
• Resource risk knowledge among team members,
• Project member risk cooperation, motivation, and team
o Stakeholders’ risks communication issues.
o Designers risk Stakeholders’ risks rightfully belong to the
o Contractor risk stakeholder alone and should be retained by
o Subcontractor risk stakeholders except to the extent that they
o Suppliers risk are influenced by construction methods
o Team risk determined by the contractor, or created by
• Construction site risk suppliers controlled by the contractor.
• Documents and information Stakeholders’ influence on the external
risk environment
nvironment is analyzed by Mitkus and
Sostak (2008).
Resource risk. Materials and equipment
involve considerable
siderable risks. The availability Designers risk. The expansion of
and productivity of the resources necessary construction has placed great burdens upon
to construct the project are risks which are the design professions. Maintaining
performance standards in the face of this is

______________

Petr Rehacek and Blanka Bazsova (2018), Journal of Eastern Europe Research in Business and
Economics, DOI:10.5171/2018.790198
790198
Journal of Eastern Europe Research in Business and Economics 6
_____________________________________________________________________________

quite difficult, and occasionally, design or Changed order negotiation and delayed
specification deflections occur that create dispute resolution are significant risks
construction problems. Design failures or during project construction. Communication
constructability errors are becoming more is very important at all construction period
and more apparent, and the architect should and after finishing construction work.
bear the true cost of such failures.
Likewise, risk management has become a
Contractor risk. The prime or general timely issue widely discussed across
contractors are in the best position to assess industries. There has been study conducted
the capacity of their subcontractors, and by Rehacek (2017a) in three countries which
therefore it is they who should bear the risk emphasizes the importance of the project
of not assessing the risk properly. context considering the industry. However,
with regard to the construction industry, risk
Subcontractor risk is properly assumed by management is not commonly used. More
the contractor except where it arises from construction companies are starting to
one of the other listed risks attributable to become aware of the risk management
stakeholder or architect (Fisk, 2003). process, but are still not using models and
techniques aimed for managing risks. This
Suppliers risk. Default from obligations of contradicts the fact that the industry is trying
the supplier (Fisk, 2003). to be more cost and time efficient as well as
have more control over projects. The
Team risk. Team risk refers to issues construction industry operates in a very
associated with the project team members uncertain environment where conditions can
that can increase the uncertainty of a change due to the complexity of each project
project’s outcome, such as team member (Sanvido et al., 1992). The aim of each
turnover, staffing build up, insufficient organization is to be successful and risk
knowledge among team members, management can facilitate it. However, it
cooperation, motivation, and team should be underlined that risk management
communication issues. The working team is not a tool which ensures success but rather
must analyze the business activities of all a tool which helps to increase the probability
alliance members and identify various risk of achieving success. Risk management is
factors in business activities and their therefore a proactive rather than a reactive
characters (Gunstone, 2003; Li and Liao, concept (Tsai and Yong, 2010). They point
2007; Li et al., 2007). out naturel phenomena like earthquake, fire,
high gale, rainfall; economics phenomena like
Construction site risk. Accident exposures in materials’ costs, difficulty of financing, low
workplace are inherent in the nature of the market demand, exchange rate fluctuation,
work and are best assessed by the politics phenomenon like change of laws,
contractors and their insurance and safety bribery, corruption, etc.
advisors (Fisk, 2003).
This study brought results from the Czech
Documents and information risk. It Republic construction companies. They have
assumes: contradiction in documents; been addressed.
pretermission; law and communication.

______________

Petr Rehacek and Blanka Bazsova (2018), Journal of Eastern Europe Research in Business and
Economics, DOI:10.5171/2018.790198
7 Journal of Eastern Europe Research in Business and Economics
____________________________________________________________________________

Fig. 2: Project risk structure tree (redesigned by Tsai and Yang, 2010)

Risk Response Planning can be done by the threat does not eliminate it; the
following methods (Rajendhran and Sundar, threat still exists however it is
2011; Rehacek, 2016): owned and managed by another
party. Transferring risk can be an
1. Risk Avoidance: Risk can be warded effective way to deal with financial
off by removing the cause of the risk risk exposure. The aim is to ensure
of executing the project in a different that the risk is owned and managed
direction while still aiming to by the party best able to deal with it
accomplish project objectives. effectively.
Change project management plan to
eliminate a threat, to isolate project 3. Risk Mitigation / Reduction: Risk
objectives from the risk’s impact, or mitigation reduces the probability
to relax the project objective that is and/or impact of an adverse risk
in jeopardy, such as extending event to an acceptable threshold.
schedule or reducing the scope. Taking early action to reduce the
probability and/or impact of a risk is
2. Risk Transfer: Transferring risk often more effective.
involves finding some other party
who is willing to accept 4. Risk Exploit: This strategy seeks to
responsibility for its management, eliminate the uncertainty associated
and who will bear the liability of the with a particular upside risk by
risk should it occur. Transferring a creating the opportunity. Eliminate

______________

Petr Rehacek and Blanka Bazsova (2018), Journal of Eastern Europe Research in Business and
Economics, DOI:10.5171/2018.790198
Journal of Eastern Europe Research in Business and Economics 8
_____________________________________________________________________________

the uncertainty associated with a in reserve to deal with unknown

particular upside risk. An risks or in the form of costs to deal
opportunity is defined as a risk event with unknown risks.
that if it occurs it will have a positive
effect on achievement of project 8. Risk Control: is the final step of the
objectives. process (Rajendhran and Sundar,
2011; Rehacek, 2016). After we have
5. Risk Share: Allocate risk ownership implemented response actions, we
of an opportunity to another party must track and record their
who is best able to maximize its effectiveness and any changes to the
probability of occurrence and project risk profile. Did the response
increase the potential benefits if they actions have a positive or negative
happen. Transferring threats and effect on achieving project
sharing opportunities are similar in objectives? Responses taken in risks
that a third party is used, those to should also be documented for
whom the threats are transferred future reference and project plans.
take on the liability and those to
whom opportunities are allocated Risk Management Methods in Projects
should also be allowed to share in
the potential benefits. According to the Rajendhran and Sundar,
20011 and Rehacek, 2016 the Risk
6. Risk Enhance: This response aims to Identification can be done by brainstorming,
alter the “size” of the positive risk. Delphi Technigue, interview, past experience,
The opportunity is enhanced by checklist and questionnaire. Risk
increasing its probability and/or Assessment can be done by the following
impact, thereby maximizing the methods (according to Rajendhran and
benefits gained from the project. Sundar, 2011; Rehacek, 2016): Qualitative
Seeking to facilitate or strengthen Method, where

= ×
the cause of the opportunity, and

"# ,
proactively targeting and reinforcing
its trigger conditions.
[2]
7. Risk Acceptance: Ultimately, it is not
possible to eliminate all threats or
take advantage of all opportunities – than Quantitative methods Sensitivity
we can document them and at least Analysis: This is carried out to identify the
provide awareness that these exist uncertainty and Scenario Analysis.
and have been identified, some term
this „passive acceptance”. This Decision Trees
strategy is adopted when it is not
possible or practical to respond to The risk analysis is carried out by decision
the risk by the other strategies, or a tree diagram. Decision trees are very helpful
response is not justified by the to both formulate the problem and evaluate
grandness of the risk. When the options. In this analysis there are graphical
project manager and the project models used to represent the project and can
team decide to accept a risk, they are clearly reflect the effects of each decision
agreeing to address the risk, if and taken in the project. The decision tree in
when it happens. This involves the figure 3 displays the evaluation of the project
use of a fallback (contingency) plan company, which has three possibilities of
if a risk occurs. Contingencies can how to evolve under condition high, middle
also be in the form of sometime kept or low demand within four years. The

______________

Petr Rehacek and Blanka Bazsova (2018), Journal of Eastern Europe Research in Business and
Economics, DOI:10.5171/2018.790198
9 Journal of Eastern Europe Research in Business and Economics
____________________________________________________________________________

company has 3 possibilities of its

development in time: even fuse with other Each edge has its utility in the decision tree.
company or reduce its activities or stay in the The edges together form branches. From the
same condition as in previous year (see fig. point of view of optimality, the optimal
3). The calculation has provided with the option for the decision maker is this, which
expectation of the high demand (probability delivers maximum usability. The evaluation [3]
0.3) or with the middle demand (probability was made in years 2014-2018. The
0.5) or with the low demand (probability mentioned case study calculate the expected
0.2). usability in the stochastic decision tree as:
(

% #&' = 1
&,')*

where: i - expresses i-th node, j – expresses j-th choice.

High 10,8
demand
5

26,4
Middle 12
I=2 demand
P = 12 2 6
on
si

Low 3,6
u
F

36,4 mil. CZK demand

1.

2.
High 5,4
1 At t e n a u t i o
12,6 demand
n 8
P=1 Middle
13,6 6
3 demand
9
29,3
Low 1,2
conditions

demand 10
3. Same

High
demand 7,2
11
21,3
Middle
P =8 demand
4 12

Low
demand
13

2014 2015 2018

Fig. 3: Decision tree (own calculation)

______________

Petr Rehacek and Blanka Bazsova (2018), Journal of Eastern Europe Research in Business and
Economics, DOI:10.5171/2018.790198
Journal of Eastern Europe Research in Business and Economics 10
_____________________________________________________________________________

Conclusions 2. Conchie, S. M.; Burns, C. (2008), 'Trust and

risk communication in high-risk
Risks are being managed every day in every organizations: a test of principles from social
industry, but not in such a structured way as risk research,' Risk Analysis 28(1), 141–149.
the literature describes. However doi:10.1111/j.1539-6924.2008.01006.x
information provided in those sources is
rather messy. Some theories provided by risk 3. Fisk, E. R. (2003). Construction Project
management literature are not at all Administration. Seventh Edition. Prentice
applicable to specific industry. As also other Hall Upper Saddle River, New Jersey
researchers confirmed, the knowledge of risk Columbus, Ohio.
management is close to zero, even though the
concept of risk management is becoming 4. Ginevičius, R.; Podvezko, V. (2009),
more popular in the construction sector. 'Evaluating the changes in economic and
social development of Lithuanian counties by
Professionals in the industry are using multiple criteria methods,' Technological
techniques described in the literature and Economic Development of Economy
concerning risk management, but are not 15(3), 418–436. doi:10.3846/1392-
aware of it. Risk management technique is 8619.2009.15.418-436
rarely used by the participants in projects.
The participants used to handle the risks 5. Gunstone, S. (2003), 'Risk assessment
with an informal approach. This technique is and management of patients whom self-
not employed because of less knowledge and neglect: a ‘grey area’ for mental health
awareness among the industry. The risk workers,' Journal of Psychiatric and Mental
management technique should be applied Health Nursing 10(3), 287–296.
into any project at the initial stage of the doi:10.1046/j.1365-2850.2003.00568.x
project to get maximum benefit of the
technique. Hence, there is a thriving need to 6. Li, G.-D.; Yamaguchi, D.; Nagai, M. (2007),
have a well-documented procedure which 'A grey-based decision-making approach to
should be a one item solution to all hazards the supplier selection problem,' Mathematical
that are likely to occur during project life and Computer Modelling, 46(3–4), 573–581.
cycle. There should be a more wholesome doi:10.1016/[Link].2006.11.021
approach towards risk management instead
of the present sporadic approach towards the 7. Li, Y.; Liao, X. (2007), 'Decision support
risks. for risk analysis on dynamic alliance,'
Decision Support Systems 42(4), 2043–2059.
Acknowledgment doi:10.1016/[Link].2004.11.008

This paper was supported within the 8. Mitkus, S.; Sostak, O. R. (2008), 'Modelling
Operational Programme for Competitiveness the process for defence of third party rights
– Project No. CZ. 1.07/2.3.00/20.0296. infringed while implementing construction
investment projects,' Technological and
References Economic Development of Economy 14(2),
208–223. doi:10.3846/1392-
1. Bazsova, B. (2014), ‘Analysis and 8619.2008.14.208-223
Evaluation of Quality in University Education’
Proceedings of the 24th International 9. PMI. (2013). A Guide to the Project
Business Information Management Management Body of Knowledge (PMBOK
Association (IBIMA 2014), ISBN 978-0- Guide). Fifth Edition. Project Management
9860419-3-8, 6-7 November 2014, Milan, Institute Inc., USA.
Italy, 738-745.

______________

Petr Rehacek and Blanka Bazsova (2018), Journal of Eastern Europe Research in Business and
Economics, DOI:10.5171/2018.790198
11 Journal of Eastern Europe Research in Business and Economics
____________________________________________________________________________

10. Rajendhran, N.; Sundar, P. (2011). A Study 15. Sanvido, V., Grobler, F., Parfitt, K., Guvenis,
of Risk Assessment and Management in M., and Coyle, M. (1992), 'Critical Success
Construction. PSG College of Technology, Factors for Construction Projects,' Journal of
Coimbatore, India. Construction Engineering and Management,
118, (1), 94-111.
11. Rehacek, P. (2016), ‘Project Management
Standards’ Proceedings of the 27th IBIMA 16. Tsai, T. C.; Yang, M. L. (2010), 'Risk
Conference on Innovation Management and Assessment of Design-Bid-Build and Design-
Education Excellence Vision 2020: from Build Building Projects,' Journal of the
Regional Development Sustainability to Operations Research Society of Japan, 53(1),
Global Economic Growth, ISBN 978-0- 20 – 39.
9860419-6-9, 4 – 5 May, 2016, Milan, Italy,
218-231. WOS:000381172300028 17. Tvaronavičienė, M.; Grybaitė, V. (2007),
'Impact of FDI on Lithuanian economy:
12. Rehacek, P (2017a), 'Risk management insight into development of main economic
standards for project management,' activities,' Journal of Business Economics and
International Journal of Advanced and Applied Management 8(4), 285–290.
Sciences, 4(6), 1-13.
doi:10.21833/ijaas.2017.06.001 18. Zavadskas, E. K.; Turskis, Z.; Tamošaitiene,
13. Rehacek, P (2017b), 'Application and J. (2008), 'Contractor selection of
Usage of the Standards for Project construction in a competitive environment,'
Management and their Comparison,' Journal Journal of Business Economics and
of Engineering and Applied Sciences, 12, 994- Management 9(3), 181–187.
1002. doi:10.3923/jeasci.2017.994.1002 doi:10.3846/1611-1699.2008.9.181-187

14. Rutkauskas, A. V. (2008), 'On the 19. Zayed, T.; Amer, M.; Pan, J. (2008),
sustainability of regional competitiveness 'Assessing risk and uncertainty inherent in
development considering risk,' Technological Chinese highway projects using AHP,'
and Economic Development of Economy 14(1), International Journal of Project Management
89–99. doi:10.3846/2029-0187.2008.14.89- 26(4), 408–419.
99 doi:10.1016/[Link].2007.05.012

______________

Petr Rehacek and Blanka Bazsova (2018), Journal of Eastern Europe Research in Business and
Economics, DOI:10.5171/2018.790198