Risk analysis of investment projects. Project implementation risk assessment

Olga Senova, economics consultant at Alt-Invest LLC. Magazine« CFO» No. 3, 2012. Prepress version of the article.

Investment risk is the measurable probability of incurring losses or missing out on the benefits of an investment. Risks can be divided into systematic and non-systematic.

Systematic risks– risks that cannot be influenced by the impact of the facility management. Always present. These include:

• Political risks (political instability, socio-economic changes)
• Natural and environmental risks (natural disasters);
• Legal risks (instability and imperfection of legislation);
• Economic risks (sharp fluctuations in exchange rates, government measures in the field of taxation, restrictions or expansion of exports and imports, currency legislation, etc.).

The value of systematic (market) risk is determined not by the specifics of an individual project, but by the general situation on the market. In countries with a developed stock market, to determine the degree of influence of these risks on a project, the coefficient? is most often used, which is determined on the basis of statistics stock market for a specific industry or company. In Russia, such statistics are very limited, therefore, as a rule, only expert estimates are used. If there is a high probability of the realization of a particular risk, if possible, additional measures are provided for leveling negative consequences in relation to the project. It is also possible to develop scenarios for the implementation of the project under various developments of external conditions.

Unsystematic risks- risks that can be eliminated partially or completely as a result of the impact of the facility management:

• Production risks (risk of non-fulfillment of planned work, failure to achieve planned production volumes, etc.);
• Financial risks (risk of not receiving the expected income from project implementation, risk of insufficient liquidity);
• Market risks (changes in market conditions, loss of market positions, price changes).

Unsystematic risks

They are more manageable. According to the impact on the project, they can be divided into several groups:

The risk of not receiving the expected income from project implementation

Manifestation: negative value of NPV (the project is not effective) or an excessive increase in the payback period of the project.

This group of risks includes everything related to the forecast of cash flows in the operational phase. This:

Marketing risk - the risk of shortfall in revenue as a result of failure to achieve the planned sales volume or a decrease in the sales price relative to the planned one. Since the profit of the project (and profit is determined to the greatest extent by revenue) determines its effectiveness, marketing risks are key project risks. To reduce this risk, it is necessary to carefully study the market, identify key factors that can affect the project, predict their occurrence or increase, and ways to neutralize the negative impact of these factors. Possible factors: changing market conditions, increased competition, loss of market positions, reduced or no demand for project products, reduced market capacity, lower product prices, etc. Marketing risk assessment is especially relevant for projects to create new production or expand existing production. For cost reduction projects in existing production, these risks are usually studied to a lesser extent.

Example: When building a hotel, marketing risks relate to two characteristics: price per room and occupancy. Suppose an investor has set a price for a hotel based on its location and class. Then the main factor of uncertainty will be occupancy. The risk analysis of such a project should be based on the study of its ability to "survive" under different meanings occupancy. And the scatter of possible values ​​should be taken from the market statistics for other similar objects (or, if the statistics could not be collected, the occupancy scatter boundaries will have to be established analytically).

• The risk of exceeding the production cost of products - production costs exceed those planned, thereby reducing the profit of the project. It is necessary to analyze costs based on comparison with the costs of similar enterprises, analysis of selected suppliers of raw materials (reliability, availability, possibility of alternatives), forecasting the cost of raw materials.

Example: If among the raw materials consumed by the project there are agricultural products or, for example, a significant share of the cost is occupied by petroleum products, then it will be necessary to take into account that the prices for these raw materials depend not only on inflation, but also on specific factors (harvest, conjuncture in the energy market and etc.). Often, fluctuations in the cost of raw materials cannot be fully transferred to the price of products (for example, the production of confectionery or the operation of a boiler room). In this case, it is especially important to study the dependence of project results on cost fluctuations.

• Technological risks – risks of shortfall in profit as a result of failure to achieve the planned volume of production or an increase in the cost of production due to the chosen production technology.
  Risk factors:
  Features of the applied technology - maturity of technology, features associated with the technological process and its applicability under given conditions, compliance of raw materials with the selected equipment, etc.
  Equipment supplier dishonesty– failures in the delivery of equipment, delivery of low-quality equipment, etc.
  Lack of available service for maintenance of purchased equipment– the remoteness of service departments can lead to significant downtime of the production process.

Example: Technological risks of building a brick factory in conditions where there is already a building to accommodate equipment, sources of raw materials have been studied, and the equipment is supplied as a single turnkey production line by a well-known manufacturer, will be minimal. On the other hand, the construction project of the plant in conditions when the place for quarrying, where raw materials will be extracted, it is required to build a plant building, and the equipment will be purchased and installed on its own from different suppliers, is huge. In the latter case, an external investor will most likely require additional guarantees or removal of risk factors (studying the situation with raw materials, attracting a general contractor, etc.).

• Administrative risks – risks of shortfall in profit as a result of the influence of the administrative factor. Interest in the project of administrative power, its support by it significantly reduces these risks.

Example: The most typical administrative risk is associated with obtaining a building permit. Usually, banks do not finance commercial real estate projects before obtaining permission, the risks are too high.

Risk of insufficient liquidity

Manifestation: negative balances Money at the end of the period in the forecast budget.

This type of risk can arise both in the investment and in the operational phase:

• Project budget overrun risk . Reason: More investments were needed than planned. The level of risk can be significantly reduced by careful investment analysis during the project planning stage. (Comparison with similar projects or productions, analysis of the technological chain, analysis complete scheme project implementation, size planning working capital). It is desirable to provide funding for contingencies. Even with the most careful investment planning, 10% over budget is considered the norm. Therefore, in particular, when attracting a loan, it is envisaged to increase the limit of funds available to the borrower, selected if necessary.
• Risk of discrepancy between the investment schedule and the financing schedule . Funding is delayed or insufficient, or there is a strict lending schedule that does not allow deviation in any direction. IN this case necessary for own funds - advance reservation of money; for a credit line – to provide in the agreement for the possibility of fluctuations in the timing of the withdrawal of funds under the credit line.
• Risk of shortage of funds at the stage of reaching the design capacity . It leads to a delay in the operational phase, a slowdown in the rate of reaching the planned capacity. Reason: Working capital financing was not considered at the planning stage.
• Risk of shortage of funds in the operational phase . Influence of internal and external factors leads to a decrease in profits and a lack of funds to pay off obligations to creditors or suppliers. When attracting credit funds for project implementation, one of the main ways to reduce this risk is to use the debt coverage ratio when building a loan repayment schedule. The essence of the method: the possible fluctuation of the money earned by the company in the period is set in accordance with the expectations of the market and economic situation. For example, with a coverage ratio of 1.3, a company's profit may decrease by 30% while maintaining its ability to repay obligations under a loan agreement.

Example: Building a business center may not seem like a very risky project if you only look at price fluctuations. On average, over the period of its existence, price fluctuations will not be so great. However, a very different picture emerges when you consider the rate of rental and the combination of income with payments. A business center built using credit funds can easily go bankrupt due to a relatively short-term (compared to its lifetime) crisis. This is exactly what happened to many facilities that started operating at the end of 2008 and 2009.

Risk of non-fulfillment of planned work during the investment phase for organizational or other reasons

Manifestation: delay or incomplete start of the operational phase.

The more complex the project under consideration, the more requirements are placed on the quality of project management - on the experience and specialization of the team implementing this project.

Ways to reduce this type of risk: selection of a qualified project management team, selection of equipment suppliers, selection of contractors, ordering a turnkey project, etc.

We have considered the main types of risks present in investment projects. It should be noted that there are many classifications of risk. The use of a specific classification in a business plan is determined by the specifics of the project. You should not get carried away with a scientific approach and give numerous complex qualifications. It is more expedient to indicate exactly those types of risks that are most significant for this investment project.

For all selected types of risk in the business plan, an assessment of their value for this investment project is given. It is most convenient to give such an assessment not on a risk score scale and through its probabilities, but through the assessment of “high”, “medium” or “low”. This is due to the fact that such a verbal, and not a numerical assessment, is much easier to prove and justify than, for example, the probability of a risk of 0.6 (the question immediately arises why exactly 0.6, and not 0.5 or 0, 7).

The main risks described in the investment project

Macroeconomic risks:

• market fluctuations
• changes in currency and tax legislation
• decline in business activity (slowdown in economic growth)
• unpredictable regulatory measures in the areas of legislation
• adverse socio-political changes in the country or region

Risks of the project itself:

• change in demand for products, works, services that are a source of income for the project
• change in pricing conditions; change in the composition and cost of resources, including material and labor
• state of the main production assets
• structure and cost of capital financing the project
• mistakes in building logistics
• poor management of the production process; increased activity of competitors
• inadequate system of planning, accounting, control and analysis
• inefficient use of property; dependence on the main supplier of material resources
• staff inefficiency
• lack of personnel motivation system

This list can be continued depending on the specifics of the implementation of a particular investment project.

The effectiveness of investments largely depends on how fully and objectively the risks were taken into account at the pre-investment stage, even before the decision to finance the project was made. This decision will help the entrepreneur, when evaluating an investment project, to take into account as correctly as possible all the threats associated with its implementation.

Assess the risks in the implementation of the project

Detailed algorithm for adjusting the discount rate for the risk factor, complex analysis threats are the main advantages of this solution. They will help to justify the feasibility of investments and to foresee possible losses. Their disadvantages include the significant impact of expert assessments on the reliability of calculations, which may result in incorrect conclusions about the economic efficiency of the project.

Among all the risks inherent in investment projects, one can single out a decrease in profits, the value of assets, and the occurrence of additional costs. Accordingly, the tasks of risk analysis are to obtain reliable criteria for the effectiveness of an investment project and increase the validity of an investment decision.

How to reflect risks in the discount rate for an investment project

One of the most simple ways take into account the risks of the project - reflect their level in the discount rate, which is used in the calculations of the economic efficiency of the project. For these purposes, the most appropriate is the cumulative calculation method (build-up approach), which makes it possible to identify various risk factors by expert means.

Formula. Calculation of the discount rate taking into account risk factors using the cumulative method

Tip: There are several indicators that can be taken as a risk-free rate.

Determining the discount rate using the cumulative method is most suitable for Russian conditions. The risk-free rate of return can be taken as the yield on long-term bonds of the Government of the Russian Federation, on deposits of Sberbank, as well as on foreign government securities with a maturity of 10–20 years.

Depending on the complexity and scale of the project being implemented, external expert consultants can be involved in assessing risk factors (especially if the project is planned to be implemented in an unfamiliar region).

Before assessing risk factors, it is necessary to decide in what range it will be carried out. For example, 1 percent is minimal risk, 4 percent is medium risk, and 7 percent or more is high risk.

As a rule, the value of the range of possible risk adjustments is determined by an expert, depending on the number of factors considered, as well as the reliability and relevance of the available risk information.

Based on the range of risk adjustments, the significance of one or another risk factor from the list (see Table 1. Distribution of risk assessments by factors) for the implementation of the project is assessed (1 - risk with the lowest significance, 7 - with the highest).

If external expert consultants are involved in the assessment, then the arithmetic average of the total risk adjustments from each expert will be the final risk adjustment most likely for this investment project. Summing up this value and the risk-free rate of return, we determine the discount rate for calculating the cash flow and performance indicators for the project.

A similar methodology for assessing project risks is widely used in practice, since it is quite simple and allows you to take into account the risks of the project even at the selection stage. However, this approach has a significant drawback - it gives only an approximate idea of ​​the level of riskiness of the project, not allowing individual factors to be taken into account. Therefore, entrepreneurs who finance projects primarily with borrowed funds should conduct a comprehensive risk analysis.

Table 1. Distribution of risk assessments by factors (fragment)

How to assess the likelihood of risk realization when planning an investment project

A comprehensive study allows you to identify and study the most significant risks for the project, calculate the probable values ​​​​of economic efficiency indicators (taking into account possible losses) and, as a result, make an informed investment decision. A full risk analysis includes their identification, qualitative description, measuring and evaluating the impact on economic efficiency indicators, designing scenarios for the development of events. In principle, by adding one more component to this system - risk management and control - we can talk about a risk management system. project activities(See diagram. Comprehensive approach to project risks).

Qualitative risk analysis. Qualitative analysis implies the identification of risks inherent in the project, their description and grouping. Usually, specific risks are identified that are directly related to the implementation of the project (project), as well as force majeure, managerial, legal. For the convenience of further tracking, project risks should be taken into account by stages: initial (pre-investment), investment (construction) and operational. The result of the stage of qualitative risk analysis should be a risk map of the investment project.

It should be remembered that the costs of risk identification work and subsequent activities should not exceed the effect obtained. In practice, the number of identified project risks can reach 150 for complex objects, but on average no more than 30–40 are considered.

The description of risks does not provide information about possible losses or their likelihood, it serves as the basis for a quantitative risk analysis.

Quantitative risk analysis. The task of quantitative analysis is to identify the most significant risks in terms of their impact on the net present value (NPV) of the project and determine the likelihood of their occurrence. Based on its results, it can be concluded whether it is worth implementing the project with the detected level of risk and the corresponding amount of potential losses.

Tip: to make an objective decision on the project, rank the risks not only by the likelihood of their occurrence, but also by the significance of the impact.

Sensitivity analysis. The most significant risks that have a significant impact on the net present value of the project are identified through sensitivity analysis. It can be carried out for all identified risks, but it is too laborious. For this reason, aggregated risk factors are singled out, the most important, according to experts, often occurring in practice or contributing to the emergence of other risks. The value of each risk factor and its impact on the income and expenses of the project are determined on the basis of expert opinion, then the planned value of NPV is recalculated.

Note that the NPV sensitivity calculation begins with the choice of the range of possible changes in the risk factor values. It is assumed that each of the risk factors has five possible implementation scenarios: decrease by 20 percent, by 10 percent, increase by 20 percent, by 10 percent, and an intermediate scenario with no change (0%). From the selected risk factors, you need to choose those that have the most significant impact on the NPV value. They are subject to further analysis. The number of significant factors depends on what threshold for reducing the NPV of the project is acceptable for the entrepreneur. If, for example, it is 5 percent, then all risk factors that have a greater impact on NPV can be classified as significant.

Probability of realization of risks. In order to avoid disagreements when determining the probability of occurrence of risk events, it is advisable to use an auxiliary (explaining) scale (see Table 2. Risk factor probability scale).

Table 2. Risk factor probability scale

The likelihood of material risk factors occurring is determined in two stages. First, the probability that the factor will change in principle is calculated (the so-called probability of the first level). For example, according to expert assessment, the probability of meeting the implementation deadlines is 40 percent (ie, the deadlines will be violated with a probability of 60 percent).

At the second stage, the probability that the risk factor will change by a certain amount (probability of the second level) is determined. It is assumed that, as in the sensitivity analysis, each of the risk factors has five possible implementation scenarios. The final probability for each risk factor is obtained by multiplying the probability of the first and second level.

Scenario design. Analysis of project development scenarios allows assessing the impact on the project of a possible simultaneous change in several risk factors. It can be performed both using spreadsheets (for example, MS Excel), and using special computer programs.

Scenario analysis involves the calculation of indicators such as standard deviation and coefficient of variation from an array of NPV values ​​obtained during sensitivity analysis. The standard deviation reflects the possible spread of NPV values ​​from the average (most likely) value. The coefficient of variation is a measure of risk per unit of return, so it can be used to compare different projects in terms of their risks.

Based on the results of scenario design, it is concluded how risky the project is and what is the expected loss of profitability in the event of a negative development of events.

It should be remembered that no methodology allows with a 100% guarantee to select projects that will be successful and profitable. Much depends on the reliability of the expert assessment, so the entrepreneur needs to be very careful in the selection of experts.

An expert assessment of all negative factors that cannot be influenced, and the development of options for minimizing manageable risks, will help to take into account the main threats to the implementation of an investment project.

Olga Senova , economics consultant Alt-Invest LLC

By identifying and analyzing project investment risks, the company tries to take into account the likelihood of negative consequences and the amount of lost profits. In business projects, they can be divided into two large groups:

1. Systematic project risks. These are the risks that cannot be influenced and managed, but are always present and taken into account in the business plan:

Political (political instability, socio-economic changes);

Natural and environmental (natural disasters);

Legal (instability and imperfection of legislation);

Economic risks (state measures in the field of taxation, restrictions or expansion of export-import, currency legislation, etc.).

The value of systematic risk is determined not by the specifics of an individual project, but by the general situation on the market. In those countries where it is developed, to determine the degree of influence of these threats, it is most often used coefficient b, which is calculated based on statistics for a specific industry or organization. In Russia, such data is not enough, therefore, as a rule, only expert assessments are used.

1. Unsystematic project risks. The CFO needs to pay special attention to them, since it is possible to manage them, which means minimizing the impact on the project. They are divided into several large blocks: production (non-fulfillment of planned work, deviation from the schedule of planned production volumes, etc.), financial (failure to receive the expected income from the project, problems with insufficient liquidity) and market risks (changes in market conditions, loss of market positions , price changes). In other words, these are threats that must be taken into account without fail.

The risk of non-receipt of income during the implementation of the project

During the implementation of the project, the risk of not receiving the expected income manifests itself in the form of a negative NPV or an excessively long payback period. This group of threats includes everything related to the forecast of cash flows in the operational phase.

• How to reduce the financial risks of an investment project

Marketing risk can significantly affect the amount of revenue. This is due to the unfulfilled planned sales volume or a decrease in the previously determined sales price. Marketing risk assessment is especially relevant for projects when a new production is created or an existing one is expanded. Its impact is minimized with the help of market analysis, when key factors of influence are determined and predicted. These include changing market conditions, increased competition and loss of positions, reduced market capacity or product prices, and falling or no demand for goods.

Example
During the construction of a hotel, marketing risks primarily relate to two characteristics - price per room and occupancy. Suppose that the investor has determined the first indicator based on its location and class, and then the main factor of uncertainty will be the occupancy of the rooms. When analyzing the risks of the project, it is necessary to study the ability of the hotel to bring at least a minimum income with various loadings. The range of these data is taken from market statistics for similar properties. If the information could not be obtained, the minimum and maximum guests living in the rooms at the same time will have to be determined analytically.

The risk of growth in the production cost of products arises if the production costs exceed the planned indicators, thereby reducing the profit of the project. Therefore, in the business plan, it is necessary to analyze the costs, based on data from similar enterprises, to evaluate the cost and suppliers of raw materials (reliability, availability, the possibility of alternative purchases).

Example
If among the raw materials consumed during the implementation of the project there are agricultural products or a significant share of the cost is occupied by petroleum products, then it will be necessary to take into account that their prices depend not only on inflation, but also on specific factors (harvest, conjuncture on the energy market, etc. .). Often, the increase in raw material costs cannot be fully transferred to the price of products (for example, the production of confectionery or the operation of a boiler house), in which case it is necessary to study the dependence of project results on changes in cost.

Technological risks can also affect the profitability of a project when a company cannot achieve planned production volumes or control cost growth. Key factors include:

• features of the applied technology, first of all, its replicability and the possibility of application in given conditions, compliance of raw materials with equipment, etc.;
• dishonesty of the equipment supplier, that is, failure to meet delivery deadlines, supply of low-quality equipment, etc.;
• the lack of an accessible service for servicing the purchased equipment, since the remoteness of the service departments can lead to downtime in production.

Example
In the business plan for the construction of a brick factory, when the building is already there, the sources of raw materials have been studied, and the turnkey production line is supplied by a well-known manufacturer, technological risks will be minimal. However, if the building has not yet been erected, the site for the extraction of raw materials (quarry) has not been developed, equipment will be purchased and installed on its own from different suppliers, the project becomes less stable. Then the external investor will most likely require additional guarantees or risk minimization (studying the situation with raw materials, attracting a general contractor, etc.).

The risk of exceeding the budget during the implementation of the project

A common situation is when the forecast budget at the end of the period has negative cash balances. The risks that determine this may arise both in the investment and in the operational phase for several reasons.

The risk of exceeding the project budget is perhaps the most common - more investments were required than planned. Its impact can be significantly reduced at the planning stage - compared with similar projects or industries, analyze the technological chain, take into account the required amount of working capital. It is also worth considering additional funding for unforeseen expenses. Even with careful investment planning, going over budget by 10 percent is considered the norm. If a loan is attracted for a project, it is advisable to negotiate with bankers to increase the limit.

The risk of non-compliance with the funding schedule, resulting in funds being received late or insufficiently, or being allocated on an overly rigid schedule that does not allow for deviations. The task of the specialists who draw up the business plan is to reserve money in the company's accounts in advance (if the project is financed by its own funds) or to provide flexible schedule receiving money from the bank (if we are talking on debt financing).

The risk of a shortage of funds at the stage of reaching the design capacity may delay the work in the operational phase and slow down the achievement of the planned capacity. A similar problem arises when the financing of working capital has not been fully analyzed in the planning process.

The risk of a shortage of funds in the operational phase arises from the influence of internal and external factors that lead to a drop in profits and problems with repayment of obligations to creditors or suppliers. If the project is implemented with the help of borrowed funds, it is worth using the debt coverage ratio when building a loan repayment schedule. Its essence is that the possible fluctuation of the cash flow takes into account the expected market and economic situation. For example, with a coverage ratio of 1.3, a company's profits could be reduced by 30 percent while still being able to meet its obligations under a loan agreement.

Example
The construction of a business center can be attributed to a not very risky project, if we focus only on price fluctuations per square meter of leased space. However, a very different picture emerges when rental rates and the combination of income with payments are taken into account. A business center built using credit funds can easily go bankrupt due to a relatively short-term (compared to its lifetime) crisis. This is exactly what happened with many facilities, the start of which took place in 2008-2009.

The risk of delaying planned work in the investment phase, arising from organizational or other reasons, and, as a result, untimely or incomplete start of the operational stage. The negative effect can be minimized with the help of a qualified team of project managers, selection of reliable equipment suppliers, contractors.

In conclusion, it is worth noting that there are many classifications of risk. The specific option that will be used in the business plan is determined by the specifics of the project. Quite often there is a scientific approach and numerous complex descriptions, but you should not get carried away with this. It is more expedient to indicate exactly those potential problems that are most significant for a particular investment project.

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There are no projects without risks. Increasing the complexity of the project leads to an increase in the number and magnitude of associated risks. When we think about project management, we don't think much more about risk assessment, which is an intermediate step, but about how to develop a response plan to achieve risk reduction. Project risk management has its own specific features which will be discussed in this article.

The concept of project risk

Under the risk in project activities, we mean a probable event, as a result of which the subject who made the decision loses the opportunity to achieve the planned results of the project or its individual parameters that have a temporal, quantitative and cost estimate. The risk is characterized by certain sources or causes and has consequences, i.e. affects the results of the project. keywords in the definition are:

• probability;
• event;
• subject;
• solution;
• losses.

Project risks are always associated with uncertainty. And in this regard, we should be concerned about two points: the degree of uncertainty and its causes. Uncertainty is proposed to be understood as the state of objective conditions in which the project is accepted for execution, which does not allow foreseeing the consequences of decisions due to the inaccuracy and incompleteness of the available information. The degree of uncertainty is significant because we are only able to manage those risks for which at least some meaningful information is available.

If there is no information, then such risks are called unknown, and for them it is necessary to lay a special reserve without implementing management procedures. For this situation, the example of the risk of a sudden change in tax legislation is quite suitable. For threats for which at least minimal information is available, a response plan can already be developed, and risk minimization becomes possible. The following is a small diagram of the boundaries of risk management from the standpoint of its certainty.

Scheme of the boundaries of risk management from a position of certainty

The next point for understanding the specifics of project risk is the dynamism of the risk map, which changes as the project task is implemented. Pay attention to the diagram below. At the beginning of the project, the probability of threats is high, but the potential losses are low. But by the end of all the work on the project, the amount of losses increases significantly, and the likelihood of threats decreases. Given this feature, two conclusions follow.

1. It is advisable to carry out risk analysis several times during the project implementation. In this case, the risk map is transformed.
2. Risk minimization is most optimal at the concept development stage or at the time of development project documentation. This option is much cheaper than at the stage of direct implementation.

Model of the dynamics of risk probability and the magnitude of losses

Consider small example. If at the very beginning of the project a threat to the quality of its product is identified due to an expensive material that is not suitable for specifications, then the costs associated with the correction will be negligible. A project plan change due to a material change will cause a slight delay. If possible negative consequences are revealed at the stage of order execution, the damage may be significant, and it will not be possible to achieve a reduction in losses.

Elements of the concept of project risk management

Modern project risk management methodology involves an active approach to dealing with the sources and consequences of identified threats and hazards, in contrast to the recent past, when the response was passive. Risk management should be understood as a set of interrelated processes based on the identification, analysis of risks, development of measures to reduce the level of negative consequences arising from the occurrence of risk events. PMBOK identifies six risk management processes. A visual diagram of the sequence of these processes is presented below.

PMBOK Project Risk Management Process Diagram

The main procedures of this type of management are:

• identification;
• grade;
• response planning;
• monitoring and control.

Identification implies the identification of risks based on the identified factors of their occurrence, the documentation of their parameters. Qualitative and quantitative analysis of the causes of occurrence, the likelihood of negative consequences form the evaluation procedure. Planning for response to identified factors involves the development of measures to reduce the adverse impact on the results and parameters of the project. The project type of activity is characterized by dynamism, uniqueness of events and associated risks. Therefore, their monitoring and control occupy a special place in the management system and are carried out throughout the life cycle of the project task. Risk management provides the following.

1. Perception by project participants of uncertainties and threats in the environment of its implementation, their sources and probable negative events due to the manifestation of risks.
2. Search and expansion of opportunities for efficient and effective solution of the design problem, taking into account the identified uncertainty.
3. Development of ways to reduce project risks.
4. Refinement of project plans taking into account the identified risks and a set of measures to reduce them.

Project risks subject to control by the project manager. All participants in the project task are involved in this work to varying degrees. The software and mathematical apparatus, methods of expert assessments, interviews, discussions, brainstorming, etc. are used. Before the start of management, an information context is formed, including the identification of external and internal conditions in which tasks will be solved. External conditions include political, economic, legal, social, technological, environmental, competitive and other aspects. Possible internal conditions consist of:

• the characteristics and objectives of the project itself;
• characteristics, structure and goals of the company;
• corporate standards and regulations;
• information about the resource support of the project.

Risk management planning

The first process among the overall design hazard procedures is risk management planning. It allows you to clarify the selected methods, tools and level of management organization in relation to a particular project. The PMI Institute assigns an important role to this process for the purposes of communication with all interested parties. Below is the planning process flow chart posted in the PMBOK Guide.

Risk Management Planning Data Flow Diagram. Source: PMBOK Handbook (Fifth edition)

The risk management plan is a document that includes a specific set of sections. Consider an example of a detailed content of such a plan.

1. General provisions.
2. The main characteristics of the company.
3. Statutory characteristics of the project.
4. Goals, tasks of risk management.
5. Methodological section. The methodology includes methods, analysis and evaluation tools, sources of information that are recommended to be used to manage project risks. Methods and tools are painted according to .
6. Organization section. It includes the distribution of the roles of the project team members with the establishment of responsibility for the implementation of the procedures provided for by the plan, the composition of the relationship with other components of project management.
7. budget section. Rules for the formation and enforcement of the risk management budget are included.
8. Regulatory section, including the timing, frequency, duration of risk management operations, forms and composition of control documents.
9. Section of metrology (estimation and recalculation). Evaluation principles, parameter recalculation rules and reference scales are predetermined, serve aids qualitative and quantitative analysis.
10. Risk Thresholds. Taking into account the importance and novelty of the project implementation, the permissible values ​​of risk parameters at the level of the project and individual threats are established.
11. The reporting section is devoted to the issues of frequency, forms, procedure for filling out, submitting and reviewing reports on this block of project management.
12. Section of monitoring and documentation of project risk management.
13. Section of templates for risk management.

Identification of project risks

The next process of the considered control unit is the identification of risks. During its implementation, project risks are identified and documented. As a result, a list of risks should appear, ranked according to their degree of danger. The identification of factors should involve not only team members, but also all project participants. The PMBOK Guidelines describe this process as follows.

Extract from Section 11 of the PMBOK Guidelines.

Identification is based on the results of a study of all identified factors. At the same time, one should not forget that not all factors are identified and subject to management. During the development and refinement of project plans, new possible sources threats and dangers. The trend is that as a project moves towards completion, the number of likely risk events increases. Qualitative identification depends on the presence of a detailed one at hand. One of the useful classification features is the level of their controllability.

Classification of risks according to the level of controllability

The classification of project risks based on the sign of controllability is useful in determining under which uncontrollable factors reserves should be made. Unfortunately, the controllability of risks often does not guarantee success in managing them, so other ways of dividing are important. It is worth noting that there is no universal classification. This is due to the fact that all projects are unique and are accompanied by a lot of specific risks. In addition, it is often difficult to draw a line between similar types of risks.

Typical features of the classification are:

• sources;
• consequences;
• ways to reduce threats.

The first sign is actively used precisely at the stage of identification. The last two are useful when analyzing risk factors. Consider the types of project risks in connection with the uniqueness of their factors.

1. Specific threats from the perspective of a local project. For example, risks associated with a particular technology being introduced.
2. Specific threats from the position of the type of project implementation. Factors for construction, innovation, IT projects, etc. have specific features.
3. General risks for any projects. An example of a misalignment of plans or a low level of budget development can be given.

For identification, the literacy of the wording of the risk is important, the source, consequences and the risk itself should not be confused. The wording should be two-part and include an indication of the source due to which the risk arises, and the threatening event itself. For example, "the risk of disruption of funding due to mismatches in". As noted, the types of project risks are often divided according to the main sources. The following is an example of the most common version of such a classification.

Classification of project risks by sources

Analysis and assessment of project risks

Risk analysis and assessment are carried out in order to transform the information obtained during identification into information that allows making responsible decisions. During the qualitative analysis process, a number of expert assessments of possible adverse effects due to the identified factors are made. In the process of quantitative analysis, the values ​​of quantitative indicators of the probability of occurrence of threatening events are determined and specified. Quantitative analysis is much more laborious, but also more accurate. It requires the quality of input data, the use of advanced mathematical models and higher competence from the staff.

There are situations when qualitative analytical research is sufficient. As a result of the analytical work, the project manager intends to receive:

• a prioritized list of risks;
• a list of positions requiring additional analysis;
• assessment of the riskiness of the project as a whole.

There are expert estimates of the probability of occurrence of adverse events and the level of impact on the project. The main output of the qualitative analysis process is a list of ranked risks with completed assessments or a completed risk map. Both probabilities and influences are broken down into categorical groups within a given range of values. As a result of the assessments, various special matrices are built, in the cells of which the results of the product of the probability value and the impact level are placed. The results obtained are divided into segments, which serve as the basis for ranking threats. An example of such a likelihood/impact matrix can be found in the PMBOK Guidelines and is presented below.

An example of a probability and impact matrix.

The results of investment activities largely depend on how fully and objectively the risks are taken into account at the pre-investment stage, even before a decision is made. To understand whether the game is worth the candle, you can include a risk adjustment in the discount rate, if we are talking about small projects, or comprehensive study risks if the project is large.

In this article you will learn:

Most of the investment projects are construction projects, which are characterized by both general investment risks and specific ones. Among all the risks inherent in investment and construction projects, one can single out a decrease in profits, the value of assets, and the occurrence of additional costs. Accordingly, the tasks of risk analysis are to obtain reliable criteria for the effectiveness of an investment project and increase the validity of an investment decision 1 .

Cumulative Method

One of the easiest ways to account for project risks is to reflect their level in the discount rate that is used in calculating project economic efficiency indicators (NPV, IRR, PI, PP). For these purposes, according to the author, the most appropriate is the cumulative calculation method (build-up approach), which allows to identify various risk factors by expert means:
r = r c + r f ,
where r is the discount rate, %;
r c – risk-free rate of return, %;
rа – adjustment (premium) for risks, %.

As a risk-free rate, you can use the average annual return valuable papers corresponding to the investment project in terms of time and currency. For example, if the expected investment currency is dollars, then the rate of return on US Treasury bonds is taken into account, the maturity of which approximately corresponds to the investment period.

As far as risk adjustment is concerned, different approaches can be applied. For example, rely on Guidelines for evaluating the effectiveness of investment projects (approved by the Ministry of Economy, the Ministry of Finance, Gosstroy of Russia on June 21, 1999 No. VK 477). However, a more accurate way would be to single out individual risk factors that affect the implementation this project. They can be combined into groups: macroeconomic, political, social, regional and industry risks, as well as construction conditions (that is, the implementation of a specific project).

Table 1. The range of adjustments for risks by the factor of the uniqueness of the object

Personal experience
Sergei Glushkov

It should be remembered that the costs of risk identification work and subsequent activities should not exceed the effect obtained. In practice, the number of identified project risks can reach 150 for complex objects, but no more than 30–40 are considered on average.

The description of risks does not provide information about possible losses or their likelihood, it serves as the basis for a quantitative risk analysis.

Table 3 Project risks of an investment and construction project (extract)

Pre-investment stage		Investment (construction) stage			Operational stage
Research	Preparation for construction <1>	Procurement organization <2>	Construction and installation works (CEW)	Completion
Errors in determining the location of an object	Delay in the development of the DED	Delay in selection of applicants	Offset construction schedule	The emergence of civil liability (ecology, etc.)	Errors in determining the selling price
Errors in determining interest payments for a loan	Errors in obtaining permits for the project	Additional costs for tenders	Increase in the cost of construction and installation works as a result of shifts in terms	Disruption of commissioning works	Warranty occurrence
Errors on the physical output sq. m according to the project	Delay at the stage of coordination and approval of the design and estimate documentation		Poor quality of work	Delay in commissioning of the facility	Delay in commissioning
Transfer of proceeds abroad			Late delivery of materials	Untimely demobilization of resources
Delay in examinations	Delay in obtaining a building permit		Late delivery of equipment	Hardware Defects

<1>The stage includes the development of design estimates (DED) and work planning. - Approx. ed.
<2>The stage includes holding tenders and concluding supply contracts. - Approx. ed.

Table 4 NPV sensitivity analysis

risk factor
	–20%	–10%	0%	+10%	+20%
Change in the cost of construction and installation works (CEW)	2369	2070	1704	1363	1150
	1159	1406	1704	1968	2232
Implementation deadline shift	3493	2982	1704	878	273
Delay in the development of design estimates	1772	1740	1704	1689	1644
Untimely acquisition of land	1744	1705	1704	1686	1668

Table 5. Risk Factor Probability Scale

Quantitative risk analysis

The task of quantitative analysis is to identify the most significant risks in terms of their impact on net present value NPV project and determine the likelihood of their occurrence. Based on its results, it can be concluded whether it is worth implementing the project with the detected level of risk and the corresponding amount of potential losses.

Personal experience
Sergei Glushkov, Head of Investment Projects Department, Ecological Products Company (Moscow)

Risks must be assessed on at least two scales: materiality and probability. Those whose consequences will be negligible can be neglected, even if the probability of their implementation is high. At the same time, you should focus on managing the most significant risks - take countermeasures in time, prevent the onset of risky events, avoid them, and insure. It should be noted that only a relatively small number of risks are significant. For example, for construction projects, these are most often deviations in terms of time and costs.

Sensitivity analysis. The most significant risks that have a significant impact on the size of NPV are identified through sensitivity analysis. It can be carried out for all identified risks, but it is too laborious. For this reason, aggregated risk factors are singled out, the most important, according to experts, often occurring in practice or contributing to the emergence of other risks. For example, for almost any investment and construction project, the aggregated risk factors are changes in the cost of construction and installation works, a shift in the timing of the project, a change in the selling price of 1 sq. m of the area of ​​the object, the delay in the development of design estimates and untimely withdrawal of the land. The value of each risk factor and its impact on the income and expenses of the project are determined on the basis of expert opinion, then the planned NPV value is recalculated.

Note that the NPV sensitivity calculation begins with the choice of the range of possible changes in the risk factor values. It is assumed that each of the risk factors has five possible implementation scenarios: decrease by 20%, by 10%, increase by 20%, by 10% and an intermediate scenario that does not involve changes (0%). The NPV values ​​obtained for each of the scenarios are reflected in the table (Table 4). So, with a 20% decrease in the cost of construction and installation works, NPV increases from $1,704 thousand to $2,369 thousand, and with an increase in the cost of construction and installation works by 1%, it decreases to $1,363 thousand.

From the selected risk factors, you need to choose those that have the most significant impact on the NPV value. As can be seen from Table. 4, NPV is most significantly affected by a shift in the timing of implementation, a change in the selling price of 1 sq. m area of ​​the object and fluctuations in the cost of construction and installation works. They are subject to further analysis. The number of significant factors depends on what threshold for reducing the NPV of the project is acceptable for the investor company. If, for example, it is 5%, then all risk factors that have a greater impact on NPV can be classified as significant.

Probability of realization of risks. In order to avoid disagreements between experts when determining the probability of occurrence of risk events, it is advisable to use an auxiliary (explanatory) scale (Table 5).

The likelihood of material risk factors occurring is determined in two stages. First, the probability that the factor will change in principle is calculated (the so-called probability of the first level). For example, according to expert assessment, the probability of meeting the implementation deadlines is 40% (that is, the deadlines will be violated with a probability of 60%).

At the second stage, the probability that the risk factor will change by a certain amount (probability of the second level) is determined. It is assumed that, as in the sensitivity analysis, each of the risk factors has five possible implementation scenarios. The final probability for each risk factor is obtained by multiplying the probability of the first and second levels (Table 6). So, in our example, the final probability of shifting the project implementation period in the direction of increasing the term by 10% will be 18%, and the probability of shifting the term by 20% is 2%.

Table 6 NPV sensitivity analysis

No. p / p	risk factor	NPV values ​​($ thousand) when the risk factor changes by
		–20%	–10%	0%	+10%	+20%
1	Change in the cost of construction and installation works
2	Level 1 probability, %	40	40	20	40	40
3	Level 2 probability, %	95	5	100	30	70
4	Final probability (p. 2 x p. 3/100), %	38	2	20	12	28
5	<1>	2369	2070	1704	1363	1150
6	Change in the selling price of 1 sq. m
7	Level 1 probability, %	30	30	40	30	30
8	Level 2 probability, %	5	95	100	80	20
9	Final probability (p. 7 x p. 8/100), %	1,5	28,5	40	24	6
10	The value of NPV with a change in the risk factor, $ thousand<1>	1159	1406	1704	1968	2232
11	Implementation deadline shift
12	Level 1 probability, %	20	20	60	20	20
13	Level 2 probability, %	70	30	100	90	10
14	Final probability (p. 12 x p. 13/100), %	14	6	60	18	2
15	The value of NPV with a change in the risk factor, $ thousand<1>	3493	2982	1704	878	273
16	Average value of NPV, $ thousand (according to lines 5, 10, 15)	1764

<1>The NPV values ​​correspond to the table. 4 “NPV sensitivity analysis”. - Approx. ed.

Scenario Design

Analysis of project development scenarios allows assessing the impact on the project of a possible simultaneous change in several risk factors. It can be performed both using spreadsheets (for example, MS Excel), and using special computer programs.

implies the calculation of indicators such as variance, standard deviation and coefficient of variation from the array of NPV values ​​obtained in the course of sensitivity analysis (Table 7). The standard deviation (?) reflects the possible spread of NPV values ​​from the average (most likely) value. The coefficient of variation is a measure of risk per unit of return, so it can be used to compare different projects in terms of their risks.

Based on the results of scenario design, it is concluded how risky the project is and what is the expected loss of profitability in the event of a negative development of events. In our example, the most probable NPV value for the project is $1,764 thousand, which basically corresponds to the expected level of $1,704 thousand. Nevertheless, the project can be characterized as extremely risky, as evidenced by the coefficient of variation (57.4%) and the standard deviation ( $1014 thousand). This means that with a probability of 68%, the company may suffer losses in the amount of 57.4% ($1012 thousand) of the average NPV 3 . Moreover, the main risk factor is the shift in the project implementation period (the largest spread of NPV values). The final decision is made on the basis of whether the investor is ready with a 68% probability to receive income in the amount of $752 thousand ($1764 thousand - $1012 thousand) instead of the planned $1704 thousand.

It should be remembered that no methodology allows with a 100% guarantee to select projects that will be successful and profitable. Much depends on the reliability of the expert assessment, so you need to be very careful in the selection of experts.

1 For more information, see the article “How to make the right investment decision” (“Financial Director”, 2008, No. 2 or on the website). - Approx. ed.
2 Risk management and control (stage 4) is not covered in this article. - Approx. ed.
3 Analysis of the data obtained in Table. 7 is carried out using the “three sigma” rule, according to which the deviation of NPV from its average value will not exceed the standard deviation (?) with a probability of 68.27%, two standard deviations - with a probability of 95.45%, three - 99, 7%.