Risk management in Etablissement Kazoza et Compagnie-Rwanda

2.2.2. Risk Quantification

Following the risk identification and qualitative risk assessment phases, risks are characterized by their frequency of occurrence and the severity of their consequences. Frequency and severity are the two primary characteristics used to screen risks and separate them into minor risks that do not require further management attention and significant risks that require management attention and possibly quantitative analysis. Various methods have been developed to help classify risks according to their seriousness. One common method is to develop a two-dimensioned matrix that classifies risks into three categories based on the combined effects of their frequency and severity. It requires classifying risks into one of five states of likelihood (remote through near certain) and into five states of consequence (minimal through unacceptable). These assessments yield a five-by-five matrix that classifies a risk as either "high" (red), "moderate" (yellow), or "low" (green).

Risks need to be quantified in two dimensions. The impact of the risk needs to be assessed. The probability of risk to occur needs to be assessed. For simplicity, rate each on a 1 to 4 scale.

The larger the number, the high is the impact or probability of that event to occur. By using a matrix, a priority can be established (www.projectperfect.com).

If probability is high, and impact is low, it is a Medium risk. On the other hand if impact is high, and probability low, it is High priority. A remote chance of a catastrophe warrants more attention than a high chance of a hiccup (www.projectperfect.com).

2.2.2.1 Low Risk Events

Risks that are characterized as low can usually be disregarded and eliminated from further assessment. As risk is periodically reassessed in the future, these low risks are closed, retained, or elevated to a higher risk category (www.projectperfect.com).

2.2.2.2 Moderate Risk Events

Moderate-risk events are either high-likelihood, low-consequence events or low-likelihood, high-consequence events. An individual high-likelihood, low-consequence event by itself would have little impact on project cost or schedule outcomes. However, most projects contain myriad such risks (material prices, schedule durations, installation rates, etc.); the combined effect of numerous high-likelihood, low-consequence risks can significantly alter project outcomes. Commonly, risk management procedures accommodate this high-likelihood, low-consequence risks by determining their combined effect and developing cost and/or schedule contingency allowances to manage their influence (www.projectperfect.com).

Low-likelihood, high-consequence events, on the other hand, usually warrants individualized attention and management. At a minimum, low-likelihood, high-consequence events should be periodically monitored for changes either in their probability of occurrence or in their potential impacts (www.projectperfect.com).

2.2.2.3 High Risk Events

High-risk events are so classified either because they have a high likelihood of occurrence coupled with at least a moderate impact or they have a high impact with at least moderate likelihood. In either case, specific directed management action is warranted to reduce the probability of occurrence or the risk's negative impact (www.projectperfect.com).

An example Risk Matrix would be as follows:

	Negligible	Marginal	Critical	Catastrophic
Certain	High	High	Extreme	Extreme
Likely	Moderate	High	High	Extreme
Possible	Low	Moderate	High	Extreme
Unlikely	Low	Low	Moderate	Extreme
Rare	Low	Low	Moderate	High

Source: Cox, L.A. Jr., 2008