Friday 16 June 2023

Risk Analysis in Project Evaluation

Risk Analysis

Risk analysis : The analysis of uncertainties in project evaluation is an important part of realizing the unity of plan and reality, and risk analysis is the main means to reduce the impact of uncertainties on project implementation, and the purpose of improving investment accuracy is achieved through a series.

 Project evaluation is to conduct a comprehensive technical and economic demonstration and evaluation of the plan, design, and implementation plan of the proposed investment construction project from the perspective of the enterprise as a whole on the basis of the feasibility study of the investment project in direct investment activities, so as to determine the future development prospects of the investment project. 

It can be seen that the project evaluation aims to achieve the purpose of aligning the plan with the reality through a comprehensive analysis of uncertainties. As the most important evaluation means to solve uncertainties, risk management plays a key role in the whole project evaluation process.

1 Causes of uncertainty

The various data used in the project evaluation are predicted and estimated and are the project hypothetical data given under certain assumptions.

Because the various assumptions of a project change over time and the development of the project, there is a certain degree of uncertainty in the project. It can be said that uncertainties run through the whole process of project evaluation, and their generation and existence are the result of the joint action of the project itself and environmental variables.


1.1 Limitations of the assessment subject's capabilities.

The uncertainty of the project is caused by the limitations of the assessment subject's cognitive ability, that is, the depth and breadth of people's understanding of the project. In any case, the evaluation subject cannot predict the future, and cannot fully understand the development and change of the project environment and the development and change of other conditions, which is the most fundamental reason for the uncertainty of the project.


1.2 Uncertainty of future development.

As an investment plan, the implementation and profitability of investment projects always depend on the external economic and social environment in the future. Future processes such as social development, technological progress and resource development, especially the socio-economic environment in which projects operate, always have a variety of variable impacts on the implementation and construction of projects, and these future events are almost impossible to predict.

1.3 Assess the variability of the project itself.

The influencing factors of the project itself include changes in the project process, technical solutions, project duration and budget funds, etc., and any change in the project content will bring uncertainties to the entire project evaluation, and ultimately affect the economic benefits of the project.


1.4 Shortcomings of traditional evaluation methods.


The traditional project evaluation method is mainly sensitive analysis, but sensitive analysis can only point out the sensitivity of project evaluation results to uncertain factors, and cannot indicate the possibility of changes in uncertain factors. 

Therefore, the sensitivity test is not sufficient for analyzing project risk, it does not take into account whether the change in the value of the variable being tested is real, nor does it take into account the probability of various events occurring that affect the performance of the project. Risk analysis can determine the direction and scope of the impact of uncertainties on project investment and benefits; Risk analysis can clarify the allowable limit value change factors of each economic benefit index of the investment project; Risk analysis bridges the gap between project analysts and decision makers.


2. How to carry out risk management


2.1 Risk Identification

 Project risk assessment depends heavily on people's ability to identify and understand the characteristics of the project's main risks. The identification of project risks is to determine what risks exist in the project, as well as the extent to which these risks affect the project and the possible consequences, and its main task is to find out the project risks, identify the main factors that cause project risks, and make a preliminary qualitative estimate of the project risk consequences.

Generally speaking, in the process of project evaluation, attention should be paid to the identification of the following key risks: market risk, resource risk, technical risk, policy risk, social risk and implementation risk.


2.2 Risk Measures


Project risk measurement refers to the comprehensive prediction and evaluation of the size of project risk, the degree of impact of project risk and the consequences of project risk. It is a kind of project risk analysis activity that quantifies the identified project risks in project risk analysis and evaluation, mainly including the following four aspects.


2.2.1 Measurement of the probability of project risk occurrence. 

 The first task of project risk measurement is to analyze and estimate the probability of project risk occurrence, that is, the probability of project risk occurrence, which is one of the most important tasks in project risk measurement. Because the higher the probability of a project risk, the greater the possibility of causing losses or opportunities, and the stricter the management and control of the project risk. Therefore, in the project risk measurement, we must first analyze, determine and measure the probability of project risk occurrence.

2.2.2 Measurement of the severity of project risk consequences. 

Measuring the size of the possible losses or opportunities brought by project risks is one of the important contents of project risk measurement, and it is also one of the core dimensions to evaluate whether the project is feasible. This is because even if the probability of a project risk is not large, once the consequences of the risk are very serious, it must be strictly managed and controlled, otherwise the occurrence of such project risk will cause huge losses to the entire project.

2.2.3 Measurement of the scope of project risk impact. 

Analyzing and estimating the size of the scope of project risk is also an important work in project risk measurement, because even if the probability of a project risk and the severity of the consequences are not large, but once it occurs, it will affect many aspects of the project, and people also need to strictly manage and control it to prevent the occurrence of such project risks.


2.2.4 Measurement of the time course of project risk occurrence. 

That is, to analyze and estimate at what stage or when project risks may occur and how to develop and change, the reason why it is measured is because the management and control of project risks must be arranged according to the time process of project risks. Generally, the sooner the project risk that occurs and develops quickly, the priority should be monitored, and people can better control the risk of the entire project by monitoring the project risk according to the time process.

2.3 Risk Prevention

 The focus of risk management is not on the identification and measurement of risks, but on risk prevention, that is, how to reduce the degree of risk or avoid risks and reduce risk losses. When predicting the main risk factors and their degree of risk, corresponding avoidance and preventive countermeasures should be proposed according to different risk factors in order to reduce possible losses. The main coping strategies are:

2.3.1 Risk Mitigation. 

Mitigate risks by means of mitigation or foreknowledge, reduce the likelihood of risk occurrence or mitigate the adverse consequences of risks.

2.3.2 Risk prevention. 

is a proactive risk management strategy, usually taking both tangible and intangible means.

2.3.3 Risk avoidance. 

It refers to a strategy to avoid risks by actively abandoning the project or changing the project objectives and action plans when the potential threat of the project risk is too likely, the adverse consequences are too serious, and there is no other strategy available.

2.3.4 Transfer of Risk.

 It refers to the transfer of risk to other people or organizations involved in the project, so it is also called partnership sharing of risk.

2.3.5 Acceptance of Risks. 

Refers to consciously choosing to take risks and consequences. It can be proactive or passive. Accepting risk is the most hassle-free and cost-effective way to avoid risk.



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