Risks on projects can be roughly divided into project risks and technical risks.

Project risks are those that occur during the execution or building of the project. For example, suppose a piece of equipment such as a specialized filter needed for a smelter can only be purchased from a limited number of suppliers.

If there is high demand for this product and none of the suppliers can supply it on time, the timelines for completing the project will be threatened. Generally groups such as construction, purchasing, finance, and human resources are responsible for managing project risks.

Technical risks are risks that occur during the operation of a project after it is completed. For example, a tank is designed and built in such a way as to create a risk of overflowing and spilling into a river during the operation of the plant.

This type of risk should be identified during the design of the project and mitigated by modifying the design.

Sources of Project Risks

Project risks arise from such things as the following:

Project location: This includes geopolitical conditions, legal/regulatory environment, and manmade or natural catastrophes. 

For example, the risks posed by severe weather events such as floods, hurricanes, tornadoes, or extreme temperature during project execution and subsequent operation of the facilities associated with the project must be addressed.

Economic, industry, and market environment : This includes demographic trends, inflationary environment, business cycle, changes to the business structure, changes in the price of inputs (both for completion of the project and for subsequent ongoing operations), and changes in interest rates or foreign ex-change rates. 

For example, some project proponents purposely proceed with projects when the overall business cycle is in a trough. 

Although a project proponent must have the necessary financial resources, this will reduce the likelihood of cost overruns, for the equipment, material, and human resources required to execute the project can likely be procured at lower prices. 

Conversely, severe cost overruns can result when projects are executed at a peak in the business cycle.

Project size, complexity, and uniqueness: Large projects tend to be more complex than smaller projects, with increased numbers of communication channels and increased levels of project governance. 

This tends to make large projects riskier than small projects. 

Financial strength of the project proponent: It may be prudent for the project proponent to find a partner with whom to share financial risk. However, this will introduce new risks related to project governance, for there will now be two different entities involved in the project. 

Technology: Projects using leading-edge, state-of-the-art technology will require extensive bench scale, pilot scale, and demonstration scale testing to prove out the technology and develop the design criteria required to complete detailed de- sign for a commercial facility. Projects using mature, well-established technology will not require this extensive testing. 

Logistics: The transport of equipment, material, and people to and from the project site can be a major undertaking. Planning for this transport must take into account the maximum load dimensions and load weights imposed by the transport route. 

For example, a plant located on the coast could take advantage of the cost savings resulting from pre-assembled units or modules and barge transport to the site. 

On the other hand, a plant located inland will be restricted in terms of load size by the dimensional and load limits of the access road or rail line. As a result, extensive pre-assembly would not be an option. 

Communication: Communication becomes more complicated as project size increases and on remote project sites. Satellite communication or the installation of fiber optic cables may be required for the communication system to provide the bandwidth required by the project. 

Design: It may be advantageous to use low-cost global execution centers to de- sign the facilities. However, coordination with the global execution centers is more complicated than if a local execution center was used. 

Procurement: Procurement risks relate primarily to the availability and quality of equipment vendors and construction contractors. There is a risk that costs could be higher if vendor or contractor availability is low owing to lack of competition. 

Construction: Construction risks can be due to extreme weather, the layout of the overall plant site, or the skill and number of construction craft workers avail- able. For example, qualified local construction craft labor may be in short supply, and an extensive training program may be required if labor from outside the immediate plant area cannot be brought in. 

Commissioning: The simplicity of equipment and system commissioning will vary from project to project. This will affect commissioning duration and com- missioning labor requirements. 

Integration with existing operations: If the project is an expansion to existing facilities, then integration of project execution and operation of the new facilities with the existing facilities must be addressed. For example, there is the risk that construction of the new facilities could affect operation of the existing facilities or that operation of the existing facilities could affect construction of the new facilities. 

Human resources: Human resources are frequently a major source of risks on projects. Project cost and schedule can be affected depending on how the project team works together as a team. 

Sustainability: Sustainability is becoming more of an issue on projects. Sustain- ability issues include community and heritage values, disease and health risks, potential releases of hazardous materials, high sound levels, the effects of an industrial or environmental disaster, and conservation and endangered species. (See the chapter on environmental risks for more.)

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