risk vs uncertainty

The project-management environment is dynamic and complex, and often, a project manager must make decisions without having all the information. Risk and uncertainty play a key role in these situations.

In risk, you can guess probabilities and the event’s impact based on historical data, while uncertainties are unpredictable situations with no background information or data.

Understanding the difference between risk and uncertainty is essential, as it influences the decision-making approach in project management. According to a World Economic Forum (WEF) study, businesses that effectively manage risk and uncertainty tend to be more resilient. 

In today’s article, we will understand risk, uncertainty, and the difference between these terms.

Risk

A risk is the possibility of unexpected events or circumstances that can affect the project objectives. These uncertainties can arise from various sources, such as technological changes, market conditions, or external factors beyond the project team’s control. Risk management is vital to avoid setbacks and ensure project success.

Risk is when you can estimate the impact of the chance of occurring the event.

A Project Management Institute’s (PMI) 2021 Pulse of the Profession report shows the importance of risk management. The report reveals that 68% of organizations experience at least one project failure in 12 months, often due to avoidance of risk management practices. According to another Standish Group’s CHAOS Report, 40% of project failures are linked to inadequate risk management. 

This emphasizes the need to use risk management practices to manage project risks proactively.

By identifying risks early in the project, you can develop a risk-response plan to manage them proactively. This will increase the chances of meeting deadlines, staying within budget, and achieving project objectives. A proactive risk-management approach is crucial for project success.

Uncertainty

Uncertainty is a lack of complete certainty. It is the presence of unknown factors that can impact the project, but you cannot predict or measure these events. Unlike risks, uncertainties are characterized by a lack of available data or historical information. Therefore, the project management team cannot assess and develop a response plan to manage these uncertainties.

Uncertainty occurs when you cannot calculate the probability of the event occurring or the strength of its impact due to the absence of historical data.

According to a survey conducted by the Project Management Institute (PMI) in their Pulse of the Profession report for 2021, 50% of organizations reported uncertainty as a significant challenge in project management. These uncertainties can come from changes in regulatory environments, evolving market conditions, emerging technologies, etc.

Managing uncertainty is a key project management skill that allows a project manager to guide their teams through uncertain environments.

Making Decisions in Risky or Uncertain Situations

Making decisions under risk or uncertainty involves careful planning and a strategic approach.

When dealing with risks, you will assess them and develop risk-response plans. Effective risk-management planning significantly reduces the chance of project failure.

In uncertain situations, decision-making requires adaptability and flexibility. The ability to navigate uncertainty depends on flexible, agile planning and continuous monitoring. Create contingency plans, stay vigilant to changes, and be ready to adapt promptly.

Risk and uncertainty management involves effective communication with all stakeholders, including the project team, organization, project sponsor, etc. Open communication channels encourage collaboration and allow team members to share insights and adapt collectively. 

Regularly reassess the project performance and update strategies as needed. By integrating risk management practices and embracing adaptability, you can improve your decision-making under risks and uncertainties and increase the chance of achieving your project objectives with minimal hassle.

Key Differences Between Risks and Uncertainties

These are the differences between risks and uncertainties:

  • Risks can be predicted, while uncertainties cannot.
  • Risks can be managed, while uncertainties are uncontrollable.
  • Risks can be measured and quantified, while uncertainties cannot.
  • Risks can be assigned a probability, while uncertainties cannot.

Uncertainties Vs Unknown Risks

Uncertainty is not an unknown risk.

In uncertainty, you completely lack the background information of an event, even though it has been identified. In the case of unknown risks, you have the historical data, but you missed it during the risk identification process.

A Real-World Example of Risk and Uncertainty

Assume two famous teams will play a football match the next day.

Can you tell me exactly which team will win?

No, you can’t; however, you can make an educated guess by analyzing the past performances of both teams and the results of matches they played against each other.

Then you can produce the numbers (e.g., “There is a 30% chance of Team A or Team B winning the match,” or, “There is a 70% possibility of Team A or Team B losing the match.”).

Now, let’s view the same football match in a different scenario.

Again, two teams will play a game with new players.

In this situation, if somebody asked you which team would win, what would your response be?

You will be clueless because you don’t know the performance of the team and players, and you have no idea how the teams will perform.

Here, you don’t have any information on past performances and cannot predict the event’s outcome, even though the rules and the stadium are the same.

This situation is called uncertainty.

Conclusion

Managing risks is easier because you can identify them and develop a response plan based on your experience. However, managing uncertainty is difficult, as no historical records are available, and you cannot predict the outcome.

You must be cautious, proactive, and open-minded to manage risks and uncertainties so that you can complete your project successfully.

Fahad Usmani, PMP

I am Mohammad Fahad Usmani, B.E. PMP, PMI-RMP. I have been blogging on project management topics since 2011. To date, thousands of professionals have passed the PMP exam using my resources.