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.
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.
by identifies risk and I must proactive to the uncertainty event by doing this my project will be successfully doing.
You should be proactive in risk management. It will surely help you complete your project successfully.
Mathematically
Risk = an uncertain event if occurs can impact the outcome of event in a positive or negative direction
So it has two parts
Risk = Probability * impact
Now under probability theory an event can occur in three ways
1) It will happen ( a certain event) prob = 1, impact you can input based on your findings to find Risk
2) It may occur ( a probable event, however small it could be, those who talk about unknown unknowns or uncertainties all fall here) the probability could be infinitesimal or we just ignore it as It’s not worth * impact = get the risk value .
3) It will not happen ( improbable event, with zero probability) * impact = no risk associated.
There is nothing that falls outside it. Those uncertainties even we may may not think or imagine will also fall under it but only worry about the major probable events that may impact our project.
Your life has millions of variables all uncertain, even lightening striking us may have a probability, but we don’t really consider it Day to Day risk, but those who are not so lucky and it get struck , despite infinitesimal probability they loose.
Every single event whether known and unknown has a probability of occurrence and it sums up to 1.
Now you choose what your sample space is?
Well said Vinod.
I’m sorry, I disagree with the basic definitions you are using. To begin with, uncertainty is an umbrella term to define any known or unknown event or series of events. It encompasses Allowances, Contingency and Risks. Allowances are “known-knowns” whose exact value is not known at the time but whose expenditure is certain to occur. Hence an amount is assigned to this particular cost, and later revisited when additional information becomes available. Contingencies are “known-unknowns,” within the defined project scope. It is a specific provision for unforeseeable elements of cost within the defined project scope, particularly important where previous experience relating estimates and actual costs has shown that unforeseeable events that increase costs are likely to occur (AACEI). Contingency event estimates are made based on experienced judgment from subject matter experts (SMEs)on that estimate. Risks are the “unknown-unknowns” whose probability of occurrence and cost impact is not certain. But even the unknown-unknowns can be estimated by SMEs, based on their experience using Monte Carlo computer models to estimate the probability of occurrence and an estimated value of the impact. The Risk Register is where the risks (or opportunities) are listed and discussed in a Risk Workshop of SMEs, and both qualitative and quantitative descriptions are assigned to each risk element. The risk elements are prioritized, and the SMEs then look for mitigation measures to reduce or eliminate each risk. The residual post-mitigation risks are then used as the basis for the Monte Carlo computer analysis. The analysis will return the calculation that there is a (say) 80% probability that the total cost of the risks will be less than $ X thousand, or other percentages and impact cost depending on the risk estimator’s (or management’s) risk appetite. This amount should be added to the Project Base Cost (which would include Allowances) and the Contingency, defined as the Project Baseline Cost, to arrive at the project funded (or budgeted) cost.
For a more complete treatise on Uncertainty which I co-authored, please read “Addressing Uncertainties in Cost Estimates for Decommissioning Nuclear Facilities,” © OECD 2017, NEA No. 7344.
These definitions are based on the PMBOK Guide fifth edition.
Err unless you guys have decided project management should have a different definition of uncertainty than other fields of human endeavour like Science, engineering and medicine I suggest reading some of the many books on the topic. Uncertainty certainly can be measured and is used in serious fields to assign a probability that an outcome will happen within a defined range.
Google uncertainty in science or uncertainty budget
I fear you may have got some of your info from the field of economics (which can make astrology and black magic look bad) ;)
Can you explain it little further:
Uncertainty certainly can be measured and is used in serious fields to assign a probability that an outcome will happen within a defined range.
Thanks for sharing the ideas about risk and uncertainty. What Angel says is not different from your right and simple idea to make it clear. The difference is only in the statement but you both have presented the same difference eithet it is quntifiable or not which clears the fundamental difference between them. Thanks for making me more clear on the subject matter.
In uncertainty you completely lack the historical and pas information. The construction of a house or painting a wall does not fall in this category. Here you can estimate the cost will a good accuracy. Most of the times these contracts are given under fixed price or cost reimbursable.
In risk, you can guess the outcome but in uncertainty you can’t.
Can someone tell me the relationship of risk and uncertainty
Risk can be said to be an uncertain event which chances of occurrence can be predicted and measured whereas, uncertainty can also be said to be an uncertain event which chances of occurrence cannot be predicted and measured. The difference is that the probability of a risk event happening can be predicted and measured while the probability of uncertainty cannot be predicted and measured.
FAHAD
Can we say contingency plan dedicated for negative risk while management reserve dedicated for uncertain issues as we can’t guess their impacts?
This is a tricky question.
As per my understanding, since the uncertainty is a identified risk, you can passively accept the uncertainty and keep some contingency reserve based on educated guess.
I also request other visitors to share their thoughts on it.
Risk: We don’t know what is going to happen next, but we do know what the distribution looks like.
Uncertainty: We don’t know what is going to happen next, and we do not know what the possible distribution looks like.
Correct….
In my view uncertainty is imperfect knowledge. Throughout a project we strive to improve definition (reduce uncertainty) to improve chances of success (reduce risk of failure.) There are key uncertainties in projects that you must understand well before making strategic decisions.
Cost estimating is a good example to illustrate uncertainty.It is very difficult (if not impossible) to estimate the final cost of a complex project to the last cent. Do you remember what happened the last your did a remodelling job at your house? If you did not understand the uncertainty well, you may end up regretting the decision of remodeling the kitchen yourself. That is why you do the front end work: develop the scope, prepare the plans, get quotes, etc. it is to reduce uncertainty.
Uncertainty analysis helps us understand the expected ranges of outcomes & test against project objectives to make informed decisions. For example, we can test whether a project is resilient to various cost grow scenarios and make an informed decision to sanction the project. We can then characterise the risk or opportunity.
Sorry to add confusion but I agree fundamentally with Angel. .
Lets suppose we have to paint a wall in our kitchen.
Initially (at the planning stage) we are uncertain of the amount of paint to be used but can estimate it as a random number
We are uncertain of the time it will take to paint the wall .
There is a risk that the plaster will fall apart in preparation.
There is a risk that the paint will bubble after it has been applied.
Uncertainty is managed by research and by putting slack into a project
Negative Risk is managed by process improvement and recovery strategies.
Incidently you can have uncertainty about the likelihood of a risk event occuring :)
Hi Fahad,
Can you please help in providing details/difference of Perform Qualitative and Quantitative risk analysis?
Thanks,
Naveen
In Qualitative risk analysis, you prioritize the risks by multiplying their probabilities and impact. And in Quantitative risk analysis, you numerically analyse the risks. Here, you find the cost of each risk (if it occurs individually) and then you add it up to get the overall effect on the project.
Thanks a lot !!!
Both risk and uncertainty are inevitable in today’s scenario of Project Management. one has to driven his path midway.
Yes, one has to chose the best path suitable to the project.