How to budget for project risk management? Part 2

This is the second article of a 3-part series on the money aspects for project risk management, including a discussion on estimating, budgeting, contingency and management reserve. In this article we discuss the management cost.

In our views, management cost for project risk management include all of the activities that the project manager, project management team, and overall project team performs. These include the cost to put the plan together, cost of identification, analysis, response planning, and monitoring and controlling. Basically, the costs related to the management of project risk management including people, tools, or any other resources used. These costs do not include the response cost, which we will discuss below.

Let us take the above concept and put it into practice – how do we do it in the real world. Well, here is where we have to consider a few alternatives.

  1. Some organizations may allocate specific budget to project risk management, based on the number of people and hours required; whether by internal or external resources. This would be per the organization budgeting policies and guidelines. This approach can be quite difficult since it is challenging to identify the level of effort required by all stakeholders on the projects.
  2. Other organizations might estimate the overall the project management team effort in term of number of people, hours, and duration, and budget accordingly. This approach assumes project risk management is part of the overall effort and no need to separate its costs. For small projects, one might estimate the number of hours required but for large projects we usually determine the budget based on the number of team members and durations. Non-team members, the other stakeholders, are likely to be excluded from the budget.
  3. One more variation on the above, some organizations do not budget internal resources and only budget for external resources, such as service providers. Most, if not all, government organizations, at least in our region, uses this approach. We must stress here that when organizations use this approach it is for all internal resources and for all activities, technical and management, and is not limited to risk management.

Final Note: we need to remind the readers that these management costs are for the project and for every phase. It is important to recognize that we repeat the risk management processes in every phase. Therefore, the management cost, is part of the phases and project budgets.

The next article is about response costs