The Mutual Effect Between Risk and Project Cost Management Essay Example

Introduction

Project cost management is a pertinent part in project management which includes; cost approximation, that mainly provides accurate front-end valuation, cost checking and cost assessment which has a direct effect on the risks encountered in carrying out the project (Haimes, 2015). To a project manager, the entire process provides two thematic concerns frequently experienced; firstly, how can one evaluate the extent of cost-outcome that is because of risks incurred? Secondly, how to efficiently regulate cost in the process of project development in adherence to the calculated value? In this research paper, I will provide an essential understanding to these two areas of concern; using Arabtec Construction as a real example, considered to be among the most significant construction organization in UAE to explain the correlation of risk and project cost management.

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Determining (evaluating) the extent of cost-outcome that is because of risks incurred

According to Arabtech financial analysis undertaken in the evaluation of cost-outcome concerning risks incurred (AlEid 2015). Several measures are taken into consideration when evaluating the milestone of cost-outcome; these phases/stages involved include; the underlying principle of cost accounting whereby the nature of objects are keenly assessed, and price fixing and output decisions are made. However, this evaluation as mentioned above criterion is considered under several factors not limited to; time, cost of the materials as well as marginal cost. Essentially in determining the extent of risk and accurately estimating its cost, risk identification; this would help in structuring the risk breakdown to access the level of technicality required (level of skills). This will pave the way for effective risk evaluation.

Every risk is evaluated based on the possibility that a risk incident will occur and the potential loss associated with it. Several risk happenings have higher chances of occurring as compared to others, in turn creating a variance of the risk happening. Risk evaluation shows the possibility of happening and the possible harm to the project. Devising standards of determining great bearing risks may aid in narrowing the focus of the potential dangers which need mitigation. For example, Arabtec Construction's evaluation of high impact risk is based on that if there could be an increase of 5% to the initial cost of the project, and then the risk management team is to develop a plan to minimize the cost increment (Guo et al., 2014).

Regulating cost in the process of project development in adherence to the calculated value

The central aspect which presents itself in task monitoring is to seek assurance that the project inputs are met without having to violate any of them. In high risk exposed projects, factoring in time and natural dynamics is essential. Each project is subjected to achieve changes in the course if the inputs are not adhered to (Goa et al., 2014).

Conclusion

Arithmetical models are at times used in evaluating risk since there are several diverse probable blends of risks to estimate them one at a time. For instance, the arithmetical model that's mainly used on projects is the Monte Carlo simulation, whereby it provides a conceivable variety of aftermaths through trying various unlike blends of risks created on their prospect.

References

AlEid, A. B. M. (2015). A Financial Statement Analysis on Three Major Construction Companies in the UAE (Arabtec Holding PJSC, Drake & Scull PJSC and Emaar Properties PJSC) (Doctoral dissertation, The British University in Dubai (BUiD)). https://bspace.buid.ac.ae/handle/1234/743

Guo, F., Chang-Richards, Y., Wilkinson, S., & Li, T. C. (2014). Effects of project governance structures on the management of risks in significant infrastructure projects: A comparative analysis. International Journal of Project Management, 32(5), 815-826. https://www.sciencedirect.com/science/article/abs/pii/S0263786313001324

Haimes, Y. Y. (2015). Risk modeling, assessment, and management. John Wiley & Sons.