Choosing a project risk-handling strategy: An analytical model

Project risk management includes the process of risk identification, analysis, and handling (response). Risk handling/response is the choice of a proper strategy to reduce the likelihood of the occurrence of risk events and/or the magnitude of their negative impact. Research on risk handling is mostly opinion- or case-based and, as such, it offers scant guidelines for making the decision. Managers often choose a risk-handling strategy based on their experience or preference toward risk, with no consideration of project characteristics (e.g., project size, slack, or technical complexity) and the associated financial implications. This study assumes that the choice of the risk-handling strategy should be aligned with unique project characteristics. This study constructed a conceptual framework that defines the relationship between risk-handling strategy and relevant project characteristics. A conceptual model was developed to describe the quantitative relationships among all variables. Accordingly, optimization analysis is performed to derive a minimum-cost risk-handling strategy for a particular risk event. The findings provide insights into how various project characteristics and risk situation affect the choice of a risk-handling strategy. (C) 2007 Elsevier B.V. All rights reserved.