Risk and Uncertainty
The terms risk and uncertainty are often used interchangeably, but they have distinct definitions in program risk analysis. Simply stated, risk and its outcomes can be quantified in some definite way, while uncertainty cannot be defined because of ambiguity. Additionally, uncertainty is always present, while risks may or may not occur. Uncertainty and risk events may contain elements of both opportunity and threat.30
A risk is a potential event that could affect the program positively or negatively. A negative or unfavorable event is a threat or harm, and a positive or favorable event is an opportunity or improvement. Risk events that can be listed and defined should be included in a program’s risk register31 in the form of threats and opportunities.
Uncertainty refers to a situation in which little to no information is known about the outcome. Uncertainty may arise because of the inherent vari-ability in the actions of individuals and organizations working toward a plan. Errors may result from historical data inconsistencies or cost estimating equations and factors used to develop the estimate. Finally, biases are often found in estimating program costs and developing program schedules.
As we describe in the following sections, threats and opportunities, as well as uncertainty, can be incorporated and quantified to some degree using cost risk and uncertainty analysis.32
Definitions of risk and uncertainty are interrelated and vary across organizations, government agencies, and even fields of study. For example, some organizations consider risk as only the unfavorable outcome of an uncertain event.↩︎
A risk register is a document that contains all identified program risks. It may also include the following information for each risk: risk handling actions taken or planned, estimated probability of risk occurrence, and the potential consequence on program cost and schedule if the risk is realized.↩︎
These techniques are designed to capture general uncertainties about the future, not unforeseen catastrophic events such as major earthquakes and hurricanes.↩︎