Projects are fraught with uncertainty. For this reason, the PMP Certification Exam will expect you to be able to handle some risk management. Many times, there is no historic information to help develop duration and cost estimates, so you’re uncertain about the project schedule and budget. You often don’t know exactly who will be on your team, or whether they’ll be available when you need them.

In many cases, projects are initiated to solve a problem, but there is no clear solution. Sometimes the problem itself isn’t clearly defined. Therefore, project scope is uncertain. Risk management attempts to reduce that uncertainty to an acceptable level.

In risk management, you try to reduce or eliminate the probability and impacts of threats while increasing the probability and impact of opportunities. Risk carries with it its own vocabulary. Here are some key terms you need to know.

Risk. An uncertain event or condition that if it occurs, has a positive or negative effect on one or more project objectives.

Threat. A risk that will have a negative impact on one or more project objectives.

Opportunity. A risk that will have a positive impact on one or more project objectives.

Risk tolerance. The degree, amount, or volume of risk that an organization or individual will withstand.

Risk appetite. The degree of uncertainty an entity is willing to take on, in anticipation of a reward.

Project objectives are identified in the project charter. For purposes of the exam, the objectives usually center on the scope, schedule, quality, and budget objectives.

Risks can be known or unknown. A known risk is one that you can identify, analyze, and develop a response for. Consider the following example of a known risk, using the example of a childcare center:

A piece of playground equipment is on back order and may not be available before the childcare center is scheduled to open. You can develop several responses to that risk. You can find another supplier, change the piece of equipment, open without it, see whether you can pay to expedite the process, or any other of a myriad of options.

Now, consider this example of an unknown risk:

The three electricians went out to lunch and ate meat that was undercooked and contaminated with E. coli. They were all unable to work for three days, leading to a schedule delay.

There really is no way you can plan for this kind of event. Schedule and cost reserves are usually set aside for unknown risks.

Project risk management is the least mature practice in project management. Many projects have no real risk management plan, and their approach to managing risk is limited to identifying five or so things that could go wrong and discussing them every so often. Granted, a lot of risk management occurs that’s not documented. Overall, though, there is much room for improvement.

When taking the exam, you should assume that you have a large project and ample time to plan for risk management.