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SME Business News

Detecting and Mitigating Project Finance Risks

  • Written by News Company


According to project management experts, project finance is a kind of systematized financing answer used to finance projects that are capital intensive where the investors have recourse. On the other hand, if the project does not meet its objectives in relation to revenue, the investors cannot demand compensation. Additionally, should problems such as an increase in commodity prices arise during the project cycle, the investors have no right to ask for extra equity.

Pre-Construction Risks

One of the best methods to detect and alleviate pre-construction risks is to perform detailed due diligence prior to approval and lending of funds. In-depth due diligence should be used to identify pre-construction risks such as technology risk, design risk, social and community risks, and regulatory risks.

As a result of hiring independent consultants such as GRS consultants, the project investors and the other relevant stakeholders will have a better understanding of potential risks during the project undertaking. The consultants will advise on technology risks and estimated capital expenses among other things.

Construction Risks

The two significant risks during project construction are the cost and schedule. Here are the most commonly used mitigation plans during the construction phase.

  •         Performing a detailed contract review that may include a clause by clause analysis is important.
  •         Putting delay-liquidated damages clauses into action can mitigate risks.
  •         Adoption of a rigorous change management process is another step.

Operations Risks

Once the project reaches the operational phase, the primary goal is to maintain a constant generation of cash with the fewest number of upsets possible. In order to achieve positive outcomes, the operation and maintenance plans need to be useful and well above average.

Additionally, to put operational risks at bay, the operation and maintenance team needs to have experienced team members and hire competitive contractors alongside putting in place effective service level agreements.

Risk Mitigation Strategies

Here are some of the conventional risk handling and mitigation options.

  •         Monitor

Keep track of the environment that affects the behavior or impact of the risk.

  •         Assume and Accept

Recognize the existence of a particular risk and develop a decision to accept it without exerting any extra effort keep it under control.

  •         Avoid

Here, you tweak the project objectives in order to eliminate the risk. The modifications could be taken care of by a change in funding, technical goals or the project timeline.

  •         Control

Under this strategy, actions are put into place that will reduce the effects of the risks.

  •         Transfer

Reallocate the responsibility and authority to another investor or stakeholder willing to accept the risk.

Learning how best to manage risks can be a significant step towards opening up new prospects when it comes to starting new projects. Risk mitigation plans will help enhance opportunities while at the same time reducing threats to project goals.

Risk mitigation processes involve coming up with mitigation plans tailored to manage, eliminate or contain risks to an acceptable level. Once a plan is put into action, it is then monitored closely to measure its efficiency with the aim of revising it if the need arises.

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