Does Your Project Need Finance Risk Analysis?

Project finance risk analysis can help you identify potential problems that could hinder or even kill your organization's plans. Not every project calls for this level of analysis, but it's critical for the ones that do. You need to know whether project financing risk is an issue. These three indicators will warn you that a project's finances may call for risk analysis.

Cash Intensive

Generally, this level of risk analysis is suited to large projects that require large amounts of cash or financing. Many public works will have financial risks, and it's essential to consider how they might unfold in the worst-case scenarios. A city that's funding a highway bypass, for example, has to assess the financing risks for a project that could consume millions or even billions of dollars.

The contracting scale often tips the cash intensity of a project, too. If you're going to enter into multiple and interlocking contracts with companies that will then subcontract jobs within the project, there are financial risks. You may need to explore financial hedges or insurance to handle scenarios where companies fail to deliver or materials costs explode.

Public Scrutiny

Financing risk extends beyond what a bank is willing to put into a project and what your organization can fund. Many projects create public scrutiny. If a company plans to expand an oil refinery, for example, there will be public objections. These objections can lead to lawsuits that discourage financing, government funds, and even insurance.

Even if you're confident you can meet public scrutiny, the effort will take time. Delays can create challenges for contracts and financing. You must prepare for the financial implications that even a one-month delay might have. Bear in mind that delays due to public scrutiny can push projects back years or even decades. At that point, the project's financial risk analysis will change due to factors like inflation, labor force shifts, and the macroeconomy.

Numerous Stakeholders and Counterparties

As interest in a plan grows, so does the inherent project financing risk. Stakeholders might be comfortable until their own financial risk profiles kick in. Suddenly, a capable partner turns into a hole in the budget.

Counterparties are also sources of risk. Lenders, government agencies, and sponsors may encounter issues. You need to analyze their risk to ensure you have the best picture of the project's future. To mitigate these risks, you may need to demand surety bonds, credit letters, or other guarantees.

For help with your project, contact a project finance risk analysis firm in your area.