Risk appetite vs risk tolerance: Why it matters for project governance

Managing risk is one of the defining responsibilities of a project manager. Every project comes with uncertainty, from financial risks and regulatory hurdles to technological limitations and stakeholder expectations. The risk practice within PRINCE2® helps teams identify, assess, and control these uncertainties. But to apply it effectively, project professionals need to understand two related concepts: risk appetite and risk tolerance.

Though they sound similar, appetite and tolerance play distinct roles in governance. Appetite defines how much risk an organisation or project board is willing to pursue in order to achieve its objectives. Tolerance, on the other hand, defines the limits that cannot be exceeded without escalation. Together, they create the framework for decision-making, escalation, and stakeholder communication.

What is risk appetite?

Risk appetite reflects an organisation’s overall attitude towards risk. It is strategic in nature and often shaped by senior leadership or the project board. For example, a start-up biotech firm may have a high appetite for risk, willing to invest heavily in unproven but promising therapies. By contrast, a government healthcare project may have a low appetite, prioritising safety, compliance, and predictability over rapid innovation.

In a project context, risk appetite helps define the boundaries of acceptable opportunity and exposure. It guides how bold or cautious a project team should be when evaluating decisions, shaping the culture of risk-taking throughout delivery.

What is risk tolerance?

Risk appetite reflects an organisation’s overall attitude towards risk. It is strategic in nature and often shaped by senior leadership or the project board. For example, a start-up biotech firm may have a high appetite for risk, willing to invest heavily in unproven but promising therapies. By contrast, a government healthcare project may have a low appetite, prioritising safety, compliance, and predictability over rapid innovation.

In a project context, risk appetite helps define the boundaries of acceptable opportunity and exposure. It guides how bold or cautious a project team should be when evaluating decisions, shaping the culture of risk-taking throughout delivery.

Appetite and tolerance in practice

Understanding both appetite and tolerance is crucial because they influence governance at different levels:

• Appetite shapes the big picture: It sets the overall philosophy of how much risk is acceptable in pursuit of benefits
• Tolerance defines the boundaries: It establishes the practical limits within which the project can operate without escalation

A project with a high appetite but tight tolerances may encourage bold ideas but require close monitoring. A project with a low appetite and wide tolerances may appear cautious but give managers flexibility in day-to-day decision-making. The balance between the two needs to be clear and aligned.

Why this distinction matters for project governance

Clear governance depends on everyone understanding both appetite and tolerance. Without that clarity, decision-making can become inconsistent, and escalation either happens too often or not often enough.

Influencing decision-making

Appetite helps project managers evaluate options in line with strategic goals. Tolerance then provides a framework for deciding whether they have the authority to proceed or whether approval is needed from the board. Together, they streamline decision-making and reduce ambiguity.

Shaping risk escalation

Escalation is central to PRINCE2’s principle of manage by exception. Appetite influences what types of risks are likely to be escalated at all, while tolerance sets the trigger point for when escalation must happen. This prevents unnecessary micro-management while ensuring significant risks are reviewed at the right level.

Guiding stakeholder communication

Different stakeholders often have different views on acceptable risk. By articulating both appetite and tolerance clearly, project managers can communicate why certain risks are being accepted, why others are being escalated, and how decisions align with organisational objectives. This transparency builds trust and confidence in governance.

How PRINCE2 supports clarity on appetite and tolerance

PRINCE2 embeds appetite and tolerance into its governance framework by ensuring they are agreed upfront and documented in the project initiation document (PID). This gives the project manager clear authority and avoids confusion during delivery. Regular stage boundaries also provide opportunities to review whether tolerances are still appropriate as circumstances change.

Training teams to understand these concepts is vital. Without a shared understanding of appetite and tolerance, even well-documented frameworks can be misinterpreted. This is why PRINCE2 emphasises not only technical risk management tools, but also the importance of communication, leadership, and decision-making skills.

Appetite and tolerance as tools for confident delivery

Risk appetite and risk tolerance are practical tools that underpin governance. Appetite defines the organisation’s ambition; tolerance defines the project’s operational boundaries. Together, they provide the structure that allows project managers to act decisively while keeping projects aligned to strategy.

By making appetite and tolerance explicit, PRINCE2 ensures that risks are managed at the right level, escalations are handled consistently, and stakeholders remain informed and engaged. For project professionals, mastering these concepts means delivering with control and confidence.

Strengthen your understanding of project risk management with PRINCE2® training. Learn how appetite and tolerance shape governance, guide escalation, and help you deliver projects that balance opportunity with control. You can also read our blog on when to escalate risk.