The respondents were asked to indicate why risk manage-
ment (identification, analysis, assessment and control) is
important to their organizations' activities. The following
are a representation of the contractors responses:
• To analyse and control risk as the key to profit, as con-
struction is a risky business.
• To ensure that we are right more often than wrong, as
right management of risk in construction determines the
ability to make profit.
• To assess and ascertain project viability because con-
struction development is a business with a high number
of variables.
• To minimize loss by risk management in an industry
where even normal contracting causes difficulties.
• To identify project risks and quantify the potential cost
of each risk and plan for it; or work around it to alleviate
the risk.
• To determine if the firm is making an adequate profit on
a particular project. The higher the risk the greater must
be the potential reward.
• To avoid unsatisfactory projects and to enhance margins.
• To control factors which will deter completion of pro-
jects within budget and schedule.
• To keep insurance premiums to acceptable levels, and
reduce losses.
Project management practices and contractors have dif-
ferent reasons for using risk management. The former seek:
• To limit professional indemnity claims.
• To provide an understanding and control risks in the
projects.
• To allow appropriate measures to be taken, to control
the effects of risks and provide cost contingency for
clients.
• To protect the firm's credibility and reputation--not of
major importance in the past, but expected to become
significant. Failure to manage risks on our clients'
projects carries some commercial risk as well as loss of
credibility and reputation.
The contractors generally agreed that the industry within
which they work is associated with high risk and saw risk
management as being essential to their overall construction
activities in order to minimize business losses. By means of
analysis and control of the risks that they are exposed to,
they can maximize their business profitability. Although all
respondents perceived risk in terms of project objectives
of cost, time and quality, the contractors responses to the
need for risk management showed most emphasis on risks
associated with cost, understandably so given that this
affects profitability.
Although the project management practices are concerned
with risk management in relation to the client's objectives,
the need to manage risk is important to them because of the
need to limit professional indemnity costs and to protect the
organization's reputation.
Risk premium in construction
Perry and Hayes 3 and Mustafa and A1-Bahar '9 have iden-
tified some risks sources central to the construction acti-
vities. These are physical, environmental, design, logistics,
financial, legal, political, construction and operation risks.
As these risk sources influence projects performance in
terms of time, cost and quality, it is not uncommon for
these to be assessed individually and a premium placed on
each of them. A risk premium strategy which is often used
in construction projects is contingency allowance. Dey
et al. 2° produced a catalogue of risks and contingency
allowance in petrochemical construction project. The
study by Dey et al. 2° described a systematic procedure for
analysing project risk from the construction perspective.
yeo2, and Dey et al. 2° described the contingency allowance
for a high risk project as a combination of management
contingency and technical contingency; both of which are
required to achieve a project objective(s).
The premium placed on each of the sources of risk may
depend on the risk exposure faced by individual firms from
experience of the firm in dealing with the particular type of
risk, the attitude of the firm to risk, the extent of impact
posed by the sources, etc. Some of the risk sources are
more important to the construction industry than the others
and this is recognized by the different premium put on
different risks associated with construction.
The respondents were asked to indicate the extent of
premium their organizations applied to each risk source.
The responses are summarized in Table 1. The organization
risk premium index, representing the overall respondents'
views of their organizations' premium on the sources of
risk, is shown in Table 2.
The tables show that both the contractors and the project
managers are quite similar in the order of importance
attached to the sources of risk. The financial and contractual
risks are most important. These are recognized as having
most adverse consequences on the successful completion
of construction project. Building contracts deal with the
relationships between parties in the contract and the alloca-
tion of risks. Carr 22 and Ashley 23 advocate balancing of
risk allocation within construction project by the two major
parties to the contract (building owner and the contractor)
but, building contracts and procurement methods seldom
achieved this. Contractual risks are those associated with
flaws in contract documents, inappropriate documents, or
improper contractual relationships. The risk consequences
or implications of contractual risks include claims and
disputes, disruption of work, stoppages of work, lack of co-
ordination, delays, and inflated costs 6'24. Financial risk to
contractors includes whether the building owner has enough
money to complete the project, financial failure of the
building owner or subcontractors, availability of money to
the contractor in a suitable manner and time to enable the
contractor to progress with the work, etc. Financial risk
influences the cash flow of construction contractors; it is
hardly surprising therefore that this source of risk is highly
important for them.
Construction risks, or job site related risks such as avail-
ability and productivity of labour, soil and site conditions,
material shortages and quality, site safety, etc. are impor-
tant to the contractors unlike the project management
practices because these risks are related to construction
process on site. The attitude of project management prac-
tices to risk is expected to change in view of the current
Construction (Design and Management) Regulations, 1994
(CONDAM) on health and safety, that demands that the
employers' agents responsible for design and supervision
should provide information on details of risks and avoid
foreseeable risks to the health and safety of any person at
work carrying out the construction work, etc. 25.
Management of risk
Methods of risk allocation take any one or combination
of risk retention, risk transfer, risk reduction, and risk
avoidance 26-29.
Risk retention, according to Williams and Heims 3°,
becomes the only option where risk prevention or transfer
is impossible, avoidance is undesirable, possible financial
loss is small, probability of occurrence is negligible and
transfer is uneconomic. Risk avoidance in construction is
generally recognized to be impractical as it may lead to
projects not going ahead or a contractor submitting an ex-
cessively high bid for a project. Risk reduction techniques
as a result, in terms of potential impact or probability of
occurrence, include the use of alternative contract strategies,
different methods of construction, project redesign, more
detailed and further in-depth site investigations, etc. 3~.
Risk transfer is described by Perry and Hayes 3 who identify
four methods used in construction projects and contracts
involving the relationships between client, contractor, sub-
contractor, design team, insurer and surety.
Table 3 shows the views of the respondents on how their
firms tend to allocate risk involved in construction project.
The standard deviations show a wide variation on the
allocation of risks amongst the firms, suggesting that firms
within the construction industry tend to treat risk allocation
differently. However, the firms show more tendency to
transfer risk associated with construction projects.
Table 4 shows the firms' strategies for transferring risks
involved in construction projects. Most of the contractors
(63%) use a 'back-to-back' sub-contract agreement to the
main contract with specialist and domestic subcontractors.
Another method popular with the contractors is insurance.
The project managers choose to transfer risks using profes-
sional indemnity and through the wordings of contract
conditions with client and designers. This is possible for
project management practices because they provide pro-
fessional services rather than site construction involving
substantial direct resource commitment.
Current usage of risk management techniques
Techniques of risk analysis in construction projects include
risk premium, risk adjusted discount rate, subjective prob-
ability, decision analysis, sensitivity analysis, Monte Carlo
simulation, stochastic dominance, Caspar and intuition 29-32.
Methods of decision analysis are algorithms, mean end
analysis, bayesian theory and decision trees. These provide
decision-making tools in an uncertain environment. An
algorithm contains a sequence of instructions for problem
solving. Mean end analysis is a method of clarifying a chain
of objectives to identify a series of decision points. The
decision tree shows sequence of known choices (a number
of alternatives) and their possible outcomes graphically in
a tree form such that the decision maker can identify best
alternatives that achieve the objectives of a major project.
The decision tree method is useful in deciding methods of
construction, choosing alternative projects, and in contractual
problems such as whether to proceed with a claim and
assessing the likelihood of a claim succeeding 33.
Monte Carlo analysis is a form of stochastic simulation.
Using this method the probability of project outcome is
obtained by carrying out a number of iterations, depending
on the degree of confidence required. Caspar is a computer
aided simulation for project appraisal and review. It is a
project management tool designed to model the interaction
of time, resources, cost and revenue throughout the entire
life of a project and it has capacity to evaluate the con-
sequences of factors such as delay and inflation, and changes
to the market or to production rates 34. Such computer-based
methods recognize the dynamic project environment. The
use of traditional methods which assess risk involved in
projects in a deterministic way has been criticized for failing
to take into account the sequential nature of construction
management process 35. Huseby and Skogen 35 are of the
opinion that in a realistic risk model, project uncertainty
must be modelled as a dynamic process in which the
decision-maker can revise his/her plans as the project runs.
Subjective probability uses the experience gained from
similar projects undertaken in the past by the decision-
maker, where decision-making is characterized by risk, to
decide on the likelihood of risk exposure and the outcomes.
Risk premiums in construction projects take the form of
contingencies or added margins to an estimate to cover
unforeseen eventualities. The amount of the premium varies
between projects and is mostly dependent upon attendant
risk and the decision-maker's risk attitude.
The respondents were asked to identify which of these
risk analysis techniques they are familiar with, and ones
that are being used by their firms for project risk analysis
and management. Table 5 shows that the use of risk analysis
techniques by the responding firms is generally low in con-
struction projects with the exception of intuition/judge-
ment/experience. This tends to support Birch and McEvoy j4
that the approach to risk analysis is largely based on the use
of checklist by managers, who try to think of all possible
risks and take appropriate action. Jamieson and LOW 36
have faulted this method of risk analysis by maintaining
that, although it is possible to make a long list that is
reasonably comprehensive, this approach gives little con-
fidence that all risks have been identified. The table shows
that most of the respondents are familiar only with sensitivity
analysis technique (CTR = 53 %, PM = 69%). This is fol-
lowed by decision trees, Monte Carlo simulation and
subjective probability.
Checklists based on intuition/judgement/experience which
recorded the highest familiarity with respondents cannot be
regarded as a formal technique. Although the sample from
project management practices is smaller, the results tend
to suggest that the project managers, compared with the
contractors, have more awareness of risk analysis and
management techniques.
Almost all organizations depend on intuition/judgement/
experience to manage risks involved in construction. This is
followed by sensitivity analysis (CTR = 53 %, PM = 38 %).
The popularity of sensitivity analysis compared with any
other formal techniques of project risk analysis and man-
agement is probably because it provides answers to a whole
range of 'what if' questions, it is comparatively simple to
use and has the ability to focus on a particular estimate 28.
The technique provides information on the project risk
variables which are considered to be of potentially serious
impact on project cost and time estimates. Other techniques
such as subjective probability and Monte Carlo simulation
require quantification of probability of occurrence and
probability distribution of risk factors before the procedures
involved in calculations can be undertaken. The computer-
based techniques like stochastic dominance, Caspar, mean
end analysis and algorithms are not used by the firms. With
the exception of checklists and sensitivity analysis, these
results generally contradict those obtained by Simister t°,
this could be explained by the work-related background
of his respondents with some skewness towards IT-related
fields.
The respondents were asked for the reasons why some of
these techniques are not used in their firms. The responses
from the contractors have been separated from the project
managers.
The reasons provided by contractors for not using the
techniques of risk analysis and management were:
• Lack of familiarity with the techniques.
• The degree of sophistication involved in the techniques
is unwarranted for project performance.
• Time plus lack of information and knowledge.
• Doubts whether these techniques are applicable to the
construction industry.
• Most construction projects are seldom large enough to
warrant the use of these techniques or research into them.
• They require availability of sound data to ensure
confidence.
• The vast majority of risks are contractual or construction
related and are fairly subjective, hence they are better
dealt with based on experience from previous contracts
undertaken by the firm.
• It is difficult to see the benefits.
The reasons provided by the project managers were par-
ticularly reflective of the services they provide to their
clients:
• Risk analysis of construction projects is seldom formally
requested by clients--clients expect project management
practice to set up projects risk-flee.
• Risk analysis in commercial terms is not always viable
on projects.
• Project risk management is about people not scientific
models.
• Lack of expertize in the techniques.
Lack of familiarity featured prominently amongst the
reasons provided by the respondents for non-use of formal
risk management techniques. This is followed by the claim
that the amount of calculations involved using the techniques
is unwarranted in order to meet that project's objectives of
time, cost and quality. The comments are not particularly
surprising considering the lack of formal training in risk
analysis and management techniques by most of the respon-
dents. Schon's 37 assertion, supported by the respondents'
comments, becomes relevant in the situation that "Managers
have become acutely aware that they are often confronted
with unique situations to which they must respond under
conditions of stress and limited time which leave no room
for extended calculation or analysis". The evidence that the
construction industry business management decisions, like
most decision-making processes involving professionals
(see Reflective Practitioners37), depends substantially on
intuition and experience, rather than quantitative analysis
irrespective of educational and professional qualification,
is supported by the firms' attitudes to risk analysis and
management techniques.
Discussion and conclusion
Risk elements associated with construction projects influence
the time, cost and quality performance of the project. Risk
management therefore becomes a continuing activity in
project development, from inception and throughout the
life of the project.
The responses to the strategies for dealing with risks in
construction suggest that the industry is mostly risk averse.
The contractors transfer risks to their domestic and specialist
sub-contractors and through insurance premiums. Project
managers resort to professional indemnity insurance to
transfer risks associated with services provided to clients.
Although, it is generally recognized that risk should be
transferred to the party that is in the best position to deal
with it, the process where a contractor transfers all risks
involved in a project does not bode well for innovation
initiative within the industry. Contractors have a tendency
to contract out all the work packages involved in a project
to sub-contractors and undertake 'contract management' as
part of a strategy to reduce or eliminate their risk. The
implication therefore is that the general contractors with the
means to do so, either fail to or have no incentive to
undertake research as part of the strategies to reduce the
risks associated with their construction business activities.
It is therefore unsurprising to hear that the construction
industry ranks poorly in terms of research activities.
The questionnaire survey of contractors and project man-
agement practices within the UK construction industry shows
that both perceive risk in construction as the likelihood of
unforeseen events occurring which could adversely affect
the potential completion of the project, i.e. in terms of cost,
time and quality of performance. Although risk manage-
ment techniques have been used in other industries for a
long time, the construction industry has approached risk
management in terms of individual intuition, judgement and
experience gained from previous contracts. One major
drawback of risk analysis techniques is that the more
powerful and sophisticated the technique, the more data and
time is required. Construction industry activity is con-
strained by time because construction production is mostly
employed just-in-time for the client's production requirement.
It is unsurprising that some of the respondents have iden-
tified project time constraint as one of the major reasons for
not using risk analysis and management techniques.
The increased availability of computers, which has
allowed the topic of project risk analysis to mature in other
related field, does not appear to have made much impact on
the tools being used for risk analysis and management in the
construction process.
The need for the risk analysis assessment and manage-
ment practitioners to develop proven techniques (such as
risk simulation techniques) other than intuitive methods is
endorsed by Ho and Pike 38 who asserted that risk analysis
should formalize managers' judgements about project un-
certainty in a more precise way and should allow them to
modify their judgement in the light of information available
to them.
Most of the respondents are aware of what is involved in
risk management. However, due to lack of familiarity, the
industry uses few formal techniques of risk analysis and
management involving calculations due to lack of familiarity.
Ho and Pike 3s also found that the major limitations most
frequently found for application of risk analysis include
managers' inadequate understanding of the risk analysis
approach. These findings may have implications for the
curriculum in Construction Management education. The
implementation of project risk analysis and management, in
view of the implications for construction business profit-
ability, may demand education and training of the con-
struction project managers and professionals in risk
management techniques to bridge the gap between theory
and practice.
Various options for dealing with this could be in the form
of formal and/or informal education and training 39. Formal
education could be postgraduate studies in risk management,
which managers could undergo on a part-time basis; Glasgow
Caledonian University, for example, currently run a full-
time/part-time postgraduate programme in Construction
Management with an option in Risk Management. Informal
education and training could be in form of CPD programmes
organized by academic establishments or interest groups
within professional bodies such as the Association of
Project Managers. It may not be expected that this will be
an immediate panacea, but it is a move in the right direction
to re-engineer the industry. Ho and Pike 38, for example,
are of the opinion that the increasing widespread use of
microcomputers in financial modelling packages will add to
the potential, ease of use and efficiency of risk analysis in
capital budgeting. The extent to which this can be achieved
in the construction industry hasA),et to be seen in view of
low usage of IT in constructions.
The respondents' doubts that risk analysis and manage-
ment techniques are applicable to the construction industry
calls for concern. Construction texts and construction
research in related fields should address this issue if such
techniques are to be of practical value to the construction
industry.
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