Organizations from many industries have recognized the
increasing importance of risk management, and many
companies have established risk management departments
to control the risks they are, or might be, exposed to. The
construction industry and its clients are widely associated
with a high degree of risk due to the nature of construction
business activities, processes, environment and organization.
Risk in construction has been the object of attention
because of time and cost over-runs associated with con-
struction projects. Although, Porter', Healey 2 and Perry
and Hayes 3 have expressed risk as an exposure to economic
loss or gain arising from involvement in the construction
process; Mason 4 and Moavenzadeh 5 have regarded this as
an exposure to loss only. Bufaied 6 describes risk in relation
to construction as a variable in the process of a construction
project whose variation results in uncertainty as to the final
cost, duration and quality of the project.
It is generally recognized that those within the con-
struction industry are continually faced with a variety of
situations involving many unknown, unexpected, frequently
undesirable and often unpredictable factors 7. Ashley 8 and
Kangari and Riggs 9 have all agreed that these situations
are not limited to the construction industry; it is recognized
that risk is built into any commercial organization's profit
structure and is a basic feature of a free enterprise system.
Insofar as risk analysis and management is important to
the activities of the construction industry, little is known
regarding the industry response, and in particular the
techniques employed for risk analysis and management.
Simister '° investigated the usage and benefit of project risk
analysis and management in 1992, based on a questionnaire
survey of 37 members of the UK Association of Project
Managers. Simister's l° survey was comprised of respon-
dents classified into five work-related groups: defence
industry (36%), management consultancy (36%), systems-
based information technology (12 %), telecommunications
(12%) and engineering contracting (4%). The objective
of the current study was to obtain feedback from con-
struction contractors and construction project management
practitioners on the following aspects of risk analysis and
management:
• Risk perception by the construction industry
• Organizational risk management
• Risk premium in construction projects
• Management of risk
• Current usage of risk management techniques.
The research survey
The need to manage risks in construction is relevant to
all professionals and groups (client groups, design team,
project management team, contractors, etc.) in the con-
struction industry which are concerned with cost, time and
quality. The current research concentrated on two categories
of respondents: contractors and project management prac-
tices. The sample for the survey was a total of 100 top firms
in the UK construction industry comprising 70 general
contractors and 30 project management practices ~. The
general contractors were selected randomly from a list of
100 contractors published in the 'Contractor File 1992 't2.
The 30 project management practices were those advertising
in Building during the period June 1994 to August 1994.
Subject to limitation of the sampling, the firms surveyed
represent a large proportion of the UK construction industry
population. The total turnover of the firms surveyed (£7000
million) represents 20 % of UK contractors' output for 1994
and had 50,000 employees. All the project management
organizations are bona fide practices providing a wide
range of project management services.
The overall response to the survey comprised of 30
general contractors (CTR) and 13 project management
practices (PM) representing a 43% response rate. The
response rate resulted from an initial mailing addressed to
the managing director of each firm and a reminder letter,
after two weeks, to those organizations that had not
responded to the original request. The response rate is
typical of a construction industry questionnaire survey
and cannot be regarded as biased considering Moser and
Kalton's j3 assertion that the results of a postal survey could
be considered as biased and of little value if the return rate
was lower than 30-40%.
The questionnaires were completed by top management
in the organizations (mainly directors and partners) and
almost all of them (more than 90%) had over 10 years of
construction experience. The respondents thus have requisite
professional and academic qualifications. On the basis of
position, work experience and educational and professional
background, it can be inferred that the respondents have
adequate knowledge of the activities associated with
construction and associated risk.
Twenty-two per cent of the firms surveyed (all the 22 %
are project management practices) have turnover less than
£10 million. Forty-nine per cent have turnover between
£10 million and £100 million; 29% have turnover over
£100 million. From this distribution of the responding
firms, it can be concluded that the survey covers a spectrum
of small, medium and large firms in the UK construction
industry.
Twenty per cent of the contractors, and 8 % of the project
management practices, have designated risk managers•
This suggests that risk control is carried out as part of
normal or regular activities of the firms rather than being
designated, given that all respondents claimed to carry
out risk analysis and management of the construction
business, process and activities in their organizations. Most
of the respondents (CTR = 67% and PM = 77%) did not
have any formal risk management training. They claimed
to be involved in risk management and the analysis of their
perceptions of risks involved in construction does in fact
suggest an awareness of what is involved in control of risk
and its consequences.
Risk perception
Risk catalogue has been described as a combination of
threat and vulnerability which occurs when the two conditions
overlap ~4. A threat is something which has an adverse
effect on the activities of an organization. A vulnerability
is characterized by a physical system which, while being
independent of any specific threat, allows a threat to be
exploited. The impact of risk from threat catalogue and
the frequency of occurrence of risk from the vulnerability
catalogue determines the level of exposure to risk.
William ~5 on the other hand has categorized details of each
risk factor into event, impact, actions and contractual; and
used a process of project risk register to identify risks and
to initiate the analyses for project risk management•
Risk perception is generally believed to be influenced
by people's belief, attitudes, judgement and feelings. The
• 16 "
report of The Royal Society claims that risk perception
cannot be reduced to a single subjective correlate of a
particular mathematical model, such as the product of prob-
abilities and consequences because this imposes unduly
restrictive assumptions about what is an essentially human
and social phenomenon• Choffray and Johnson ~7 and
Ritchie and Marshall ~8 have identified factors influencing
the formation of risk perception including educational
background, practical experience, an individual's cognitive
characteristics, the availability of information, peer group
influence, etc.
While it is generally recognized that the foregoing factors
may affect the respondents' perception of risk, they are not
directly investigated in this study. However, in order to
obtain the view of the industry on risk in construction, the
respondents were asked to describe risk in construction
projects.
The general contractors offered diversified opinions,
quoted as follows:
• "Factors which can adversely affect the successful com-
pletion of a project in terms of budget and schedule,
which in themselves are not always identifiable" (Project
Control Manager, Turnover = £100 million, Employ-
ment = 2000).
• "Construction is a risk business--the main contractor
accepts all risks relevant to a contract in terms of cost,
time and quality of performance" (Director, Turnover =
£130 million, Employment = 900).
• "The likelihood of physical, contractual or economic
conditions becoming more difficult than those allowed
for in the price" (Managing Director, Turnover = £80
million, Employment = 600).
• "The opportunity to make a profit on a contract whilst
satisfying the client quality, delivery and contract price
requirements" (Deputy Managing Director, Turnover =
£100 million, Employment = 500 +).
• "Loss of money, loss of reputation, and a chance of an
accident occurring to persons on property" (Director,
Turnover = £25 million, Employment = 200).
• "The likelihood of unplanned events occurring" (Director
of Business Development, Turnover = £45 million,
Employment = 68).
• "The degree of certainty that the financial objectives for
each particular project will be achieved and the extent to
which risk factors can be quantified at bid stage and
monitored closely" (Group Director, Turnover = £250
million, Employment = 2000).
• "Tender or on-site performance mistakes leading to
quality under performance, cost over-run and an impact
on all of these from a variety of unforeseen circum-
stances" (Finance Director, Turnover = £200 million,
Employment = 2000).
• "The probability of a construction activity costing more
than allowed for in the tender" (Contract Manager,
Turnover = £20 million, Employment = 60).
• "Cumulating liabilities that arise from a particular set of
contract terms for a construction project" (Managing
Director, Turnover = £170 million, Employment = 800).
"In safety terms, as any sequence of events which are
likely to result in the possibility of injury" (Chief
Executive, Turnover = £35 million, Employment = 170).
• "Potential overspending against tender proposals"
(Managing Director, Turnover = £50 million, Employ-
ment = 600).
• "Evaluating the complexity associated with contracts,
programming period and resource scheduling of labour
and plant at tender stage" (Group Managing Director,
Turnover = £80 million, Employment = 480).
• "Financial--due to vague information, tendering pro-
cedure. Legal--due to action of others. Safety problems--
due to the nature of construction business" (Group
Marketing Director, Turnover = £130 million, Employ-
ment = 600).
The views expressed by the contractors are generally risk
elements associated with project objectives 7. In summary,
the contractors perceived risk as the likelihood of unfore-
seen factors occurring, which could adversely affect the
successful completion of the project in terms of cost, time
and quality. One contractor, however, saw risk as an
opportunity to make profit and not something that will
always have an adverse effect.
The risk perception of construction by the project manage-
ment practices were not markedly different from the general
contractors. Some of their comments are quoted as follows:
• "The activities/ocurrences which traditionally are likely
(or to some degree will happen) to happen, and to have
an adverse effect upon programme and/or cost" (Planning
Manager, Turnover = £5 million, Employment = 35).
• "Risk is uncertainty with regard to events and their
effects which affects the project outcome in terms of
cost, time, quality and any other relevant performance
criteria" (Director, Turnover = £10 million, Employ-
ment = 100).
• "Something to be avoided or transferred" (Regional
Director, Turnover = £6 million, Employment = 70).
• "Comes in varying forms--most projects are high
risk. People forget that construction is a people's busi-
ness" (Commercial Director, Turnover = £3.5 million,
Employment = 70).
The project management practices, generally, recognized
that the consequences of risks directly affect the client and
his objectives rather than their practices. This is not sur-
prising as project management practices provide consultancy
services on a fee basis and do not commit large volumes
of resources to construction projects in the manner of
contractors.
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