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Pergamon
Malcolm J MacLeod
1RISC Technical Services, International Loss Adjusters, 35 Seething Lane, London, EC3N 4AH, UK
The paper describes, on the basis of a questionnaire survey of general contractors and project
management practices, the construction industry's perception of risk associated with its activities
and the extent to which the industry uses risk analysis and management techniques. It concludes
that risk management is essential to construction activities in minimizing losses and enhancing
profitability. Construction risk is generally perceived as events that influence project objectives
of cost, time and quality. Risk analysis and management in construction depend mainly on
intuition, judgement and experience. Formal risk analysis and management techniques are
rarely used due to a lack of knowledge and to doubts on the suitability of these techniques for
construction industry activities. Copyright 1996 Elsevier Science Ltd and IPMA.
Keywords: Risk perception, risk analysis, risk management, project managers, contractors
15/I--I]
31
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
32
16
"
"Factors which can adversely affect the successful completion of a project in terms of budget and schedule,
which in themselves are not always identifiable" (Project
Control Manager, Turnover = 100 million, Employment = 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).
" T h e likelihood of physical, contractual or economic
conditions becoming more difficult than those allowed
for in the price" (Managing Director, Turnover = 80
million, Employment = 600).
" T h e 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 circumstances" (Finance Director, Turnover = 200 million,
Employment = 2000).
" T h e 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).
Contractors
0
0
62
46
17
31
8
0
34
8
17
31
38
25
38
38
8
42
33
66
7
0
42
31
46
25
8
33
0
0
0
8
0
0
25
8
26
17
0
16
8
0
8
42
8
8
10
55
55
17
11
18
0
3
30
41
31
41
62
62
29
18
66
48
26
10
0
17
17
31
39
24
14
14
4
4
4
4
18
29
7
0
9
0
0
0
0
4
14
0
Extent of risk premium: 4 = high; 3 = fairly high; 2 = low; 1 = fairly low; 0 = indifferent.
Construction risks, or job site related risks such as availability and productivity of labour, soil and site conditions,
material shortages and quality, site safety, etc. are important to the contractors unlike the project management
practices because these risks are related to construction
process on site. The attitude of project management practices 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 excessively 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 Hayes3 who identify
four methods used in construction projects and contracts
involving the relationships between client, contractor, subcontractor, 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
Contractors
All firms
2.33
2.52
3.40
3.50
2.93
2.90
2.50
1.69
2.20
3.54
3.55
2.50
3.00
2.58
1.71
3.08
2.05
2.37
3.44
3.50
2.71
2.95
2.56
1.81
2.88
1.89
2.69
i=4
Organization risk premium index (RPI) is defined as RPI = ~ E~ P~, where E i = ith extent of premium; and P, = percentage of respondents.
i=0
34
Contractors
All firms
Mean (%)
S.D.
Mean (%)
S.D.
Mean (%)
S.D.
24
21
31
24
23
13
21
20
27
17
39
17
23
14
38
22
25
19
34
22
23
14
26
21
Retention
Reduction
Transfer
Avoidance
Total
100
100
100
life of a project and it has capacity to evaluate the consequences of factors such as delay and inflation, and changes
to the market or to production r a t e s 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 decisionmaker, 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 construction projects with the exception of intuition/judgement/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 confidence 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 followed 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
No.
No.
19
63
5
6
4
10
0
17
20
13
33
0
2
2
1
4
3
15
15
8
31
23
35
Risk premium
Risk adjusted discount rate
Subjective probability
Decision analysis
Algorithms
Mean end analysis
Decision trees
Bayesian theory
Sensitivity analysis
Monte Carlo simulation
Stochastic dominance
Caspar
Intuition/judgement/experience
Respondent familiar
Respondent familiar
27
17
17
33
7
23
23
8
38
8
0
46
3
7
27
7
53
20
0
0
77
0
0
13
0
53
3
0
0
77
8
0
38
0
69
46
0
0
100
0
0
23
0
38
31
0
0
100
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