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Risk Management In Construction projects
Contents
Construction projects........................................................2 Risk
management process................................................4 Risk
identification.............................................................5 Risk
identification.............................................................5 Typical
Construction Project Risks and Uncertainties........7 Risk allocation
through construction contracts...............10 Design-bid-
build............................................................. .12 Design-
build....................................................................13 Collaborative relation
hips in construction projects.........13 Relational contracting and
partnering............................14 Joint risk
management....................................................15 Construction
projects......................................................16

2
Risk Management In Construction projects
Construction projects
A project is an endeavor in which human, material and financial resources are
organized in a novel way; to undertake a unique scope of work of given
specification, within constraints of cost and time, so as to achieve unitary,
beneficial change, through the delivery of quantified and qualitative objectives.
The definition suggests three key targets of the project, i.e. time, cost and quality,
which are to be in focus when undertaking the project. It also highlights the
importance of efficient organization of available resources in order to achieve a
good final result.
3
Risk Management In Construction projects
Flanagan and Norman (1993) emphasize two aspects of any construction
project: the process, i.e. project phases, and the organization, i.e. project actors.
From the process perspective, any construction project comprises a number of
sequential phases. Different authors suggest a different number of project
phases. The simplest approach identifies two main phases – project
development and project implementation. These two can be further detailed and
developed into a larger number of phases, e.g. feasibility, design, procurement,
construction, commissioning, and operation. Risk management process take
place in programme, design, procurement and production. The maintenance
phase was excluded because no risk management activities are to be found in
this phase.
Programme phase
In the programme phase the client has an idea about the project and
analyses conditions for its execution.
Design phase
During the design phase the architects and engineers produce construction
drawings according to the client’s requirements.
Procurement phase
In the procurement phase the client appoints the contractor to carry out the
project. Depending on the form of contract, the procurement phase follows either
the programme phase (DB contracts) or the design phase (DBB contracts).
Production phase
Finally, the contractor executes the job in the production phase. Figure overviews
the different models presented in the literature and the model used in the thesis.
Risk Management In Construction projects
Another important aspect of the construction process is project organization.
Different participants are usually involved in a construction project. These are
clients or owners, contractors, sub-contractors, manufacturers and suppliers,
architects, engineers, consultants, local authorities, funding organizations etc.
The more participants that are involved, the more
Complex the task of project management becomes. In risk management three
main groups of construction industry actors are in focus: clients, contractors and
consultants.
Client
A clie nt is a party that carries out or assigns others to carry out
construction, demolition or land work. There are two main groups of
Risk Management In Construction projects
construction clients: public and private. Privately owned companies undertake
the projects to make a profit. The public sector includes the central government
and local authorities and undertakes the projects to provide a public service
and/or benefit to the citizens.
Contractor
A contr actor is an organization that provides a service for the client, i.e.
executes the construction works. The contractor organizations have different
complexities and provide different ranges of services – from ground works to
electrical installations and telecommunications.
Consultants
The role ofconsultants is to assist clients and contractors and provide architectural
and engineering services. Due to their dynamic nature, projects change
continuously. Thus a great amount of risk and uncertainty is involved in
construction activities. This uncertainty may have a significant impact on the
project objectives and, therefore, has to be
properly managed by the project actors during the whole project life cycle.
Risk management process
Risk management is a systematic process of identifying, assessing and
responding to project risk. The overall goal of the risk management process is to
maximize the opportunities and minimize the consequences of a risk event. A
variety of risk management models with different numbers of stages can be
found in the literature. The international standard “Project risk management –
Application guidelines” (IEC 2001) offers a model with four steps: risk
identification, risk assessment, risk treatment, and risk review and monitoring.
PMBOK’s model (PMI 2000) is similar but divides risk assessment into two
processes of qualitative risk analysis and quantitative risk analysis. Baloi and
Price (2003) include an additional step of risk communication. Chapman and
Ward (2003) present the SHAMPU (Shape, Harness, and Manage Project
Uncertainty) framework which involves nine stages: define the project, focus the
project, identify the issues, structure the issues, clarify ownership, estimate
variability, evaluate implication, harness the plans, and manage implementation.
Del Cano and de la Cruz (2002) propose an integrated methodology for project
risk management in large and complex construction projects. The model is
divided into four process phases: initiation, balancing, maintenance and learning.
Each phase consists of several stages, which, in turn, are divided into different
activities. Despite the variety of models, risk identification, assessment and
response
Risk Management In Construction projects
form the core of project risk management. Therefore, a model consisting of
these three stages is mostly used in construction projects.
Risk identification
Risk identification is the first step of the risk management process. It
is aimed at determining potential risks, i.e. those that may affect the project.
PMBOK (PMI 2000) suggests that as many project stakeholders as possible
should participate in the risk identification process. There are a number of tools
and techniques for identifying the project risks These are brainstorming, expert
opinion, structured interviews, questionnaires, checklists, historical data, previous
experience, testing and modeling, evaluation of other projects. Empirical studies
of risk management practice show that checklists and brainstorming are the most
usable techniques in risk identification. They also highlight that risk identification
often relies
on individual judgments of the project participants. In this context, it is interesting
to mention a recent study by Maytorena et al. (2007) that suggests that the role
of experience in risk identification is less significant than is commonly assumed.
During the risk identification process the potential risks fall in the different groups.
There are several approaches to classifying project risks and risk sources. In
general, the sources of risk in construction projects may be divided into three
Groups:

Risk Management In Construction projects


➢ Internal or controllable risks design, construction, management
and relationships.
➢ External or uncontrollable risks financial, economic, political, legal
and environmental.
➢ Force majeure risks
Several studies contributed to knowledge by identifying unique, specific and
country-related risks.
Risk assessment
During risk assessment, identified risks are evaluated and ranked. The goal is to
priorities risks for management. The research literature offers a large number of
models that use both qualitative and quantitative methods for assessment of
project risks. Tah and Carr (2000) develop a formal model for qualitative risk
assessment based on fuzzy estimates of risk components. Baccarini and Archer
(2001) describe a methodology for risk ranking of projects, which allows an
effective and efficient allocation of the resources for the management of project
risks. The JRAP (Judgemental risk analysis process) model proposed by Öztas
and Ökmen (2005) is a pessimistic risk analysis methodology, which is effective
in uncertain conditions within construction projects. Zeng et al. (2007) propose a
risk assessment methodology based on fuzzy reasoning techniques and aimed
at dealing with risks in complex projects. A fuzzy system is also used by Motawa
et al. (2006) to evaluate the risk of change in construction projects. Poh and Tah
(2006) have developed an integrated model that takes into account both duration
and cost risks and can be used for modeling risk impacts that affect the project.
Dikmen and Birgonul (2006) propose a methodology for both risk and opportunity
assessment of international projects.
Empirical research on risk assessment practice investigates the use of the
different risk assessment techniques in construction projects. A study by Baker et
al. (1998) shows that the construction companies in UK use both qualitative and
quantitative techniques for assessing the project risks. Personal and corporate
experience and engineering judgment are the most
successful qualitative techniques, while quantitative techniques include
break-even analysis, expected monetary value and scenario analysis.
Several authors report rather opposite results on the usage of quantitative
techniques. The studies of risk management practice in the UK construction
industry show that the practitioners rely mostly on professional judgment, intuition
and experience (Akintoye and MacLeod 1997, Wood and Ellis 2003). A
questionnaire survey conducted by Tang et al. (2003) shows that qualitative
analysis is the most commonly used technique in the Chinese construction
industry, while the use of quantitative methods is very low. The results of the
study conducted by Simu (2006) show that the contractors mostly use
professional experience and gut-feeling in risk assessment.

Risk Management In Construction projects


Kähkönen (2007) argues that the quantitative methods used in risk management
have advantages in comparison with the qualitative methods but their use is
limited due to difficulties that practitioners face. He also discusses the elements
that contribute to development of a workable solution for quantitative risk
assessment.
Risk response process
The risk responseprocess is directed at identifying a way of dealing with the
identified and assessed project risks. There are four main risk response
strategies: risk avoidance, risk reduction, risk transfer and risk retention (IEC
2001, PMI 2000, Smith et al. 2006). Risk avoidance deals with the risks by
changing the project plan or finding methods to eliminate the risks. Risk reduction
aims at reducing the probability and/or consequences of a risk
event. Those risks that remain in the project after risk avoidance and reduction
may be transferred to another party either inside or outside the project. Risk
retention or acceptance indicates that the risk remains present in the project.
Two options are available when retaining the risk: either to develop a
contingency plan in case a risk occurs, or to make no actions until the risk is
triggered. Several studies (Baker et al. 1999, Lyons and Skitmore 2004, Tang et
al. 2007) have identified risk reduction as the most frequently used technique
within the construction industry. The results of a questionnaire survey (Akintoye
and MacLeod 1997) report that risk transfer is the most preferable strategy
among the UK practitioners.
Typical Construction Project Risks and Uncertainties
Construction projects are characterized as very complex, always unique
projects, where risks raise from a number of different sources. These
projects are characterized by a continuous decision making due to numerous
sources of risk and uncertainty, many of which are not under the direct control of
project participants. Construction projects have a bad reputation of failing to meet
the deadlines and cost targets. That’s why identifying risk sources is extremely
important, since it is not necessarily possible to identify single risks. Odeh and
Battaineh studied the most typical reasons for construction delays in Far-East
construction projects. They found seven significant causes of delays: owner
interference, inadequate contractor experience, financing and payments, labor
productivity, slow decision making, improper planning and subcontractors.
Authors emphasize the meaning of experience and capability of project
participants to have the most effect on these causes of delays. These kinds of
risks can be seen as network-related. Thus in order to have a successful project,
it should be
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