RISK ASSESSMENT AND MANAGEMENT IN

CONSTRUCTION PROJECTS

Project by

A.DEVIPRASADH
M.E Construction Engineering and Management

Under the guidence of

Dr.M.SEKAR
Professor & Dean, College of Engineering Guindy,

INTRODUCTION

Project risk management is the processes

concerned with identifying, analyzing, and
responding to project risk.
Risk is a multi-facet concept. In the context of
construction industry, it is the likelihood of the
occurrence of a definite event or combination
of events which occur during the whole process
of construction.
Risk is exposure to the consequences of
uncertainty.

RISK ASSESSMENT
Risk assessment is defined as a technique that
aims to identify and estimate risks to personnel
and property impacted upon by a project.
Construction involves many variables, and it is
often
difficult
to
determine
causality,
dependence and correlations.
As a result, subjective analytical methods that
rely on historical information and the
experiences of individuals and companies have
been used to assess the impact of construction
risk and uncertainty.

RISK IN REAL ESTATE AND

CONSTRUCTION INDUSTRY

The real estate and construction industry has

changed significantly over the past years.
It is an industry driven primarily by private investors;
the presence of securitized real estate has increased
considerably.
Not unexpectedly, the influence of institutional
investors on the real estate industry is formidable.
They are beginning to experience a higher degree of
scrutiny by investors, consultants and analysts, and
are expected to deliver "best in class" service in all
areas - from property management to risk
management.

The four major processes of project risk

management
Risk Identification
Determining which risks are likely to affect the project and
documenting the characteristics of each.
Risk Quantification
Evaluating risks and risk interactions to assess the range
of possible project outcomes.
Risk Response Development
Defining enhancement steps for opportunities and
responses to threats.
Risk Response Control
Responding to changes in risk over the course of the
project.

General Sources of risk in construction

projects
Misunderstanding of contract terms and conditions
Design changes and errors
Poorly coordinated work
Unskilled staff
Poorly defined roles and responsibilities

Natural hazards
Political and legal problem

OBJECTIVE
Infrastructure projects being huge in nature
and involving a large amount of money, any
sort of wastage (either time, resources etc)
would lead to huge monetary losses.

The losses are due to various risks associated

with such mega projects.
Research on risk assessment and management
has been done by various people, mostly on
developed countries.

 In India, only few research works have been

done in this area.
This study focuses risk assessment and
management in India in field of construction.
The scope of this work is limited to the
construction of large building projects like IT
parks, Multiplexes, Malls, Large residential
complex etc.

METHODOLOGY
Study of literature related to Risk Analysis and Risk
Management capabilities
Preparation of Questionnaire.
Site visit to major construction project sites.
Questionnaire survey and personnel interviews with
in-charges and managers and collection of data
from site.
Analyzing the Questionnaire
Qualitative analysis of data obtained from site and
to identify the root cause.
Remedial measures to be suggested and the
present data to be recorded for future reference.
Conclusions, recommendations and suggestions for
future study.

Types of risk
Financial risk
1.
2.
3.
4.
5.
6.
7.

Bankruptcy of project partner

Loss due to fluctuation of inflation rate
Loss due to fluctuation of interest rate
Loss due to fluctuation of exchange rate
Loss due to rise in fuel prices
Low credibility of shareholders and lenders
Changes in Bank formalities and regulations

Legal risk

1.
2.
3.
4.
5.

Breach of contract by project partner

Lack of enforcement of legal judgment
Improper verification of contract documents
Lack of knowledge of arbitration
Uncertainty and unfairness of court justice

Management risk

Change of Top management

No past experience in similar projects
Short tendering time
Sub-contractor related problems
Improper project feasibility study
Improper project planning and budgeting
Inadequate choice of project partner

Management risk contd

Improper project organization structure

Poor relation and disputes with partner
Poor communication between clients
Internal management problems
Team work
Poor relation with government departments
Time constraint
Project delay

Policy and political risk

1.
2.
3.
4.

Cost
Loss
Loss
Loss

increase due to changes of Govt policies

incurred due to corruption and bribery
incurred due to political changes
due to bureaucracy for late approvals

Technical risk

Design changes
Equipment failure
Errors in design drawings
High degree of difficulty in construction
Accidents on site
Stiff environmental regulations
Incompetence of transportation facilities
Industrial disputes
Materials shortage

Technical risk contd

Obsoleteness of building equipment

Poor quality of procured materials
Problems due to partners different practice
Shortage in supply of water
Shortage in supply fuel
Shortage in supply electricity
Unknown site physical conditions
Following government standards and codes
Wastage of materials by workers
Theft of materials at site
Site distance from urban area
Surplus materials handling
Architect Vs Structural Engineer dispute
Shortage of skilful workers

Environmental risk
Any adverse impact on project due to climatic
conditions
Any impact on the environment due to the
project
Healthy working environment for the workers

METHOD OF SURVEYING
The general methodology of this study relied largely on
the survey questionnaire which was collected from the
local building contractors of different sizes by mail or by
personnel meeting. A thorough literature review was
initially conducted to identify the risk factors that affect
the performance of construction industry as a whole.

This research has adopted the more general and broad

definition of risk as presented by Shen et al (2001)* on
Chinas construction joint ventures and more risk factors
from other literature. Also some interviews with industrial
practitioners were conducted to produce to check
effectiveness of questionnaires.

*Shen et al (2001) based on their survey, established a risk

significance index to show the relative significance among the risks
associated with the joint ventures in the Chinese construction
procurement practice. Real cases were examined to show the risk
environment faced by joint ventures.

ANALYSIS OF SURVEY RESULTS

For calculating the significance score = multiply
the probability of occurrence by the degree of its
impact.
Thus, the significance score for each risk
assessed by each respondent can be obtained
through the model

where
Si = significance score assessed by respondent j for risk i;
j = probability of occurrence of risk i, assessed by
respondent j; and
i = degree of impact of risk i, assessed by
respondent j.

 By averaging scores from all the responses the

risk index score is obtained and is used to
rank all risks. The model for the calculation of
risk index score can be written as

RSi = index score for risk i;

Si = significance score assessed by respondent j
for risk i and
T = Total number of responses. To calculate Si,
the five point scales for and , which will be
converted into numerical ( Likert scale) scales.

KEY FOR QUESSIONAIRE

Example

Results of survey
Totally for seventy five companies the
questionnaires were given, out of which forty five
had an effective reply and two were rejected due
to improper answering. Thus the response rate is
60%, which is considered a good response in this
type of survey.
For easy understanding the survey analysis is
divided into two part (i.e.) one for the project
costing below fifty crores and the other for
projects costing above fifty crores.

FINANCIAL RISK
Loss due to fluctuation of inflation rate

3.05

Loss due to fluctuation of interest rate

2.99

Loss due to rise in fuel prices

2.75

Bankruptcy of project partner

1.69

Loss due to fluctuation of exchange rate

1.43

Changes in
regulations

0.93

Bank

formalities

and

Low credibility of shareholders and

lenders

0.86

Ranking of Financial risks

3.5

2. Loss due to fluctuation

of interest rate

3.05 2.99
3

2.75

3. Loss due to rise in fuel

prices

Mean Value

2.5
2
1.5

1. Loss due to fluctuation

of inflation rate

1.69

4. Bankruptcy of project
partner

1.43
0.93 0.86

1
0.5

5. Loss due to fluctuation

of exchange rate
6. Changes in Bank
formalities and regulations

0
Factors

7. Low credibility of
shareholders and lenders

MANAGEMENT RISK
Shortage of skilful workers

4.58

Materials shortage

2.94

Unknown site conditions

2.83

Design changes

2.74

Site distance from urban area

2.6

Errors in design drawings

2.53

Poor quality of procured materials

2.39

Wastage of materials by workers

2.3

Technical risk

2.15

High degree of difficulty in construction

2.07

Ranking of Market risks

Sub risks

Mean
Competition from other companies

3.51

Fall short of expected income from project

1.15

Increase of accessory facilities price

1.54

Increase of labour costs

2.95

Increase of materials price

3.07

Inadequate forecast about market demand

1.33

Local protectionism

0.98

Unfairness in tendering

1.26

TECHNICAL RISK
Time constraint

4.12

Sub-contractor related problems

3.94

Project delay

3.94

Improper project planning and budgeting

3.25

Poor communication between clients

3.03

Internal management problems

2.93

Improper project feasibility study

2.86

Improper project organization structure

2.79

Team work

2.56

LEGAL RISK

Improper verification
documents

of

contract
3.83

Breach of contract by project partner

2.91

Lack arbitration clause in agreement

2.13

Lack of enforcement of legal judgment

1.26

Uncertainty and unfairness of court

justice

1.04

POLITICAL RISK

Cost increase due to changes of Govt

policies

2.24

Loss due to bureaucracy for late approvals

1.73

Loss incurred due to corruption and

bribery

0.78

Loss incurred due to political changes

0.68

ENVIRONMRNTAL RISK

Any adverse impact on project due to

climatic conditions

2.5

Any impact on the environment due to

the project

0.8

Healthy working environment for the

workers

0.8

For project costing more than 50 crores top

ten risks

S.No

Sub risk

Mean

SD

Shortage of skilful workers

4.58

3.61

Time constraint

4.12

4.58

Sub-contractor related problems

3.94

5.72

Project delay

3.94

6.39

Improper verification of contract documents

3.83

3.6

Competition from other companies

3.51

6.31

Improper project planning and budgeting

3.25

2.92

Increase of materials price

3.07

4.73

Loss due to fluctuation of inflation rate

3.05

3.45

10

Poor communication between clients

3.03

4.47

For project costing less than 50 crores top

ten risks

S.No

Sub risk

Mean

SD

Increase of materials price

4.51

3.5

Loss due to fluctuation of inflation rate

4.5

4.13

Increase of labour costs

3.93

5.13

Materials shortage

3.92

6.56

Errors in design drawings

3.85

3.16

Shortage of skilful workers

3.56

6.32

Time constraint

3.45

3.93

Sub-contractor related problems

3.17

5.71

Project delay

3.11

4.44

10

Competition from other companies

2.99

6.17

Bar chart for project costing less than 50 crores - Top ten risks
Increase of materials price

5
4.51 4.5
4.5
4
3.5

Loss due to fluctuation of

inflation rate

3.933.923.85
3.56
3.45
3.173.11
2.99

Increase of labour costs

Materials shortage

Mean

3
Errors in design draw ings
2.5
Shortage of skilful w orkers

Time constraint

1.5
1

Sub-contractor related
problems

0.5

Project delay

0
Factors

Competition from other

companies

Conclusion
Shortage of skilful workers is the major risk
faced by almost all the companies. This is
because; the skilled workers are migrating
between companies very often due to the high
demand in the market/ Middle east countries.
Since real estate, construction sector are in the
boom side, construction companies are in move
to make profit as soon as possible in current
wave itself;
but this creates tremendous pressure to the
management & workers to complete the project
in a very short span. This time constraint risk
prevails in all the companies surveyed.

Conclusion..contd
Sub-contractor related risks are also high,
since most of the sub contractors are not able
to meet the standards of the main contractor
and the client due their size of work.
Delay in the project is also one of the main
risks, but this delay is looped with various
others factors and risks directly or indirectly.

Conclusion
Inflation rate is very high in India and increasing
proportionately with time, this causes the
increase in prices of materials like cement, steel
which intern causes financial risk to the
developers and construction firms.
Banks have also raised their interest rates for
the loan given by them, this have affected the
residential construction market hugely. Thus the
financial part of risk is very high than any other
risk.
Political risk is substantially very low for the
large firms when compared to other risk.

Conclusion

Legal risk is also very low, but the

implementation of court directive is not proper;
this was the complaint seen from this survey.

Large companies are accepting that there are

few environmental effects due to their project,
but says that it is a global phenomena and it can
not be nullified, but only can be reduced.

Overall management and the financial risks are

high when compared to other risks.

Suggestions to the companies:

Risk management should be considered a primary

tool to assess the project. From the survey we can
understand that risk management is not followed in
most of the companies as such but if followed also it
is not done systematically. Immediate mitigation
measures are not in place if a risk event happens.
During the planning stage itself a full fledged risk
assessment about the project should be made as a
effective measure to curb risks.
Financial part of the risk is a global phenomena and
this risk should be handled carefully using financial
consultants since this cannot be handled by
engineers alone.

 There is not a single company with a separate person

in the manager level who handles risk management
within the company and takes decision on his own.
Thus a risk management body within the company
should be formed and atleast monthly once evaluation
should be done.
Most of the companys management follow Top to
down approach which is a traditional approach, but
Down to top approach should be followed so that the
employees voices are heard.
It is better to involve a risk consultant in a large
construction project.

 With the assistance of the practical survey, this

paper has systematically examined major risks
affecting the construction industry.

This study should assist management in

identifying activities where there is a risk of
injury or loss and hence provide a basis for
management decisions on the application of
resources.

 These findings are very important for

implementing further effective measures to
ensure the right direction of future development
and create a more attractive construction sector.

National Conference

National Seminar

Thank you

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