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Risk analysis and management in construction

ARTICLE in INTERNATIONAL JOURNAL OF PROJECT MANAGEMENT · FEBRUARY 1997
Impact Factor: 1.53 · DOI: 10.1016/S0263-7863(96)00035-X

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The analysis and management in 1992. judgement and experience. undesirable and often unpredictable factors 7. 35 Seething Lane. all professionals and groups (client groups. It concludes that risk management is essential to construction activities in minimizing losses and enhancing profitability. dents classified into five work-related groups: defence Risk in construction has been the object of attention industry (36%). Ashley8 and Kangari and Riggs9 have all agreed that these situations The research survey are not limited to the construction industry. International Loss Adjusters. and many techniques employed for risk analysis and management. project managers. 31-38. design team. risk management.00 S0263-7863 (96)00035-X Risk analysis and management in construction Akintola S Akintoye* Department of Building and Surveying. • Risk premium in construction projects struction industry are continually faced with a variety of • Management of risk situations involving many unknown. Risk analysis and management in construction depend mainly on intuition. Copyright © 1996 Elsevier Science Ltd and IPMA. exposed to. UK Malcolm J MacLeod 1RISC Technical Services. G40BA. International Journal of Project ManagementVol. Simister's l° survey was comprised of respon- business activities. risk analysis. Mason 4 and Moavenzadeh5 have regarded this as practitioners on the following aspects of risk analysis and an exposure to loss only. No. unexpected. etc. EC3N 4AH.00 + 0. based information technology (12 %). 15. Glasgow Caledonian University.) in the con- the activities of the construction industry. 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. on the basis of a questionnaire survey of general contractors and project management practices. London. Although. UK The paper describes. time and quality. management consultancy (36%). companies have established risk management departments Simister '° investigated the usage and benefit of project risk to control the risks they are. All rights reserved 0263-7863/96 $17. duration and quality of the project. Bufaied 6 describes risk in relation management: to construction as a variable in the process of a construction project whose variation results in uncertainty as to the final • Risk perception by the construction industry cost. Porter'. pp. or might be. • Organizational risk management It is generally recognized that those within the con. frequently • Current usage of risk management techniques. contractors Organizations from many industries have recognized the regarding the industry response. systems- because of time and cost over-runs associated with con. Glasgow. contractors. 1. Insofar as risk analysis and management is important to project management team. environment and organization. it is recognized that risk is built into any commercial organization's profit The need to manage risks in construction is relevant to structure and is a basic feature of a free enterprise system. time and quality. little is known struction industry which are concerned with cost. telecommunications struction projects. the construction industry's perception of risk associated with its activities and the extent to which the industry uses risk analysis and management techniques. Healey2 and Perry (12%) and engineering contracting (4%). The current research concentrated on two categories of respondents: contractors and project management prac- *Author for correspondence. processes. and in particular the increasing importance of risk management. tices. Construction risk is generally perceived as events that influence project objectives of cost. The objective and Hayes3 have expressed risk as an exposure to economic of the current study was to obtain feedback from con- loss or gain arising from involvement in the construction struction contractors and construction project management process. The sample for the survey was a total of 100 top firms PM 15/I--I] 31 . based on a questionnaire construction industry and its clients are widely associated survey of 37 members of the UK Association of Project with a high degree of risk due to the nature of construction Managers. Keywords: Risk perception. 1997 Pergamon Copyright© 1996 Elsevier Science Ltd and IPMA Printed in Great Britain.

and social phenomenon• Choffray and Johnson ~7 and The overall response to the survey comprised of 30 Ritchie and Marshall ~8 have identified factors influencing general contractors (CTR) and 13 project management the formation of risk perception including educational practices (PM) representing a 43% response rate. Employ- background. All the project management abilities and consequences because this imposes unduly organizations are bona fide practices providing a wide restrictive assumptions about what is an essentially human range of project management services. such as the product of prob- and had 50. The William ~5on the other hand has categorized details of each general contractors were selected randomly from a list of risk factor into event. the firms surveyed by people's belief. Most of Business Development. work experience and educational and professional Control Manager. given that all respondents claimed to carry Turnover = £25 million. The general contractors offered diversified opinions. • "Tender or on-site performance mistakes leading to quality under performance. Turnover = are project management practices) have turnover less than £130 million.000 employees. peer group the managing director of each firm and a reminder letter. Employment = 500 +). in order to and cannot be regarded as biased considering Moser and obtain the view of the industry on risk in construction. independent of any specific threat. attitudes. loss of reputation. threat and vulnerability which occurs when the two conditions Employment = 2000). The response rate is may affect the respondents' perception of risk. is characterized by a physical system which. it can be inferred that the respondents have ment = 2000). Turnover = £100 million. practical experience. they are not typical of a construction industry questionnaire survey directly investigated in this study. million. Employment = 600). influence. Employment = 900). contractual or economic £10 million and £100 million. medium and large firms in the UK construction • " T h e opportunity to make a profit on a contract whilst industry. and a chance of an normal or regular activities of the firms rather than being accident occurring to persons on property" (Director. Forty-nine per cent have turnover between • " T h e likelihood of physical. used a process of project risk register to identify risks and The 30 project management practices were those advertising to initiate the analyses for project risk management• in Building during the period June 1994 to August 1994. However. The questionnaires were completed by top management quoted as follows: in the organizations (mainly directors and partners) and almost all of them (more than 90%) had over 10 years of • "Factors which can adversely affect the successful com- construction experience. an individual's cognitive response rate resulted from an initial mailing addressed to characteristics. Turnover = £45 million.Risk analysis and management in construction: A S Akintoye and M J MacLeod in the UK construction industry comprising 70 general catalogue determines the level of exposure to risk. A threat is something which has an adverse • " T h e probability of a construction activity costing more effect on the activities of an organization. Turnover = management practices. overlap ~4. judgement and feelings. They claimed • "The degree of certainty that the financial objectives for to be involved in risk management and the analysis of their each particular project will be achieved and the extent to perceptions of risks involved in construction does in fact which risk factors can be quantified at bid stage and suggest an awareness of what is involved in control of risk monitored closely" (Group Director. etc. The respondents thus have requisite pletion of a project in terms of budget and schedule. the availability of information. it can be concluded that the survey covers a spectrum million. while being Turnover = £20 million. Turnover = £200 million. after two weeks. cost over-run and an impact Risk perception on all of these from a variety of unforeseen circum- Risk catalogue has been described as a combination of stances" (Finance Director. Turnover = £80 firms. process and activities in their organizations. allows a threat to be • "Cumulating liabilities that arise from a particular set of exploited. A vulnerability than allowed for in the tender" (Contract Manager. was lower than 30-40%. This suggests that risk control is carried out as part of • "Loss of money. and 100 contractors published in the 'Contractor File 1992 't2. On the basis of which in themselves are not always identifiable" (Project position. From this distribution of the responding for in the price" (Managing Director. of small. accepts all risks relevant to a contract in terms of cost. The background. impact. Employment = 800). Employment = 2000). Turnover = £250 and its consequences. and 8 % of the project requirements" (Deputy Managing Director. Employment = 60). £10 million. out risk analysis and management of the construction • "The likelihood of unplanned events occurring" (Director business. Turnover = £170 million. the Kalton's j3 assertion that the results of a postal survey could respondents were asked to describe risk in construction be considered as biased and of little value if the return rate projects. Employment = 200). The impact of risk from threat catalogue and contract terms for a construction project" (Managing the frequency of occurrence of risk from the vulnerability Director. satisfying the client quality. designated. adequate knowledge of the activities associated with • "Construction is a risk business--the main contractor construction and associated risk. 29% have turnover over conditions becoming more difficult than those allowed £100 million. Twenty-two per cent of the firms surveyed (all the 22 % time and quality of performance" (Director. professional and academic qualifications. to those organizations that had not While it is generally recognized that the foregoing factors responded to the original request. actions and contractual. have designated risk managers• £100 million. delivery and contract price Twenty per cent of the contractors. Risk perception is generally believed to be influenced Subject to limitation of the sampling. contractors and 30 project management practices ~. 32 . have any formal risk management training. The total turnover of the firms surveyed (£7000 cannot be reduced to a single subjective correlate of a million) represents 20 % of UK contractors' output for 1994 particular mathematical model. of the respondents (CTR = 67% and PM = 77%) did not Employment = 68). The represent a large proportion of the UK construction industry report of The Royal Society claims that risk perception • 16 " population.

Legal--due to action of others. political. • To determine if the firm is making an adequate profit on • "Evaluating the complexity associated with contracts. saw risk as an clients. required to achieve a project objective(s). and to have which they work is associated with high risk and saw risk an adverse effect upon programme and/or cost" (Planning management as being essential to their overall construction Manager. opportunity to make profit and not something that will • To protect the firm's credibility and reputation--not of always have an adverse effect. Risk analysis and management in construction: A S Akintoye and M J MacLeod • " I n safety terms. however. depend on the risk exposure faced by individual firms from 33 . these to be assessed individually and a premium placed on ment (identification. construction and operation risks. 2° produced a catalogue of risks and contingency are a representation of the contractors responses: allowance in petrochemical construction project. Failure to manage risks on our clients' ment practices were not markedly different from the general projects carries some commercial risk as well as loss of contractors. • To control factors which will deter completion of pro- • "Financial--due to vague information. need to limit professional indemnity costs and to protect the The project management practices. Although all cost. The former seek: The views expressed by the contractors are generally risk • To limit professional indemnity claims. Employ- of cost. In summary. Safety problems-. Employ. analysing project risk from the construction perspective. quality and any other relevant performance respondents perceived risk in terms of project objectives criteria" (Director. recognized organization's reputation. Turnover = £50 million. • To avoid unsatisfactory projects and to enhance margins. cedure. Marketing Director. Employment = 170). • To identify project risks and quantify the potential cost • "Potential overspending against tender proposals" of each risk and plan for it. Project management practices and contractors have dif- ferent reasons for using risk management. and Dey et al. understandably so given that this Director. struction development is a business with a high number The premium placed on each of the sources of risk may of variables. ment = 600). ness" (Commercial Director. the risk. The following in construction projects is contingency allowance. Employment = 480). and due to the nature of construction business" (Group reduce losses. Turnover = £3. the need to manage risk is important to them because of the Employment = 70). need for risk management showed most emphasis on risks • "Something to be avoided or transferred" (Regional associated with cost. as con. Employ- ment = 600). logistics. People forget that construction is a people's busi- with risk management in relation to the client's objectives. that the consequences of risks directly affect the client and his objectives rather than their practices. • To provide an understanding and control risks in the the contractors perceived risk as the likelihood of unfore- projects. Some of their comments are quoted as follows: credibility and reputation. which could adversely affect the • To allow appropriate measures to be taken. but expected to become The risk perception of construction by the project manage- significant. cost and quality. both of which are • To assess and ascertain project viability because con. generally. jects within budget and schedule. This is not sur. assessment and control) is each of them. • "Comes in varying forms--most projects are high Although the project management practices are concerned risk. Executive. legal. A risk premium strategy which is often used important to their organizations' activities. As these risk sources influence projects performance in Organizational risk management terms of time. study by Dey et al. Risk premium in construction prising as project management practices provide consultancy services on a fee basis and do not commit large volumes Perry and Hayes 3 and Mustafa and A1-Bahar '9 have iden- of resources to construction projects in the manner of tified some risks sources central to the construction acti- contractors. and plant at tender stage" (Group Managing Director. 2° described a systematic procedure for struction is a risky business. time and quality. Turnover = £130 million. The • To analyse and control risk as the key to profit. design. contingency and technical contingency. analysis. or work around it to alleviate (Managing Director. elements associated with project objectives 7. as any sequence of events which are • To minimize loss by risk management in an industry likely to result in the possibility of injury" (Chief where even normal contracting causes difficulties. a particular project. tendering pro. By means of • "Risk is uncertainty with regard to events and their analysis and control of the risks that they are exposed to. time. Turnover = £10 million. major importance in the past. Dey et al. affects profitability. the contractors responses to the ment = 100).5 million. • To ensure that we are right more often than wrong. environmental. activities in order to minimize business losses. The higher the risk the greater must programming period and resource scheduling of labour be the potential reward. to control successful completion of the project in terms of cost. Turnover = £80 million. These are physical. seen factors occurring. Turnover = £5 million. Employment = 70). it is not uncommon for The respondents were asked to indicate why risk manage. One contractor. time the effects of risks and provide cost contingency for and quality. Turnover = £35 million. Turnover = £6 million. vities. effects which affects the project outcome in terms of they can maximize their business profitability. • " T h e activities/ocurrences which traditionally are likely The contractors generally agreed that the industry within (or to some degree will happen) to happen. as yeo2. • To keep insurance premiums to acceptable levels. Employment = 35). financial. 2° described the contingency allowance right management of risk in construction determines the for a high risk project as a combination of management ability to make profit.

building contracts and procurement methods seldom transfer is uneconomic. avoidance is undesirable. tices to risk is expected to change in view of the current The respondents were asked to indicate the extent of Construction (Design and Management) Regulations. i=0 34 . etc. safety) 17 25 42 8 8 17 62 17 4 0 Market/industry (availability of workload) 31 38 31 0 0 11 62 17 4 0 Company (corporate) 8 38 46 0 8 18 29 31 18 4 Development in IT 0 8 25 25 42 0 18 39 29 14 Project (design information) 34 42 8 8 8 3 66 24 7 0 Extent of risk premium: 4 = high. (CONDAM) on health and safety. contractor.89 1. that demands that the The responses are summarized in Table 1.56 Development in IT 1.g. financial failure of the Risk transfer is described by Perry and Hayes3 who identify building owner or subcontractors. money to complete the project. weather) 0 8 33 33 26 8 30 48 14 0 Political.05 Political. 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.33 1. the Construction risks. 1 = fairly low. risk. weather) 2. injury. the likelihood of occurrence.69 2. soil and site conditions. possible financial parties to the contract (building owner and the contractor) loss is small.37 Contractual arrangement (e. inappropriate documents. include the use of alternative contract strategies. = percentage of respondents.54 3. 3~. The risk consequences cessively high bid for a project. Risk reduction techniques or implications of contractual risks include claims and as a result. injury. The standard deviations show a wide variation on the Table 2 Index of organization risk premium Contractors Project management practices All firms Environmental (e. ordination.50 2.88 i=4 Organization risk premium index (RPI) is defined as RPI = ~ E~ P~. responsibilities) 3. The attitude of project management prac- different risks associated with construction.g. according to Williams and Heims 3°.Risk analysis and management in construction. availability of money to four methods used in construction projects and contracts the contractor in a suitable manner and time to enable the involving the relationships between client. sub- contractor to progress with the work. it is Table 3 shows the views of the respondents on how their hardly surprising therefore that this source of risk is highly firms tend to allocate risk involved in construction project. The organization employers' agents responsible for design and supervision risk premium index. inflation) 2. Risk retention. etc. occurrence.69 3.81 Project (design information) 2. where E i = ith extent of premium. are impor- posed by the sources. Financial risk contractor.95 Company (corporate) 2. Contractual risks are those associated with generally recognized to be impractical as it may lead to flaws in contract documents. work carrying out the construction work.g.08 2. site safety.g.40 3. etc. Risk avoidance in construction is achieved this. 2 = low. the attitude of the firm to risk. each of the sources.90 3. in terms of potential impact or probability of disputes. risk reduction. 1994 premium their organizations applied to each risk source. and inflated c o s t s 6'24. important for them. more contractors includes whether the building owner has enough detailed and further in-depth site investigations. Financial risk to different methods of construction.g. Social & Economic (e.71 Market/industry (availability of workload) 2. and risk of construction project. etc. etc. Social & Economic (e. 3 = fairly high.93 2. and P. These are recognized as having Methods of risk allocation take any one or combination most adverse consequences on the successful completion of risk retention. or projects not going ahead or a contractor submitting an ex- improper contractual relationships.50 Construction (productivity. representing the overall respondents' should provide information on details of risks and avoid views of their organizations' premium on the sources of foreseeable risks to the health and safety of any person at risk. The financial and contractual Management of risk risks are most important. project redesign.55 3.50 2. the extent of impact material shortages and quality. insurer and surety. Building contracts deal with the avoidance 26-29.44 Financial 3. tion of risks. design team.00 2. responsibilities) 62 31 7 0 0 55 31 10 4 0 Financial 46 38 0 0 16 55 41 0 4 0 Construction (productivity. Carr 22 and Ashley 23 advocate balancing of becomes the only option where risk prevention or transfer risk allocation within construction project by the two major is impossible.52 2. 0 = indifferent.20 2. or job site related risks such as avail- experience of the firm in dealing with the particular type of ability and productivity of labour. relationships between parties in the contract and the alloca. delays. 25. inflation) 0 17 66 0 17 10 41 26 14 9 Contractual agreement (e. risk transfer. safety) 2. lack of co.71 1.58 2. disruption of work.50 3. stoppages of work. influences the cash flow of construction contractors. Some of the risk sources are tant to the contractors unlike the project management more important to the construction industry than the others practices because these risks are related to construction and this is recognized by the different premium put on process on site.g. is shown in Table 2. probability of occurrence is negligible and but." A S Akintoye and M J MacLeod Table 1 Perceptions of premium placed on the sources of risk (% of respondents) Contractors Project management practices 4 3 2 1 0 4 3 2 1 0 Environmental (e.

This is possible for Subjective probability uses the experience gained from project management practices because they provide pro. ability.D. that. Mean (%) S. Table 5 shows that the use of risk analysis decision-making tools in an uncertain environment. mean end that are being used by their firms for project risk analysis analysis. obtained by carrying out a number of iterations. sensitivity analysis. and in contractual fidence that all risks have been identified. suggesting that firms life of a project and it has capacity to evaluate the con- within the construction industry tend to treat risk allocation sequences of factors such as delay and inflation. PM = 69%). resources. The Table 4 shows the firms' strategies for transferring risks use of traditional methods which assess risk involved in involved in construction projects. this approach gives little con- construction. Although the sample from project management tool designed to model the interaction project management practices is smaller. project uncertainty The project managers choose to transfer risks using profes. This tends to support Birch and McEvoy j4 of objectives to identify a series of decision points. Such computer-based transfer risk associated with construction projects. and ones Methods of decision analysis are algorithms. risk and the decision-maker's risk attitude. Retention 24 23 27 23 25 23 Reduction 21 13 17 14 19 14 Transfer 31 21 39 38 34 26 Avoidance 24 20 17 22 22 21 Total 100 100 100 allocation of risks amongst the firms. It is a regarded as a formal technique. must be modelled as a dynamic process in which the sional indemnity and through the wordings of contract decision-maker can revise his/her plans as the project runs. methods recognize the dynamic project environment. Jamieson and LOW 36 a tree form such that the decision maker can identify best have faulted this method of risk analysis by maintaining alternatives that achieve the objectives of a major project. bayesian theory and decision trees. decide on the likelihood of risk exposure and the outcomes. Huseby and Skogen 35 are of the Another method popular with the contractors is insurance. Mean (%) S.D. who try to think of all possible of alternatives) and their possible outcomes graphically in risks and take appropriate action. procurement route and contractual exclusions where possible 5 17 2 15 To design teams/consultants 6 20 2 15 To clients 4 13 1 8 To insurance/professional indemnity 10 33 4 31 Contractors 0 0 3 23 35 . and changes differently. Monte Carlo simulation and Using this method the probability of project outcome is subjective probability. stochastic dominance. Monte Carlo The respondents were asked to identify which of these simulation. subjective prob. The that the approach to risk analysis is largely based on the use decision tree shows sequence of known choices (a number of checklist by managers. An techniques by the responding firms is generally low in con- algorithm contains a sequence of instructions for problem struction projects with the exception of intuition/judge- solving. compared with the Table 4 How risks are transferred by firms Contractors Project management practices No. lowed by decision trees. the results tend of time. to substantial direct resource commitment. where decision-making is characterized by risk. Caspar is a computer recorded the highest familiarity with respondents cannot be aided simulation for project appraisal and review. These provide and management. opinion that in a realistic risk model. management process 35. although it is possible to make a long list that is The decision tree method is useful in deciding methods of reasonably comprehensive. Most of the contractors projects in a deterministic way has been criticized for failing (63%) use a 'back-to-back' sub-contract agreement to the to take into account the sequential nature of construction main contract with specialist and domestic subcontractors. risk adjusted discount rate. % No. % To subcontracting (including specialist contractors)--on back-to-back subcontract agreement 19 63 0 0 Contractual terms--qualification of tender. The table shows problems such as whether to proceed with a claim and that most of the respondents are familiar only with sensitivity assessing the likelihood of a claim succeeding 33. depending Checklists based on intuition/judgement/experience which on the degree of confidence required. risk analysis techniques they are familiar with.D. similar projects undertaken in the past by the decision- fessional services rather than site construction involving maker. However. This is fol- Monte Carlo analysis is a form of stochastic simulation. analysis technique (CTR = 53 %. conditions with client and designers. the firms show more tendency to to the market or to production r a t e s 34. decision analysis. cost and revenue throughout the entire to suggest that the project managers. Risk analysis and management in construction: A S Akintoye and M J MacLeod Table 3 Respondents' perceptions of how construction projects' risks are allocated by their firms (as a percentage) Strategies for risk allocation Contractors Project management practices All firms (risk response) Mean (%) S. Caspar and intuition 29-32. choosing alternative projects. Risk premiums in construction projects take the form of contingencies or added margins to an estimate to cover Current usage of risk management techniques unforeseen eventualities. Mean end analysis is a method of clarifying a chain ment/experience. The amount of the premium varies Techniques of risk analysis in construction projects include between projects and is mostly dependent upon attendant risk premium.

The contractors transfer risks to their domestic and specialist • The vast majority of risks are contractual or construction sub-contractors and through insurance premiums. Other techniques is unwarranted in order to meet that project's objectives of such as subjective probability and Monte Carlo simulation time. these with unique situations to which they must respond under results generally contradict those obtained by Simister t°. becomes relevant in the situation that "Managers end analysis and algorithms are not used by the firms. managers. conditions of stress and limited time which leave no room this could be explained by the work-related background for extended calculation or analysis". the time. Project related and are fairly subjective. supported by the respondents' based techniques like stochastic dominance. cost and quality. like fields. The computer- dents. agement is probably because it provides answers to a whole • Lack of expertize in the techniques. With have become acutely aware that they are often confronted the exception of checklists and sensitivity analysis. experience to manage risks involved in construction. hence they are better managers resort to professional indemnity insurance to dealt with based on experience from previous contracts transfer risks associated with services provided to clients. cost and quality performance of the project. The comments are not particularly require quantification of probability of occurrence and surprising considering the lack of formal training in risk probability distribution of risk factors before the procedures analysis and management techniques by most of the respon- involved in calculations can be undertaken. undertaken by the firm. Contractors have a tendency clients: to contract out all the work packages involved in a project 36 . transferred to the party that is in the best position to deal with it. PM = 38 %). The responses to the strategies for dealing with risks in • They require availability of sound data to ensure construction suggest that the industry is mostly risk averse. requested by clients--clients expect project management Almost all organizations depend on intuition/judgement/ practice to set up projects risk-flee. models. techniques of risk analysis and management were: • Lack of familiarity with the techniques. the process where a contractor transfers all risks The reasons provided by the project managers were par. Although. project development. S c h o n ' s 37 assertion. from inception and throughout the • Most construction projects are seldom large enough to life of the project. confidence. on projects. The popularity of sensitivity analysis compared with any • Project risk management is about people not scientific other formal techniques of project risk analysis and man. Risk • Doubts whether these techniques are applicable to the management therefore becomes a continuing activity in construction industry. it is generally recognized that risk should be • It is difficult to see the benefits. involved in a project does not bode well for innovation ticularly reflective of the services they provide to their initiative within the industry. it is comparatively simple to Lack of familiarity featured prominently amongst the use and has the ability to focus on a particular estimate 28. The responses intuition and experience. This is followed by the claim variables which are considered to be of potentially serious that the amount of calculations involved using the techniques impact on project cost and time estimates. Discussion and conclusion • The degree of sophistication involved in the techniques is unwarranted for project performance. reasons provided by the respondents for non-use of formal The technique provides information on the project risk risk management techniques. have more awareness of risk analysis and • Risk analysis of construction projects is seldom formally management techniques. depends substantially on these techniques are not used in their firms. rather than quantitative analysis from the contractors have been separated from the project irrespective of educational and professional qualification. Caspar. is supported by the firms' attitudes to risk analysis and The reasons provided by contractors for not using the management techniques. mean comments. Risk elements associated with construction projects influence • Time plus lack of information and knowledge. warrant the use of these techniques or research into them. most decision-making processes involving professionals The respondents were asked for the reasons why some of (see Reflective Practitioners37). This is • Risk analysis in commercial terms is not always viable followed by sensitivity analysis (CTR = 53 %.Risk analysis and management in construction: A S Akintoye and M J MacLeod Table 5 Techniques of risk management (% of respondents) Contractors Project management practices Respondent familiar Use within organization Respondent familiar Use within organization Risk premium 27 33 23 8 Risk adjusted discount rate 17 7 8 0 Subjective probability 17 23 38 46 Decision analysis Algorithms 3 0 8 0 Mean end analysis 7 0 0 0 Decision trees 27 13 38 23 Bayesian theory 7 0 0 0 Sensitivity analysis 53 53 69 38 Monte Carlo simulation 20 3 46 31 Stochastic dominance 0 0 0 0 Caspar 0 0 0 0 Intuition/judgement/experience 77 77 100 100 contractors. The evidence that the of his respondents with some skewness towards IT-related construction industry business management decisions. range of 'what if' questions.

Thesis. The are of the opinion that the increasing widespread use of implication therefore is that the general contractors with the microcomputers in financial modelling packages will add to means to do so. Thesis. in the construction industry hasA). control through risk analysis: a petroleum pipeline-laying project' which managers could undergo on a part-time basis. for example. D Business Risk Management Chapman and management techniques to bridge the gap between theory Hall. i. It may not be expected that this will be 25 HMSO. P E 'Measuring perceived pre-purchase risk for a new industrial product' Industrial Marketing Management ability. the more data and 3 Perry. B and Marshall. Heinemann Educational. Washington DC. Thesis. Civil Engineering. University of Manchester. A S Risks in the Construction Industry: their Causes and their related field. due to lack of familiarity. UK (1993) and practice. S O 'Planning for project education could be postgraduate studies in risk management.4 powerful and sophisticated the technique. July (1977) risk simulation techniques) other than intuitive methods is 9 Kangari. the 12 New Builder. Ho and Pike 38. CA. Tabucanon. C E Risk Allowance in Construction Contracts M. M) 45-49 industry uses few formal techniques of risk analysis and 13 Moser. industry. 21 Yeo. Formal 20 Dey.1-B3. J G and Hayes. P. UK (1971) Ho and Pike 3s also found that the major limitations most 14 Birch. The extent to which this can be achieved risks associated with their construction business activities. HMSO (1994) 37 . 8 (1977) 333-334 struction project managers and professionals in risk 18 Ritchie. which has and Management of Construction. However. Risk analysis and management in construction: A S Akintoye and M J MacLeod to sub-contractors and undertake 'contract management' as to re-engineer the industry. New York. USA. D G W and McEvoy. 78. Health and Safety. 499-521 employed just-in-time for the client's production requirement. G Survey Methods in Social Investigation management involving calculations due to lack of familiarity. J F 'Project risk assessment using the analytic Hierarchy process' lEE Transactions of Engineering Various options for dealing with this could be in the form Management 38 (1991) 46-52 of formal and/or informal education and training 39. 220. US National Academy of Science. M J Perception and Management of Risk in the UK to them. 4 Mason. T M 'Using a risk register to integrate risk management in managers' inadequate understanding of the risk analysis project definition' International Journal of Project Management 12 approach. may demand education and training of the con. Glasgow International Journal of Project Management 12 (1994) 23-33 Caledonian University.et to be seen in view of It is therefore unsurprising to hear that the construction low usage of IT in constructions. ment practitioners to develop proven techniques (such as Stanford University. UMIST (1981) 2 Heale. in terms of cost. time and quality of performance. G E A Quantitative Risk Management Approach to the Selection of a Construction Contract Provisions Ph. R I 'Paying the price for construction risk' Journal of Con- Management with an option in Risk Management. Glasgow Most of the respondents are aware of what is involved in Caledonian University (1994) risk management. 17 Choffray. within professional bodies such as the Association of USA (1985) Project Managers. ease of use and efficiency of risk analysis in undertake research as part of the strategies to reduce the capital budgeting. J 'Risks and risk analysis in construction not using risk analysis and management techniques. a supplement to New Civil Engineer andNew Builder (Edited by Winney. M A and AI-Bahar. industry ranks poorly in terms of research activities. Stanford University (1973) tified project time constraint as one of the major reasons for 5 Moavenzadeh. Part 1. Department of Civil Engineering. R W 'Risk and its management in construction time is required. June strained by time because construction production is mostly (1985) Vol. ASCE 103 (1977) 152-161 education and training could be in form of CPD programmes 23 Ashley. 19 Mustafa. 8 Ashley. management' Proceech'ng of the C1B W65.D. in Report of a Royal Society Study Group. R and Riggs. These findings may have implications for the (1994) 17-22 curriculum in Construction Management education. N A Corporate Risk Management McGraw Hill. J M and Johnson. L S 'Construction risk assessment by endorsed by Ho and Pike 38 who asserted that risk analysis linguistics' IEEE Transaction of Engineering Management 36 (1989) should formalize managers' judgements about project un. J R 'Contingency funds evaluation' Transaction of American drawback of risk analysis techniques is that the more Association of Cost Engineers (1982) B3. ment techniques are applicable to the construction industry agement practices within the UK construction industry shows calls for concern. One major University of Manchester. The Construction (Design and Manage- an immediate panacea. Boston. either fail to or have no incentive to the potential. Informal struction Division. 19-20 May (1976) allowed the topic of project risk analysis to mature in other 6 Bufaied. D B Construction Project Risk Sharing Technical Report No. Construction industry activity is con. Contractors File 1992. M A 'Risk analysis for information frequently found for application of risk analysis include systems' Journal of Information Technology 7 (1992) 44-53 15 William. does not appear to have made much impact on Effects at the Project Level Ph. Stanford. K T 'Risk classification of estimates and contingency' Journal of Engineering Management 6 (1990) 458-470 time/part-time postgraduate programme in Construction 22 Carr. USA (1981) 24 Doherty. D B 'Construction project risks: mitigation and management' organized by academic establishments or interest groups Proceedings of PMI International Symposium. London (1992) view of the implications for construction business profit. judgement and 1 Porter. 7 Fong. 126-131 10 Simister.Sc. for example. The 16 The Royal Society "Risk: analysis. perception and management' implementation of project risk analysis and management. T and Ogunlana.e. F and Rossow. Symposium on Organisation The increased availability of computers. Department of It is unsurprising that some of the respondents have iden.D. SJ 'Usage and benefits ofproject risk analysis and manage- certainty in a more precise way and should allow them to ment' International Journal of Project Management 12 (1994) 5-8 modify their judgement in the light of information available 11 MacLeod. experience gained from previous contracts. currently run a full. The respondents' doubts that risk analysis and manage- The questionnaire survey of contractors and project man.Sc. S W 'Risk management' The Cost Engineer 25 (1987) 12-16 The need for the risk analysis assessment and manage. the tools being used for risk analysis and management in the UMIST (1987) construction process. projects' Proceedings of Institution of Civil Engineers. Construction texts and construction that both perceive risk in construction as the likelihood of research in related fields should address this issue if such unforeseen events occurring which could adversely affect techniques are to be of practical value to the construction the potential completion of the project. C A and Kalton. 3140. the construction industry has approached risk management in terms of individual intuition. Dissertation. part of a strategy to reduce or eliminate their risk. but it is a move in the right direction ment) Regulations No. The Construction Institute. Construction Industry Unpublished M. Who Does What. Although risk manage- ment techniques have been used in other industries for a References long time.

'Project risk analysis and man. G Risk Management and Construction lecturer in construction cost studies Blackwell. J Risk Analysis in Project Management E & FN Spon. Brisbane. R M Risk Management and Insurance. Action Basic Books. construction agement' in Project. 45 (1995) 38 . S M C 'Risk management and the building of construction economics and con- procurement process' Innovation and Economics in Building struction management. R and Low. 33 Thompson. His educational and pro- 36 Jamieson. UMIST (1988) 35 Huseby. USA (1983) His research interest is in risk man- 38 Ho. American Society of Civil Engineers. R H 'The use of risk analysis techniques in capital agement of construction projects. Dissertation. S 'Construction contract arrangements' Construction Risks 40 McCellar. The Bulletin of the Association of Project Managers risk management. R and Norman. Perry. USA (1989) published widely in the subject areas 31 Toakley. F) John Wiley and Sons.Risk analysis and management in construction: A S Akintoye and M J MacLeod 26 Ribakoff. T EDl in the UK Construction Industry Unpublished M. and market modelling. J and Simon. London. A B and Skogen. J Engineering Construction Risks--A Guide to Project Risk Analysis and Risk Management Thomas Telford Services. 24-26 January (1979) 27 Perry. S S M and Pike. J G 'Dealing with risks in contracts' Building Technology and Management (April 1986) 23-26 Dr Akintola Akintoye is senior 28 Flanagan. A R and Ling. He has presented papers 30 Williams. P) 4 (April 1992) procurement. D A The Reflective Practitioner: How Professionals Think in surveying practices on major projects. J and Wharton. A 'Construction management education in UK--A survey of the content of postgraduate taught courses' Construction Papers. C. and Liability Sharing Conference. and construction (Compiled by Norris. UK (1995) Arizona. No. 39 Akintoye. Glasgow Caledonian (1994) University. G 'Local area network operations: a security fessional background is in quantity control and audit perspective' Journal of Information Technology 5 surveying. His research Conference. (September 1991) 63-67 interests include construction price 32 The Association of Project Managers. Glasgow Caledonian University. NY national firm of loss adjusters as a (1992) 71-94 construction risk analyst. P and Perry. S "Dynamic risk analysis: the DynRisk Malcolm J MacLeod holds a master concept' International Journal of Project Management 10 (1992) degree from the Glasgow Caledonian 160-164 University.Sc. He has worked with UK (1990) 63-72 construction firms and quantity 37 Schon. at international conferences and has McGraw Hill. University of Manchester. UK Surveying. The Chartered Institute of Building. Australia. He investment appraisal' in Risk Analysis Assessment and Management is currently working with an inter- (Edited by Ansell.D. C A and Heims. G Development of Risk Models for Engineering Construction Projects Ph. Thesis. New York. UK (1993) in the Department of Building and 29 Raftery. UK (1979) 34 Willmer.