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Abstract: Risk management is a relatively new field in the construction industry of Pakistan, but it is gradually gaining prominence because
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of increased construction activity and competitiveness. This is an empirical survey-based study of risk management in the construction
industry of Pakistan. It reports the findings of the importance of risks, their current management techniques, the existing status of risk
management systems of the organizations, and barriers to effective risk management from the perspective of key stakeholders. The analysis
of the results reveals that financial and economic factors, followed by quality, are the most important risks, and the industry generally tries to
avoid or transfer these risks. Results indicated that the risk management system and practices of most of the organizations are reactive,
semipermanent, informal, and unstructured with nonexistent and limited committed resources to deal with risks. Nonetheless, the results
of interviews indicate that there is awareness about risk management and a desire to learn from past mistakes. The study concludes that
the major barriers to effective risk management are the lack of a formal risk management system and the lack of a mechanism for joint
risk management by the parties. Insights and discussions are given in the analysis, which are valuable to planners, project managers, super-
visors, and other stakeholders. Finally, this work can be used in exploring mechanisms for joint risk management by prospective stakeholders.
DOI: 10.1061/(ASCE)ME.1943-5479.0000122. © 2013 American Society of Civil Engineers.
CE Database subject headings: Construction industry; Construction sites; Risk management; Pakistan.
Author keywords: Construction industry; Construction site; Risk management; Risk management techniques; Joint risk management;
Stakeholder; Pakistan.
points toward the greater issues of labor laws, their implementation, because consultants possess in-house expertise. In contrast, con-
and the general plight of the construction laborers. tractors with more limited expertise consult experts more frequently
Spearman rank correlation was performed to evaluate the nature for guidance. The results of the Spearman rank correlation (see
of the consensus between various groups on the rankings of the Table 2) reveal that clients and contractors agree with one another’s
importance of project risks. Results reveal that there is a strong ranking, whereas both differ significantly (p ¼ 0.104) from the
positive correlation between the risk ranking of clients, consultants, ranking of consultants. This is because of the difference in the level
and contractors, which is statistically significant. The results of the of in-house expertise available to consultants versus clients and
Kruskal-Wallis test and Spearman rank correlation demonstrate that contractors. Interviews revealed that the various techniques are em-
although groups differ from one another on the perception of six of ployed unsystematically, without any documentation. Most parties
the twenty risks, they all agree on the risk ranking of one another. rely on personal experience and information extracted from printed
The statistical and interview results also signify the willingness and electronic media. The respondents were not very familiar with
of the groups for a joint risk management mechanism to address proactive and reactive risk identification techniques and their
these risks collaboratively provided a standard contract/bidding utility. Nevertheless, they do recognize that risks arise as a result
document of the Pakistan Engineering Council or Federation of decisions made in the backdrop of an identified risk. Addition-
Internationale Des Ingenieurs Conseils (FIDIC) are implemented ally, using creative people or providing creativity training for
on all public sector construction contracts. risk identification is a rare phenomenon, and only idea elicitation
techniques are employed for this purpose.
Risk Management Techniques Risk Analysis Techniques
Respondents were asked to identify the frequency of usage of three
Risk Identification Techniques risk analysis techniques on a scale of 1–5, in which 1 represented
Respondents were asked to identify the frequency of usage of five never used and 5 represented always used. An overall ranking of
risk identification techniques on a scale of 1–5, in which 1 repre- risk analysis techniques based on means (see Table 3) is as follows:
sented never used and 5 represented always used. An overall mean qualitative (mean ¼ 2.20), semiquantitative (mean ¼ 1.23), and
ranking of risk identification techniques was computed for each quantitative (mean ¼ 1.11). The low mean values signify that
group (see Table 1). Consulting experts (mean ¼ 3.49) is the most analysis is seldom utilized for already identified risks, and these
frequently-used technique to identify risks, followed by industry groups are not very familiar with their utility. The Kruskal-Wallis
information (mean ¼ 3.01), checklists (mean ¼ 2.66), risk review test reveals that the perceptions of each group about a specific risk
meetings (mean ¼ 2.53), and brainstorming (mean ¼ 1.36). The analysis technique do not differ significantly. The results of the
perceptions of the various groups do not differ significantly, except Spearman rank correlation reveal that groups agree with the ranking
for the technique of consulting experts (p ¼ 0.023), as revealed by of one another about the frequency of usage of risk analysis tech-
results of the Kruskal-Wallis test. It is ranked low (mean ¼ 3.13) niques. Also, the interviews revealed that there is barely any pro-
by consultants and high by contractors (mean ¼ 3.85), probably cess of documentation of risks analyzed by any process by any
group, and is best regarded as an informal and trivial effort. Addi-
Table 2. Spearman Correlation for Risk Identification Techniques tionally, the use of computers and risk analysis software is seldom
Client Consultant Contractor utilized in conjunction with project management software, e.g., MS
Project and Primavera, despite the fact that many project managers
Groups r p r p r p
do recognize their utility. The advanced techniques for quantitative
Client 1.000 — 0.800 0.104 1.000 — risk analysis, for example, sensitivity testing, expected monetary
Consultant 0.800 0.104 1.000 — 0.800 0.104 values (EMV), and risk-adjusted discount rate (RADR), are seldom
Contractor 1.000 — 0.800 0.104 1.000 — employed. An added issue is the availability of reliable data for
Note: r = Spearman correlation coefficient (rho); p = significance value. quantitative risk analysis, because most of the organizations do
Table 5. Spearman Correlation for Risk Response Techniques The investigation of the ranking of risk response techniques
Client Consultant Contractor suggests that the construction industry is far beyond the process
of risk sharing (ranked 5th) and mostly relies on transferring the
Groups r p r p r p risk (ranked 2nd). Interviews revealed that insurance, a means of
Client 1.000 — 0.829 0.042 a
0.771 0.072 transferring risk, is only utilized in public sector contracts in which
Consultant 0.829 0.42a 1.000 — 0.371 0.468 it is a contractual obligation. There are no principles that are fol-
Contractor 0.771 0.072 0.371 0.468 1.000 — lowed in transferring the risk to a business partner, as suggested
Note: r = Spearman correlation coefficient (rho); p = significance value. by Loosemore et al. (2006). The business partner is not made
a
Significant at the 0.05 level (2-tailed). fully aware of the risks being taken, nor do they have the necessary
capacity and resources to manage it effectively. Furthermore, they
not have an appropriate system, expertise, or capacity to record data do not possess the appropriate attitude to take the risk that results
of ongoing and completed construction projects. in conflicts and is usually detrimental to project objectives.
than that of clients (mean ¼ 2.61) and consultants (mean ¼ 2.47). and lack of risk consciousness (mean ¼ 2.95). The results are
While generally low, the perceptions of clients (mean ¼ 2.32) are presented in Table 8. The Kruskal-Wallis test reveals that all
comparatively better about the adequacy of their organization’s groups have similar perceptions about individual barriers, except
risk management system than that of contractors (mean ¼ 2.20). for a shortage of knowledge/techniques that differ significantly
Most of the clients represent public sector organizations, and (p ¼ 0.032) and is given much higher ratings by the contractors
although they place formality level of their organizations compa- (mean ¼ 4.20) than clients and contractors. Contractors are rela-
ratively lower than contractors, they are more satisfied with its tively less qualified than clients and consultants, and therefore
adequacy. Contractors typically represent the private sector and probably consider it a greater impediment than the other groups.
have a slightly better perception of their risk management system The Spearman rank correlation reveals that there is a strong posi-
than clients, but they still feel it is inadequate. Because the contract tive correlation between the ranking of clients to that of consultants
forms the basis for the allocation or distribution of risks between and to that of contractors, and vice versa. This unanimous opinion
client and contractor, clients in the public sector typically use stan- signifies the degree of conviction to the barriers to the effective
dard contract documents. Hence, clients are more confident about implementation of a risk management system. Interviews with
the adequacy of their risk management system as far as risk distri- the respondents revealed that most had a vague idea of the aim
bution is concerned; contractors work with different types of client and purpose of implementing an effective risk management system.
organizations when entering into different type of contracts, and They were of the opinion that the motivation behind implementing
feel inadequacy of their risk management system. The single most an effective risk management system is to avert unfavorable con-
important influence on any project is whether or not it is carried out sequences of risk events rather than adding value. It is appropriate
by the public or private sector organization (Smith et al. 2006). to use the term investment in risk management rather than cost of
The overall perceptions about the formality level (mean ¼ 2.59) risk management (Loosemore et al. 2006).
are comparatively higher than the overall perceptions about the Lack of a formal risk management system is ranked first overall
adequacy level (mean ¼ 2.33). Interviews revealed that the overall (mean ¼ 4.06). Interviews revealed that although organizations
risk maturity level of the respondent organizations can best be de- practice risk management at some level with varying degrees of
scribed as being between level 1 and level 2. Whereas the highest expertise, it is mostly unorganized, unsystematic, inconsistent, per-
level is 4, only 2–3% of the organizations claimed to attain it when sonalized, and informal. The result is that risks may be overlooked
measured according to the risk management maturity level audit and unmanaged. Loosemore et al. (2006) suggests that risk man-
tool of the PMI. The risk management system and practices of agement is best practiced in the presence of a clear aim, sound pol-
most of the surveyed organizations are reactive, semipermanent, icies, and best practices, similar to any other managerial activity.
informal, and unstructured, with little or no committed resources In the absence of such policies and practices, the organizations
to deal with risks. Nonetheless, there is awareness about risks are at the mercy of the capabilities of its employees and their ex-
and a desire to learn from past mistakes. Results of the Kruskal- periences. Risk management is compromised in the event a valued
Wallis test reveal that groups possess similar perceptions of the employee leaves the organization. The system needs to be mature
current status of the risk management system of their respective enough to absorb such shocks by performing adequately with or
organizations. without the replacement of the departing employee.
terms and conditions. Negating this principle will result in disputes, 3. The overall risk maturity level of surveyed organizations was
which are detrimental to construction project objectives. Interviews categorized between level 1 and level 2 against the highest
reveal that most of the standard contract documents implemented level of 4; only 2–3% of the organizations claim to attain it
in the public sector are inclined toward the clients and allocate most close to level 4 when measured according to the risk manage-
of the risks to the contractors or subcontractors. This aspect needs ment maturity level audit tool.
further investigation. 4. The risk management system and practices of most of the
Shortage of knowledge/techniques is third overall (mean ¼ 3.80), organizations are reactive, semipermanent, informal, and un-
and the results of interviews revealed that although respondents structured, with little or no committed resources to deal
were familiar with risks and their generic sources, there is a clear with risks. There is barely any process of documentation of
deficiency concerning the knowledge and techniques to manage the risk management process by all parties, and is character-
them appropriately. No respondent organization had a dedicated risk ized as an informal and trivial effort.
manager, and most of the project managers were not familiar with 5. The main barrier to implementing an effective risk manage-
the rudiments of risk management. Interviews showed that most of ment system is the lack of a formal risk management system,
the project managers consider risk management to involve complex followed by the lack of mechanisms for joint risk management
techniques and procedures. Nonetheless, an effective system needs by the parties. Shortage of knowledge/techniques is ranked
to be simple both in understanding and implementation. A compli- third overall, whereas the parties are familiar with risks and
cated system will only replace the existing risks with new forms their generic sources but lack an awareness of risk manage-
of risks. ment techniques.
Reactive rather than proactive is ranked fifth overall Financial and economic factors are the most important risks
(mean ¼ 3.54), and interview participants revealed that many of faced by the construction industry, followed by quality. A system-
the project managers were under the impression that they are atic risk management approach needs to be adopted in the con-
practicing risk management, whereas in essence, they are practicing struction industry to mitigate the adverse impacts of these risks,
crisis management. Risk management is proactive, whereas crisis individually and collectively, on the construction project. The
management is reactive in nature. Crisis management entails usage and applicability of risk management techniques need to
the loss of initiative and the loss of opportunities. The construction be adopted in the local environment. Systematic improvement in
industry may be capable of implementing crisis management, but it the risk maturity level of the local organizations must take place,
is still beyond the boundaries of effective risk management. especially with the increase in risk management knowledge. The
Centralized rather than decentralized is ranked sixth overall identified main barriers to effective risk management are the lack
(mean ¼ 3.44), and interviews revealed that most of the construction of the availability of a formal risk management system and lack of
firms are in the private sector and are owned by individuals. The lack joint risk management. There is need to improve joint risk manage-
in a corporate culture has a heavy influence in their operations, be- ment by the parties, especially its contractual aspects in local envi-
cause company operations are guided by the personal uniqueness of ronments. Finally, the country risk management standards for
the individuals in the organization. These firms are aware of the issue industries are required to be developed.
and have graded this barrier slightly higher (mean ¼ 3.60) than cli-
ents (mean ¼ 3.32) and consultants (mean ¼ 3.44). Loosemore et al.
(2006) reveals that a centralized system is generally less responsive, References
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