Chapter 7 Risk allocation and procurement decisions

This chapter explains what risks are and how to handle them in construction projects

7.1 TYPES OF RISK IN CONSTRUCTION CONTRACTS

a. Management, direction and supervision

         Usually this risk is experienced by employers and contractors as a result of the
greed between the two parties, this risk usually occurs when the interests of each party
are concerned so as to influence decision making regarding the selection of materials,
consultants, contractors and poor design.

b. Physical work

         This risk is due to the lack of information regarding the location that does not
consider soil conditions, weather, number of workers, materials, and financial
arrangements

. c. Delay and disputes

         The risk is caused by a lack of information regarding ownership of the

construction project site so that delays in project implementation occur

d. Damage and injury to persons and property

         risks resulting from negligence and violations during the construction project
process, not prioritizing occupational health and safety.

e. External factors

         This risk comes from external the project, namely government policies, laws,
disputes between industries

f. Payment

         risk comes from financial problems of both parties, between the employed and
the contractor which results in late payment of materials and workers

g. Law and arbitration

         risks from laws and regulations are

very important to predict what risks will arise when running a construction project, and
determine the probability of project success, as well as the estimated costs caused by
these risks. This risk estimation also predicts what steps are taken in order to minimize
risk and what steps will be taken when the risk occurs and who has to make decisions,
what actions and when will be implemented.

         A list of risk predictions is very important to do to inform the employer or project
manager about any risks that may occur so that they can be anticipated when risks
occur, the risk responsibility will be explained in the construction project contract

7.2 DEALING WITH RISK

         In working on a construction project, it is impossible not to have risk, therefore as

contractors and employers we must make the risk as small as possible by utilizing a
construction consultant regarding risk allocation. To identify risk, there are 3 steps:

1. Identify the risks:

The first step is to define the risks that may occur, and determine priorities in the
project, whether the risks affect the time of work, the quality of work or others, then it
can be determined which risks are of the highest severity and must be aware of

2. Analyze the risks

Analyze the likelihood of the risk occurring, the impact of the risk, the severity of the
risk, the range of risk values, and the likelihood of when the risk occurs. This needs to
be reviewed because some risks are considered critical and need further assessment

3. Respond to the risk

The final step is to decide who is responsible for the risk with the choice of the
employer, contractor, consultant or insurer. To decide the person in charge of the risk, it
can be based on the person in charge of a part in the construction project, so that risk
funds can also be delegated to the person in charge of the risk

7.2.1 Transfer of risk

         In starting a construction project contract, it is necessary to confirm the risks that
may be experienced in the project. Project risk is not fully deferred to the contractor, by
involving third parties such as consultants and subcontractors.

7.2.2 Acceptance of risk

         It is unfair if all risks are deferred to the contractor, in addition, if all risks are
deferred to the contractor and the risk occurs, the contractor will lose in cost, in the
project opportunity. As for the losses that will be borne by the employer, namely the
number of contractors who are reduced to working on the project, the impact is that the
project cannot be carried out and the cost increases. Employers must also be
responsible for the risks because there are many risks that cannot be calculated and
predicted, such as earthquakes, wars, inflation that cannot be measured and predicted.
Here, the Contractor must be able to negotiate the cost of the risk even though they
have to mark-up the price.

7.2.3 Avoidance of risk

         The risk that is too high must be considered, this is called avoidance. Because
the risk that is too high cannot be accepted, it must be recalculated, the allocation of
funding must also be considered considering the high risk. In this case a construction
consultant also needs to be involved.

7.2.4 Insuring against risk

         Insurance is a third party that is often used in standard construction projects,
which can be insured by third parties is compensation for losses from work accidents,
fires. Usually the consultant makes the decision on what insurance to use.

7.2.5 Doing nothing about risk

         In a project, sometimes the employer does not pay attention to the risk,
sometimes even the employer and consultant do nothing about the risks that might
occur in a construction project, so when the risk occurs, the person in charge is the
contractor.

7.2.6 Allocating risk through methods of payment

         In determining the allocation of risk funds, careful calculations are needed so as
not to cause cost overruns. There are two ways to analyze the price of risk:

1. Fixed price items paid based on the contractor's estimate that has been
approved by the employer

2. Cost reimbursement items, which is payment according to the contractor's

expenses in the implementation of a construction project.

For contractors, the smaller the risk that occurs, it is an advantage for the contractor,
but the large risk that exceeds the initial budget is a loss for the contractor.