Nature of Risk

▪ Risk vs Uncertainty
▪ Distinction between Risk and Uncertainty
▪ Risk Types
▪ Construction Project Risk
 Risk definition
◼ Uncertainty event or set of situation, if it happen, will effect
achievement of project goal (APM, 1997)
◼ an uncertain event or circumstance that, if it happens, will have a
positive or negative effect on project performance in terms of cost,
time and quality (PMI, 2000)
◼ An event where the set of possible outcomes is known, and the
probability of obtaining each outcomes can be measured (but not
precise).(Hilson, 2004)
◼ In general, risk can be summarized as the likelihood of an event
that, if it occurs, will affect the project objective for better or worse.
◼ Three elements of risk
 the event itself : an incident or
situation that might occur at a
particular time in a project
 its probability: the likelihood that a risk
will occur
 its impact: the consequence or effect
on the project if that risk does occur
 Risk Level Measurement

▪ Risk is analyzed based on its two components, namely likelihood and

consequence (impact).
▪ In a simple form can be expressed as below:

▪ If the level of risk is proportional to each of its two components

consequence or likelihood) the risk function is essentially a product.
This can be shown mathematically as:

▪ If consider complicating factor such as a non-linear relationship

between utility and the value of consequence, can be expressed as
follow:
 Risk Level Measurement (Cont’d)
◼ The level of the risk or expected value of the
risk is measured in terms of its probability and
its impact (ICE and FIA, 1998).
R = f (P, I)
◼ Example: If risk A occurs, there is a 5%
probability of losing £ 1,000,000, and if risk B
occurs, there is a 5% probability of losing £
10,000.
 Thus, the level of risk A is £ 50,000; this is
higher than the level of risk B, which is £ 500.
 The Different between Risk and Uncertainty

◼ Uncertainty refers to problems where there is no information (Baloi and

Price, 2003).

◼ Uncertainty (the opposite of certainty), is an imperfect state of knowledge or

information and its possible consequences concerning future events
(Ritchie and Marshall, 1993)
◼ Uncertainty refers to a state of mind, based on a lack of knowledge about
what may happen in the future (Vaughan, 1997).
◼ Lack of knowledge about possible outcomes (Hilson, 2004).
 Tingkatan Ketidakpastian

Tingkat Ketidakpastian Karaketeristik Contoh

Tidak ada (pasti) Hasil bisa diprediksi Hukum alam (Lama bumi
dengan pasti mengitari matahari)

Ketidakpastian Obyektif Hasil bisa diidentifikasi Permainan dadu, kartu

dan probabilitas
diketahui
Ketidakpastian Subyektif Hasil bisa diidentifikasi Kebakaran, kecelakaan
tapi probabilitas tidak mobil, investasi
diketahui
Sangat Tidak Pasti Hasil tidak bisa Eksplorasi angkasa
diidentifikasi dan
probabilitas tidak
diketahui

Sumber : Hanafi (2006)

 Factors causing uncertainty
(Ritchie and Marshall 1993)

◼ Inadequate information→ prevent the decision maker

from recognising existing problems and delay effective
decisions.
◼ Lack of clarity in structuring problems → lack of
confidence in making decisions (difficulty in
disaggregating the problem into several understood
components).
◼ Inability to identify alternative solutions → difficulty in
identifying the components of the problem and alternative
solutions so the decision maker may make a wrong
decision.
 Risk Vs Uncertainty
Risk
◼ Risk is measurable
uncertainty
◼ Unknown event drawn
from a known set of
possible outcomes
◼ repeatable events
◼ synonymous with threats
◼ unwelcome negative
effects
Uncertainty
◼ Uncertainty is un-
measurable risk
◼ An unknown event from
unknown set of possible
outcomes
◼ non-repeatable events
In principal the distinction between risk and
uncertainty:
◼ Risk is likely to focus on adverse effects
and an action may be taken to reduce
losses.
◼ Uncertainty encompasses both unwelcome
and welcome effects and actions are taken
to minimise losses or enhance the chance
of opportunities.
◼ However, in practical decision making,
these terms are interchangeable.
Source: Al Bahar
(1988)
 Summary
Risk: any uncertainty that, if it occurs, would affect one or
more objectives.

Threat:
Any uncertainty that, if it
occurs, would affect
one or more
objectives negatively
Opportunity:
Any uncertainty that, if it
occurs, would affect
one or more
objectives positively
 Types of risk
◼ Pure or speculative
• Pure risk, involves a situation that can only cause a loss, and it
is normally insurable. e.g.: accident, fire.
• Speculative risk describes a situation that involves a chance of
loss or gain. e.g.: business
◼ Static or dynamic
• Static risks, tend to occur regularly over time and are
generally predictable. e.g.: storm accident.
• Dynamic risks, on the other hand, are those that arise from
the external environment and the management’s. e.g.:
environment change, technology.
◼ Particular or fundamental
• Particular risks involve losses that arise out of individual
events. e.g.: a robbery at a bank.
• Fundamental risks involve losses that are caused by
economic, social and political aspects. e.g.: war, inflation and
unemployment.
Source of project risk
• Uniqueness
• Different stakeholders
• People
• Assumption
• Constraints and objectives
• Change
• Environment
Types of risk
◼ several types of risks involved in commercial activities
(Edwards, 1995).
 Physical or material: includes loss due to fire, structural damage
or war.
 Consequential: involves loss of profit following problems such as
fire or theft.
 Social: includes changes in public opinion and greater
awareness of moral issues
 Political: includes government intervention and changes in
legislation.
 Financial: involves inadequate inflation forecasts and incorrect
marketing decisions.
 Technical involves increased technology in manufacture and
data handling
Types of risk
◼ risks involved in a project life cycle (Mulholland
and Christian, 1999)
 Engineering design: includes site investigation,
design criteria and engineering estimates.
 Procurement: involves long lead items material,
manufacturing process, and vendor performance.
 Construction: includes labour resource planning,
construction mistakes, and weather effects.
 Project management: involves management
experience, project procedure, and management
resources control.
 Construction project risk
◼ A construction project is unique, specific and dynamic
→uncertainty →risk → risk management.

◼ The issue of risk management has always been important in

construction projects.

• Risks play a significant part in decision-making and may

affect the performance of a project in terms of its cost,
time and quality.

• If they are not dealt with sensibly, they may cause cost
overrun, delay on schedule and poor quality.
◼ Typical risk on construction project
• Failure to complete within the stipulated
design and construction time.
• Unforeseen adverse ground conditions
delaying the project.
• Exceptionally inclement weather delaying
the project.
• Strike by the labor force.
• Unexpected price rises for labor and
materials.
Typical risk on construction project:
• An accident to an operative on site causing physical
injury.
• Latent defects occurring in the structure through
poor workmanship.
• Force majeur (flood, earthquake, etc.)
• A claim from the contractor for loss and expense
caused by the late production of design details by
design team
• Failure to complete the project within the client
budgets allowance.
Risk Classification in Project (Tah and Carr 2001)
Overseas Project
(Zhi, 2005)
Risk Classification in Construction Project (Al Bahar, 1988)