International Civil Engineering Conference "Towards Sustainable Civil Engineering Practice"

Surabaya, August 25-26, 2006

IDENTIFYING AND MANAGING IMPORTANT RISKS IN BUILDING AND

INFRASTRUCTURE PROJECTS: CONTRACTORS’ PERSPECTIVE

ANDI1, SANTI2 and Adi DARMAWAN2

ABSTRACT: To effectively manage risks in construction projects, it is crucial for contractors to

correctly identify important risks and properly take effective mitigation measures. This paper aims to
evaluate and compare important risks and their effective mitigation measures between building and
infrastructure projects. For the purpose, in-depth interviews were conducted to construction personnel
working in two building projects and two infrastructure projects in Surabaya. It is found that the risks
considered as important in building projects are also important in infrastructure projects. Similarity
occurs for risks at project level. Differences however are encountered for those risks at market and
country levels, which are commonly deemed important by contractors involving in the infrastructure
projects, but not in building projects. In general the contractors manage the important risks at project
level by exercising such risk control as proper plan, control and organization of site works. On the
other hand, the contractors tend to transfer risks at market and country levels by using additional
clauses in the construction contract or buying insurance to cope with force majeure risk.

Key Words: Risk, Risk Management, Construction projects, Contractors, Building, Infrastructure

1. INTRODUCTION

Construction projects are normally executed under an environment characterized by varying degree of
risks and uncertainties, which can result from “known”, “known- unknown”, and “unknown-
unknown” conditions [1,2]. Failure to adequately deal with these uncertainties has been shown to
cause cost and time overruns in construction projects [3].

If we are to manage the risks, we must first identify those risks. However, attempts to consider every
risk is doomed to failure: the time taken would be enormous, delaying the possibility of formulating
managerial strategy until after the risked consequences had actually occurred, and the whole exercise
is a waste of resources [4]. Thus, in practice, the primary aim should be to identify the key, critical,
important risks in the project so that they can be analyzed and an appropriate response can be
determined.

However, the variations in responding/managing risks are considerable. The appropriate responses
therefore are dependent not only on project factors, such as the type of project, the size of the project,
the stage in the project life cycle, but also on the nature of the risks stated above. With this in mind,
the main objective of this paper is to identify and compare risks contractors may face in building and
infrastructure projects. In addition the paper also identifies and evaluates effective and practical
measures for mitigating the risks.

1
Lecturer of Postgraduate Program In Construction Management, Petra Christian University, Indonesia
2
Alumni, Dept. of Civil Engineering, Petra Christian University, Indonesia

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2. CONCEPT OF RISK IN CONSTRUCTION

Risk in construction is defined in various ways. Hertz and Thomas [5] define risk both as uncertainty
and as the results of uncertainty. That is, risk refers to a lack of predictability about structure,
outcomes or consequences in a decision or planning situations. Risk is therefore related to concepts of
chance such as the probability of loss or the probability of ruin. Others see risk as the exposure to the
chance of occurrences of events adversely or favorably affecting project objectives as a consequence
of uncertainty [6]. Fisk and Reynolds [7] argue that there is no single “correct” definition. They define
risk as the variation in the possible outcome that exists in nature in a given situation. Risk is a
property of an entire probability distribution, whereas there is a separate probability for each outcome.

Following Wang et al. [8], this paper categorizes risks into three levels, i.e. country, market and
project levels. Country level risks are seen as a function of the political and macroeconomic stability.
These include technological advantage over local competitors, availability of construction resources,
complexity of regulatory processes, and attitude of local and foreign governments towards the
construction industry. Meanwhile, project level risks are specific to construction sites and comprise of
logistic constraints, improper design, site safety, improper quality control and environment protection.

3. CONCEPT OF RISK MANAGEMENT

Risk management is a formal and orderly process of systematically identifying, analyzing, and
responding to risks throughout the life-cycle of a project to obtain the optimum degree of risk
elimination, mitigation and/or control. Significant improvement to construction project management
performance may be achieved from adopting the process of risk management [9]. The risk
management process begins with the initial identification of the relevant and potential risks associated
with the construction project. It is of considerable importance since the process of risk analysis and
response management may only be performed on identified potential risks. Risk analysis and
evaluation is the intermediate process between risk identification and risk management. It incorporates
uncertainty in a quantitative and qualitative manner to evaluate the potential impact of risk. Once the
risks of a project have been identified and analyzed, an appropriate method of treating risk must be
adopted.

Within a framework of risk management, contractors should decide how to handle or treat each risk
and formulate suitable risk treatment strategies or mitigation measures. These mitigation measures are
generally based on the nature and potential consequences of the risk. The main objective is to remove
as mush as possible the potential impact and to increase the level of control of risk. The more control
of one mitigation measure on one risk the more effective the measure is [8].

4. METHODOLOGY

This research employed a case study approach to achieve the objectives. Two building and two
infrastructure projects located in Surabaya were investigated intensively. The first step was to identify
most important risks using a questionnaire. The questionnaire listed 23 risks, which were obtained
from [8] with some modifications. Table 1 displays the risks. The respondents were required to rate
each risk, from not important, important, to very important.

The next step of the research was interviewing the respondents to pinpoint ways to manage the
important and very important risks, which were obtained from the previous stage. At this point, the
respondents were introduced with a set of mitigation measures for each risk. The complete measures
for each risk in Table 1 can be seen in [8]. Finally, the research compared the results from the first and
second stages between building and infrastructure projects.

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Table 1. Risks under hierarchy levels and their definitions (modified from [8])
Code Risks
Level I: Country Risks
R1 Approval and permit – delay or refusal of project approval and permit by local government
R2 Change in law – local government’s inconsistent application of new regulations and laws
R3 Corruption – corrupt local government officials demand bribes or unjust reward
R4 Political instability – frequent changes in government; agitation for change of government or disputes
between political parties or different organs of the state
R5 Government policies – government policies on foreign firms, e.g. mandatory joint venture (JV);
mandatory technology transfer; differential taxation of foreign firms, etc.
R6 Cultural differences – differences in work culture, education, values, language, racial prejudice, etc.,
between foreign and local partners
R7 Environmental protection – stringent regulation which will have an impact on construction firms’ poor
attention to environmental issues
R8 Public image – victim of prejudice from public due to different local living standards, values, culture,
social system, etc.
R9 Force majeure – the circumstances that are out of the control of both foreign and local partners, such
as flood, fires, storms, epidemic diseases, was hostilities and embargo
Level II: Market Risks
R10 Human resource – foreign firms face difficulties in hiring and keeping suitable and valuable
R11 employees
Local partner’s creditworthiness – information on local partner’s accounts lucidity, financial
R12 soundness, foreign exchange liquidity, staff reliability
Termination of Joint Venture (JV) – unfair dividends, e.g. assets, shares and benefits, to foreign firm
R13 by local partner upon termination of JV contract
R14 Foreign exchange and convertibility – fluctuation in currency exchange rate and/or difficulty of
convertibility
R15 Inflation and interest rates – unanticipated local inflation and interest rates due to immature local
R16 economic and banking system
Market demand – inadequate forecast about market demand
Competition – competition from other international investors/developers/contractors
R17
Level III: Project Risks
R18 Cost overrun – unavailability of sufficient cash flow, improper measurement and pricing of BoQ, ill
planned schedule and client’s delay in payment
R19 Improper design – unanticipated design changes and errors in design/drawings resulting from the
difference in local design custom and practices
R20 Low construction productivity – obsolete technology and practices by local partner; or low labor
R21 productivity of local workforce owing to poor skills or inadequate supervision
R22 Site safety – high rate of accidents during construction or operation phases
Improper quality control – local partner tolerance of defects and inferior quality
R23 Improper project management – improper project planning, budgeting; inadequate project organization
structure; and incompetence of local project team
Intellectual property protection – former local employees, partners and/or third parties steal company’s
intellectual property, commercial secrets or patent formula

5. RESULTS AND DISCUSSIONS

5.1 General

The researcher investigated 4 projects, including 2 building and 2 infrastructure projects. The types of
the building projects were shopping mall and educational building. Meanwhile the infrastructure
projects consisted of tollway and airport projects. The two infrastructure projects were join venture
(JV) project. The tollway project was constructed by two local contractors, whilst the airport project
by two local and two Japanese contractors. It can be said that the airport project is an international
project.

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5.2 Important Risks and Their Management in Building Projects
Tables 2 and 3 detail risks that are regarded as important and very important in building and
infrastructure projects, respectively. The table also displays management strategies that are commonly
applied by the contractors.
Table 2. Important risks and their mitigation in building projects
Important Management Measures
risks Shopping mall
Level I: Country Risks
Approval and • Prepare and submit all necessary
permit document and feasibility study report in a
timely manner to local government
departments
• Maintain good relationship with local
government and higher officials
Change in law • Include clauses for delays and additional
payments in contract, which occur due to
new rules or change in law
Environmental • Adopt strict pollution control measures
protection • Prepare budget for compensating
surrounding community
• Help to repair damage
Force majeure • Insure all of the insurable force majeure
risks
• Include delay clauses for contingency
plan in contract
Level II: Market Risks
Human
resource
Inflation and • Obtain payment and performance bonds
interest rates from local banks
• Specify extension or compensation
clauses in contract for payment
Competition
Level III: Project Risks
Cost overrun • Secure standby cash flow in advance
• Measure and price BoQ properly during
bidding stage
• Develop a clear and appropriate plan and
control schedule and cost
• Incorporate escalation clauses for
interest, inflation rates and delays in
contract
• Specify extension or compensation
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Educational building
• Ensure the project is complying with
local planning commission’s
development plan
• Prepare and submit all necessary
document and feasibility study report in a
timely manner to local government
departments
• Pre-package all approvals when signing
contract with project client
• Maintain good relationship with local
government and higher officials
• Include clauses for delays and additional
payments in contract, which occur due to
new rules or change in law
• Insure all of the insurable force majeure
risks
• Include delay clauses for contingency
plan in contract
• Decide on recruitment and selection
criteria for employees/workers
• Client to ensure standby financing
• Obtain payment and performance bonds
from local banks
• Specify extension or compensation
clauses in contract for payment
• Conduct market study and obtain exact
information on competitive projects
• Adopt as much as possible domestic
product/labor
• Secure standby cash flow in advance
• Measure and price BoQ properly during
bidding stage
• Develop a clear and appropriate plan and
control schedule and cost
• Incorporate escalation clauses for
interest, inflation rates and delays in
contract
• Specify extension or compensation
 International Civil Engineering Conference "Towards Sustainable Civil Engineering Practice"

clauses in contract for payment clauses in contract for payment

• Adopt as much as possible domestic
product/labor
• Sign fixed or predetermined prices with
material and accessory facilities suppliers
Improper • Introduce adjustment clauses in contract • Undertake pre-project planning to
design to review plan and constructability minimize design errors
• Specify construction extension clause in • Adopt design and build option
contract • Introduce adjustment clauses in contract
to review plan and constructability
• Arrange and undertake comprehensive
site investigation before construction
phase
• Organize for appraisal/vetting of
drawings and design criteria
Low • Organize site properly for max
construction productivity
productivity • Incorporate weather impacts into project
schedule
• Monitor construction activities properly
Site safety • Adopt proper safety control program • Ensure that construction and operation
are as per examination
• Get third party insurance
• Adopt proper safety control program
Improper • Adopt proper quality control procedures • Adopt proper quality control procedures
quality control • Initiate a special division for QC • Implement ISO 9000 and get certification
Improper • Hire competent project management team
project • Clear definition of each staff’s scope of
management work
• Provide clauses on schedule delay and
additional payment if caused by client

Table 3. Important risks and their mitigation in infrastructure projects

Important Management Measures
risks Toll way Airport
Level I: Country Risks
Approval and • Prepare and submit all necessary • Maintain good relationship with local
permit document and feasibility study report in a government and higher officials
timely manner to local government • Pre-package all approvals when signing
departments contract with project client
Change in law • Prepare claim to owner and try to achieve • Maintain good relationship with local
win-win solution government and higher officials
• Obtain support of international
monetary institution in legal procedures
Corruption • Establish JV with renowned local
partners, especially the central local
government agencies or state owned
enterprises
• Set aside a budget for unavoidable
spending
• Try to work directly with business
connection, i.e. do not hire broker or
middleman
Political • Be informed of political developments
instability by using information sources, like

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international security and risk

assessment companies
• Maintain good relationship and
connections with higher local
government officials, local power
sources and politicians
Government • Establish JV with renowned local
policies partners, especially the central local
government agencies or state owned
enterprises
Work culture • Devise unambiguous and agreed risk
differences sharing code at the time of contract
Environmental • Comply with local environmental laws • Comply with local environmental laws
protection and standards, and regulations and standards, and regulations
• Include disclaimer in contract for present
pollution level
Force majeure • Include delay clauses for contingency
plan in contract
Level II: Market Risks
Human resource • Sign formal employment contract with
every staff
• Decide on recruitment and selection
criteria for employees/workers
• Offer training to new and existing staff
Local partner’s • Define clearly the merging scope of • Examine the target company’s financial
creditworthiness assets, employees, shares, organization, viability, technical and management
strategies, etc. when merging competence and connections with local
government
• Pay careful attention to contract
translation
• Define clearly the merging scope of
assets, employees, shares, organization,
strategies, etc. when merging
Termination of • Chose to establish a cooperative JV and
JV partnership
Foreign • Obtain local government guarantees of • Use dual-currency contracts with
exchange and exchange rate and convertibility certain portion to be paid in local
convertibility • Negotiate with owner currency and others in foreign currency
• Use other money transfer tools, e.g.
forward and swap
Inflation and • Obtain payment and performance bonds • Client to ensure standby financing
interest rates from local banks • Obtain payment and performance
• Specify extension or compensation bonds from local banks
clauses in contract for payment • Specify extension or compensation
clauses in contract for payment
Competition • Conduct market study and obtain exact
information on competitive projects
• Adopt as much as possible domestic
product/labor
Level III: Project Risks
Cost overrun • Secure standby cash flow in advance • Measure and price BoQ properly
• Adopt as much as possible domestic during bidding stage
product/labor • Develop a clear and appropriate plan
• Speed up payment request to owner and control schedule and cost
• Ensure that a reputable owner through
international institute, e.g. ADB, World

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Bank
• Specify extension or compensation
clauses in contract for payment
• Adopt as much as possible domestic
product/labor
Improper design • Arrange and undertake comprehensive • Undertake pre-project planning to
site investigation before construction minimize design errors
phase • Introduce adjustment clauses in
• Specify construction extension clause in contract to review plan and
contract constructability
• Organize for appraisal/vetting of
drawings and design criteria
Low • Organize site properly for max
construction productivity
productivity • Review plans jointly with local partner
to determine changes
• Incorporate weather impacts into
project schedule
Site safety • Adopt proper safety control program
Improper • Adopt proper quality control procedures • Adopt proper quality control
quality control • Implement ISO 9000 and get certification procedures
• Implement ISO 9000 and get
certification
Improper • Hire competent project management
project team
management • Clear definition of each staff’s scope of
work

In general, important risks in the two building projects are similar. Differences are found more in
infrastructure projects. Comparison between Tables 2 and 3 shows that risks regarded as important in
building projects are also considered to be important in infrastructure projects. Similarities are laid on
project risks level.

On the other hand, differences in the two types of projects are revealed at risks at country and market
levels. The infrastructure projects face more risks at these levels, such as risks of corruption, political
instability, government policies, work culture differences, local partner’s creditworthiness, termination
of JV, and foreign exchange and interest rates. One reason for the differences is the nature of the
projects, where building projects mostly are private projects that are less influenced by the country
levels. This is quite different from infrastructure projects, especially the international ones, which are
public project and thus are influenced more by the political and economical situations of the country.

In addition, infrastructure projects are usually lager in size and need higher financing than building
projects. To cope with the complexity, large construction cost, and risks, it is common to find that two
or more contractors form a JV to carry out the project. As the case studies indicate, the two
infrastructure projects are JV project. This thus generates other risks related to the relationship among
the JV participants, especially in airport project where the JV involves foreign contractors.

Risks at country level that are experienced by all projects are approval and permit and change in law,
and at market level are inflation and interest rate. Meanwhile, the contractors agree more important
risks at project level, such as cost overrun, improper design, and improper quality control. This is in
line with the findings of [10], where risks at projects level are considered to be more important.
Previously both contractors and owners acknowledged that design related risks were important and
might lead to changes in work.

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To anticipate the risks, there is a common agreement among the contractors that risks at project level
are better managed through risk control. This is exercised by, for examples, conducting appropriate
planning, site organization, and control procedures. Meanwhile, the contractors may not have total
control over risks at market and country levels. This thus may necessitate the contractors to transfer
the risks to other parties, such as by using additional clauses in contract (to transfer the risks to owner)
and buying insurances (e.g. force majeure risks).

6. CONCLUDING REMARK

This paper has identified important risks and their mitigation strategies by conducting interviews in
building and infrastructure projects. In general, infrastructure projects consider more important risks
than building projects, due to their nature. The infrastructure projects are more sensitive to the risks at
country and market levels. Meanwhile similarity occurs for important risks at project level. Strategies
selected by the contractors to mitigate the important risks vary, depending on the nature of the risks.
The contractors tend to transfer risks at country and market levels and to apply risks control strategy
for mitigating risks at project level.

Whilst this research has identified important risks, it however did not quantitatively (e.g. using scales
1 to 5) the importance of the risks. It will be beneficial to grasp which risks are more important in
building and infrastructure projects. It will also be important to know the priority of each management
strategy to mitigate the risks, similar to the study conducted by Wang et al. [8].

7. REFERENCES

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6. Al-Bahar, J.F., and Crandall, K. C., Systematic Risk Management Approach for Construction
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