UP Copyrights 2017

Special Course in Construction Management

Faculty of Applied Engineering and Urban Planning

Civil Engineering Department

Special Course in Construction Management

(Lecture 7)

Dr. Nadine N. Abu-Shaaban

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 Defining Risk and Uncertainty
• The environment within which decision-making takes place
can be divided into three parts:

– Certainty.

– Risk.

– Uncertainty.

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• Certainty (deterministic situation): where each action is known to lead
to a specific outcome. It exists only when one can specify exactly what
will happen during the period of time covered by the decision i.e.
When the values of decision variables are known with 100% certainty,
which is rarely the case in construction.

• Uncertainty: where actions may lead to a set of consequences, but

where the probabilities of these outcomes are completely unknown.
This situation occurs when there are no historic data or previous
history related to the situation being considered by the decision maker.

• Risk: where each action leads to one of a set of possible specific

outcomes, each outcome occurring with a known probability.
Uncertain situations can be changed to risky situations by the
assignment of subjective probabilities.

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 Decisions under uncertain situations
• Examples of Decisions under uncertain situations:
– Launching a new product,
or
– opening your first branch

The outcome could be influenced by:

– the reaction of competitors,

– new competitors,
– changes in customer demand,
– government legislation.

All of these conditions are beyond your control.

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 Probability
•Probability: is an important concept in dealing with risk. Definitions of probability include:

– Probability is the chance that a given event will happen/occur.

– a measure of how often a particular event will happen if something is done repeatedly.

– Examples of PROBABILITY
• There is a low probability that you will be chosen.
• There is some probability of rain tomorrow.
• The probability of a coin coming up heads is one out of every two tries.

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 Probability Theory
– Probability theory: deals with events of special kinds called
random (stochastic) events, whose outcome is affected by
chance.

In other words it can be defined as: the branch of mathematics

that studies the likelihood of occurrence of random events in
order to predict the behaviour of defined systems.

– There are two schools of thoughts about probability theory:

• Objective probabilities
• Subjective probabilities.

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• Objective Probabilities: The probability that an event will is
based on a recorded observation. As a result, only events that
can be repeated over a large number of trials may be covered
by objective probabilities.  

• Subjective Probabilities: A probability derived from an

individual's personal judgment about whether a specific
outcome is likely to occur.

Subjective probabilities contain no formal calculations and

only reflect the subject's opinions and past experience.
Numeric measure of chance (probability) that reflects the
degree of a personal belief in the likelihood of an occurrence.

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 Subjective Probabilities

• For example: if the decision-maker feels an event is very

unlikely to happen, he will assign a probability value of its
occurrence close to zero; if he believes the event is very likely
to happen he will assign a probability value close to one.

• In general, decisions are likely to be determined by subjective

probabilities in the construction industry. Projects tend to be
unique; construction is not a factory line routine repetitive
process.

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 Subjective Probabilities
There are two approaches to the subjective probabilities:
direct and indirect.

– In a direct approach, the decision maker assigns a number

to his opinion about the outcome in question.

– indirect approach, the decision maker has to answer a

series of questions and from his answers, it is possible to
determine the personal probability.

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 Risk Management

• Risk: unexpected event leading to undesirable impact.

• Risk: a potential event, either internal or external to a project

that, if it occurs, may cause the project to fail to meet one or
more of its objectives.

• Risk has two aspects:

– The expected likelihood (or probability) of the event
occurring ; and,
– The expected impact if it does occur.

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 Types of Risk

• There are two types of risks:

– Dynamic Risk; and

– Static/pure Risk.

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 Dynamic Risk

• Dynamic risk means that there will be potential gains as well as

losses (a situation in which either profit OR loss is possible).

• Examples of Dynamic Risks are:

– Developing a new product.

– Purchasing new equipment.
– Expand areas of operations.

• Dynamic Risk is uninsurable.

• The outcome of such dynamic risk is either beneficial (profit) or
loss.

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 Static/Pure Risk

• Static risk is a situation in which there are only the possibilities of loss or
no loss, as appose to loss or profit with dynamic risk. Such risk will arise
from the possibility of accident or technical failure.

• Examples of Static/ Pure Risks are:

– Disability
– Damage to property due to fire, lightning or flood.

• Static Risks are insurable.

• The only outcome of static risks are adverse (in a loss ) or neutral (with
no loss), never beneficial (no potential gain).

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 Impact of Risk
(The Risk Hierarchy)

The Environment

The Market/Industry

The Company

The
project/individual

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 Impact of Risk
• General Environment: General environment al risk can be
divided into two parts:

– The physical (natural): which includes the weather and other natural
phenomena such as earthquakes. It can have a significant effect
impact on the construction process. For instance, continuous rain may
mean a change to the indoor and outdoor programme of work, low
temperatures may change the sequence of concreting operations.

– The political, social and economic: is partially controllable. For

example, the government can control events in the UK economy but
not in the world economy.

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 Impact of Risk
• The Market/Industry Risk: Market risk relates to any event
that might affect the complete industry, such as a national
strike of all building workers.

• The Company Risk: Any company operates within a market.

The company will have a number of current projects at any
one time, each project being a profit centre. Company risk
and project risk are linked because the company must bear
the consequences of a risky project. For example: if a
contractor has a major project which is losing money, it will
have an effect upon the company’s financial performance.

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 Fundamental Risks and Particular Risks  

• Fundamental risks affect the entire economy or large numbers of people

or groups within the economy. Examples of fundamental risks are high
inflation, unemployment, war, natural disaster such as earthquakes and
floods.

• Particular risks are that affect only individuals and not the entire
community. Examples of particular risks are theft and accidents. With
particular risks, only individuals experience losses and the rest of the
community are left unaffected.

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 Basic rules for risk taking
• No matter how good or how sophisticated any analysis, it will be
people who make the decision on risk. Some basic rules apply:

– Do not risk a lot for a little.

– Always plan ahead.
– Always analyse both the source and the consequences of risks.
– Plan for alternative options as a contingency measure.
– Don’t use other people as an excuse for inaction.
– Don’t take risks purely for reasons of principle.
– Never risk more than you can afford to lose.
– Be prepared to seek advice from the experts.
– Consider the odds and what your experience tells you.
– Consider the controllable and uncontrollable parts of the risk.

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 The risky shift phenomenon

• When a group of people discuss a risk-taking problem, they

usually arrive at a riskier solution than the average of their
own previous individual solutions.

• Most people would disagree with this opinion, but research

shows otherwise.

• The risky shift phenomenon states that groups influence

decision-making towards positions of higher risk a
significantly greater number of times than not.

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 The risky shift phenomenon

• Social scientists specified two reasons for the risky shift idea
as follow:

– Most people think of themselves as no less risk taking than

anyone else. When opinions are aired in group, those of
lesser risk bent towards an increase in risk taking.

– A second reason is that, an individual feels less of personal

responsibility for failure of risking options he would decline
if deciding alone.

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