The Price of Risk in Construction Projects (original) (raw)

The price of risk in construction projects: contingency approximation model (CAM)

2007

Little attention has been focussed on a precise definition and evaluation mechanism for project management risk specifically related to contractors. When bidding, contractors traditionally price risks using unsystematic approaches. The high business failure rate our industry records may indicate that the current unsystematic mechanisms contractors use for building up contingencies may be inadequate. The reluctance of some contractors to include a price for risk in their tenders when bidding for work competitively may also not be a useful approach. Here, instead, we first define the meaning of contractor contingency, and then we develop a facile quantitative technique that contractors can use to estimate a price for project risk. This model will help contractors analyse their exposure to project risks; and help them express the risk in monetary terms for management action. When bidding for work, they can decide how to allocate contingencies strategically in a way that balances risk and reward.

Risk and Price in the Bidding Process of Contractors

Journal of Construction Engineering and Management, 2011

Formal and analytical risk models prescribe how risk should be incorporated in construction bids. However, the actual process of how contractors and their clients negotiate and agree on price is complex, and not clearly articulated in the literature. Using participant observation, the entire tender process was shadowed in two leading UK construction firms. This was compared to propositions in analytical models and significant differences were found. 670 hours of work observed in both firms revealed three stages of the bidding process. Bidding activities were categorized and their extent estimated as deskwork (32%), calculations (19%), meetings (14%), documents (13%), off-days (11%), conversations (7%), correspondence (3%) and travel (1%). Risk allowances of 1-2% were priced in some bids and three tiers of risk apportionment in bids were identified. However, priced risks may sometimes be excluded from the final bidding price to enhance competitiveness. Thus, although risk apportionment affects a contractor"s pricing strategy, other complex, microeconomic factors also affect price. Instead of pricing in contingencies, risk was priced mostly through contractual rather than price mechanisms, to reflect commercial imperatives. The findings explain why some assumptions underpinning analytical models may not be sustainable in practice and why what actually happens in practice is important for those who seek to model the pricing of construction bids.

A Conceptual Model for Risk Allocation in the Construction Industry

American Journal of Applied Sciences, 2017

Appropriate risk allocation influences positive project delivery on construction projects while inappropriate allocation results in disputes, quality shortfalls, time and cost overruns. The existing body of knowledge provides guides on how risks should be allocated between the contracting parties. Nevertheless, the full appreciation of risks allocation is rarely given as risk allocation is more than just which party should bear a risk. This study provides a conceptual model of the various ways risks could be allocated. Furthermore, the FIDIC-Redbook (1999), NEC3 (2005/2006) and JCT Major building contract (2005), JBCC (2014), JLC (1972) and open national bidding contract (2013) are used to demonstrate the practicality of the conceptual model. An understanding of risk allocation prerequisites might help to mitigate risks that influence project performance negatively. The use of this conceptualization may help to assign a risk with more than one treatment option to maximize a positive outcome of a negative risk factor.

Incorporating Risk Analysis in Bidding for Construction Contracts

MSc. Thesis - Marmara University Engineering Management Program, 2010

Contracting has been always perceived as an extremely risky business owing to several infamous financial incidents of contractors. Naturally, efforts and researches on dealing with the inherent riskiness of the business have been arousing interest widely. As all other investors, contractors are also compelled to keep continuity of their business with positive cash flow. This depends on just one condition: revenue collected according to contract provisions must be over the realized cost. Contract provisions these are on account of the contractors are set according to their winning bid. Thus, tender preparation phase is actually the first and last position of the contractors where they can freely manage the risk of their future investment. Literature contains numerous researches focusing on analyzing/managing risks of construction business through several points of views. Analysis/management requires data/knowledge. However, neither data nor knowledge except the ones of past experiences is available to bidding for a brand new construction project. Besides, due to distinct risk factors (i.e. political, financial) of different states, risk model ought to be uniquely developed for each state. Previous researches cannot fulfil the risk analysis requirements of bidding for construction contracts of Turkish State, due to their exorbitant complexity and resultant impracticability, and unique conditions of the Turkey. This thesis aims to research a risk analysis technique suitable for conservative construction professionals bidding for Turkish State contracts.

On the calculus of risk in construction projects: Contradictory theories and a rationalized approach

Safety Science

Evaluating risks through numbers-although an inevitable stage of risk management-can be seriously problematic, especially when marginalized groups of risks turn out to be significant, for example, to the lives of people. While it questions the effectiveness of the traditional approach to risk scoring, the literature provides no alternative satisfying all the criteria stressed by the critics. In fact, different dimensions of uncertainty, along which a risk can be viewed, entail different quantifications. Most previous work, however, concentrates on supposedly all-purpose solutions that are often justified or promoted over others by reasons not necessarily applicable; little information is available on how to best select the needed scoring approach. This research investigates the issues involved in constructing a risk factor formula that is more consistent with the nature of the project and its goals. Major concerns addressed in the literature are organized, serving as a basis to evaluate and improve seven groups of alternative formulas in light of mathematical arguments without which fallacious conclusions-such as the myth that importance is implied by exponents greater than one-would be inferred. These groups are complemented by a multifaceted approach introduced for the first time in this paper, providing the observer with customized information about risks. A robust scoring system founded on these results will ensure that allocated risk factors are neither too high nor too low. Although expressed in the terminology of construction safety, the findings of this research can be extended to other industries that feature some element of uncertainty.

Risk pricing practices in finance, insurance and construction

2008

A review of current risk pricing practices in the financial, insurance and construction sectors is conducted through a comprehensive literature review. The purpose was to inform a study on risk and price in the tendering processes of contractors: specifically, how contractors take account of risk when they are calculating their bids for construction work. The reference to mainstream literature was in view of construction management research as a field of application rather than a fundamental academic discipline. Analytical models are used for risk pricing in the financial sector. Certain mathematical laws and principles of insurance are used to price risk in the insurance sector. construction contractors and practitioners are described to traditionally price allowances for project risk using mechanisms such as intuition and experience. Project risk analysis models have proliferated in recent years. However, they are rarely used because of problems practitioners face when confronted ...

An empirical study of risk analysis and their impact on construction projects

The purpose of this paper is to identify and assess the likelihood of occurrence and degree of impact of the risk factors on construction projects in medium and large enterprises within the Ghanaian construction industry. Literature review is used to identify relevant risk factors which are then incorporated into the design of the survey instrument. The questionnaire is administered via a postal survey and information was collected from 103 construction professionals practising with construction client (private and public), consultant and contractor organisations within the Ghanaian construction industry. Survey response data was subjected to descriptive statistics and subsequently analysis of variance (ANOVA), post-hoc tests and other non-parametric tests were used to examine the differences in the likelihood degree of occurrence and degree of impact of risk on construction projects. The findings indicate a disparity of the ranking of the degree of occurrence and impact among the groups. There was a statistically difference at the p < .05 level significant for 5 out of 25 risk factors likelihood of occurrence as follows: 'construction methods'; 'inflation'; 'weather condition'; 'ground conditions and contaminant conditions';

Risk importance and allocation in the Pakistan Construction Industry: A contractors’ perspective

Ksce Journal of Civil Engineering, 2007

This paper on the basis of a questionnaire survey has investigated the perception of the contractors regarding risk importance and risk allocation. The purpose was to provide insight into the current attitude of Pakistani contractors towards the impact of different risks to the project delay and risk allocation. The respondents were asked to judge the relative importance of 31 risks types included in questionnaire. The risk types were generated on: a) an extensive literature review and b) consultation with the five key local experts participated in the survey. The weighted average score approach (WAS) is used to rank the potential risks based on the judgment of the respondents. The risks ranked by the contractors are analyzed and discussed. For risk allocation, the respondents have selected the party actually taking the risk from one of the following three options: owner, contractor or shared by both he owner and contractor. The results of this part of the survey are summarized in terms of percentages of the total number of respondents who have chosen the appropriate selection.

Preferred risk allocation in target cost contracts in construction

Facilities, 2011

Purpose-The purpose of this paper is to identify the party most preferred to take the risks associated with the Target Cost Contracts and Guaranteed Maximum Price Contracts (TCC/GMP) in the Hong Kong context. Design/methodology/approach-An empirical questionnaire survey was conducted with the relevant industrial practitioners to solicit their preferences of risk allocation in TCC/GMP construction projects in Hong Kong. Findings-The survey findings indicated that risks on tender documentation and project design are better borne by clients, while construction related risks are perceived to be taken by contractors. The research findings are consistent with other similar studies on risk allocation in construction projects in general. Practical implications-This paper has developed a preferred risk allocation scheme for the delivery of future TCC/GMP projects, taking Hong Kong as an example. It can serve as a useful guide for the decision makers to determine an optimal risk allocation at the planning stage of a TCC/GMP scheme. Originality/value-This study is expected to benefit both academic researchers and industrial practitioners in generating an equitable risk sharing mechanism for TCC/GMP projects. It has provided sufficient empirical evidence, added to the growing body of knowledge and laid a solid foundation for further research such as an international comparison of various risk allocation schemes associated with this kind of contractual arrangement.