Song, X; Peña-Mora, F; Menassa, C C and Arboleda, C A (2012) Insurance as a risk management tool for ADR implementation in construction disputes. Journal of Construction Engineering and Management, 138(1), pp. 14-21. ISSN 0733-9364
Abstract
Nowadays, along with the inherent intricacy and magnitude of large-scale construction projects come increasingly complex disputes. Because most projects operate on tight budgets, alternative dispute-resolution (ADR) techniques such as negotiation, mediation, and arbitration are being widely adopted in large-scale construction projects to help handle disputes in more effective and cost-saving ways. However, the risk of incurring uncertain ADR-implementation costs in the dispute-resolution process has become an important issue. The traditional self-insured approach of simply retaining all risks is no longer considered economical. One way to reduce the potential for variations in the dispute-resolution budget is to price ADR techniques as an insurance product, which allows project participants to transfer the risk of incurring unexpectedly high ADR-implementation costs to the insurance company. Despite this advantage, many factors are preventing project participants from investing in ADR-implementation insurance. This paper proposes a model on how to use ADR-implementation insurance as a risk management tool for construction dispute resolution. It first investigates the possibility of using insurance for ADR-implementation and then uses subjective loss to represent the risk-averse attitude of project participants and quantify the effect of ADR-implementation costs in monetary terms. Event-tree analysis (ETA) is used to simulate different dispute-resolution processes and determine the probability mass function of ADR-implementation costs by drawing analogies from seismic risk insurance. These probabilities are employed to calculate the expected ADR-implementation costs and to derive the insurance premium. Finally, the gross premium is compared to project participants' subjective loss to help them determine whether purchasing ADR-implementation insurance is necessary. At the end, a numerical example is presented to illustrate the application of the methodology.
| Item Type: | Article |
|---|---|
| Uncontrolled Keywords: | adr techniques; insurance; risk management |
| Index terms: | drawing, mediation, construction project, variation, methodology, dispute, purchasing, seismic risk, arbitration, construction dispute, negotiation, resolution, implementation, risk management tool, risk management, insurance |
| Subjects: | contractual condition, production management, financial risk, research methods, procurement strategy, conflict resolution, dispute resolution, risk assessment, contractual arrangements, economic analysis, technical documentation |
| Topics: | Contract Administration, Design Practice, Legal Issues, Procurement, Risk Management, Stakeholder Management, Research Practice, Project Management, Cost Management, Business Strategy |
| Descriptive scope: | 3 PCT |
N.B. Descriptive scope is a count of how many of the five facets of empirical research are indicated by the words used in title, abstract and keywords. It is not intended as a judgement on the research; merely a count of the kind of word we would expect to indicate Phenomenon, Concepts, Theoretical framing, Empirical techniques, Analytical techniques. If all five are present, then a code of “5 PCTEA” will indicate this. If you feel the coding for this record is questionable, we welcome discussion around the terms we matched or the way we categorized them. The facet you would expect may not be coded, or a facet may be coded inappropriately. This can also bear on a larger question, of which facets should be treated as defining in construction management research. Please get in touch, and we will look at it. More details here