A study of risk management in dealing with contracts in the construction industry

There is a consensus that the construction industry is subject to greater risk and uncertainty than other industries. Many studies of construction management and contract management have looked at risk management in major construction projects. However, most of these studies focussed on the client (buyer) rather than the contractor (seller), and most dealt with the engineering management of construction work rather than the managerial decision making process involved. This study concerns risk management by decision makers in contracting firms in the British construction industry. The purpose of this study is to examine how construction contractors perceive their decision making process in terms of risk perception and management. The study has gathered data and analysed it to examine four main hypotheses. Chapter One provides an overview of the literature on how individual buyers and business executives deal with perceived risk in general purchasing. Chapter Two examines the underlying theory of risk management in the construction industry to understand the principles and processes of risk management. Chapter Three describes the construction industry. Chapter Four introduces models of organisational buying behaviour and construction processes. Chapter Five demonstrates that the tendering stage constitutes an important area where the contractor applies risk management strategies. Chapter Six provides a discussion of the contract commitment stage. After considering relevant factors, 210 construction contractors operating in Britain were identified. A questionnaire, with a covering letter, was mailed directly to the Managing Director of the contractors included in the sample. From the sample, 101 sample contractors replied to yield a total of 76 useful responses. The 36.2% response rate was considered high enough to provide the data required for the purposes of this study. The research design and methods used for data collection and analysis are dealt with in Chapter Seven. The analysis of the data mainly has been presented in Chapter Eight. The results show that all the four hypotheses have been supported. Chapter Nine summarises the findings of the study with recommendations for further research. The results of the study indicate that: Construction companies perceive risks in their contracting process, and some situational factors affect the risk perception. Although risk analysis is relevant to the construction industry, rigorous analysis techniques such as sensitivity analysis, probability analysis, decision tree analysis, simulation approach, etc. are not widely applied in the contracting process, instead the more traditional techniques are still favoured for risk analysis. The tendering stage and the commitment stage are the critical stages for contract decision making. The tendering stage is the most important phase for applying risk management primarily through an effective bidding/negotiating approach. However, the final success of a construction project depends on the contractor's ability to manage the risk factors involved in the commitment stage. An inability to manage becomes a major source of risk in this stage.