A hierarchical approach to the management of construction project risk

The construction industry in Britain is undergoing a radical change; new markets are opening up as traditional ones close, and the nature of contracts are changing with the increasing popularity of design-build and the development of the Government's Private Finance Initiative. These changes have left many construction companies moving into markets in which they have little experience or entering into contracts which allocate risks to them which have previously been held by others. Since the traditional method of managing risks was by using the experience and judgment of managers, this has left many companies in a dangerous position, selecting projects with little knowledge of the risks the company is already exposed to, the extent to which the company wants the project, or the change that project will make to the risk profile. An investigation into the formal approach to risk management, developed over the last few decades as a way of progressing from the purely experience based approach, concludes that although several of the techniques offer an improvement, the overall approach does not consider the company. Projects are treated as independent entities rather than temporary parts of the company's ongoing activities. A system is produced which builds on the already identified organisational hierarchy of a company. Two risk models are produced, one for use at the project level, which considers the sources of uncertainty in the project, and one for use at the company level, which combines the uncertain impacts of the projects it is undertaking, those it is pursuing, and those which it expects will be available in the future. The models have been tested and validated using data collected from projects in their tendering stage. The results of the tests are presented and the findings discussed. Conclusions drawn from the work and recommendations for future work are presented.