A framework for managing global risk factors affecting construction cost performance

Poor cost performance of construction projects has been a major concern for both contractors and clients. The effective management of risk is thus critical to the success of any construction project and the importance of risk management has grown as projects have become more complex and competition has increased. Contractors have traditionally used financial mark-ups to cover the risk associated with construction projects but as competition increases and margins have become tighter they can no longer rely on this strategy and must improve their ability to manage risk. Furthermore, the construction industry has witnessed significant changes particularly in procurement methods with clients allocating greater risks to contractors. Evidence shows that there is a gap between existing risk management techniques and tools, mainly built on normative statistical decision theory, and their practical application by construction contractors. The main reason behind the lack of use is that risk decision making within construction organisations is heavily based upon experience, intuition and judgement and not on mathematical models. This thesis presents a model for managing global risk factors affecting construction cost performance of construction projects. The model has been developed using behavioural decision approach, fuzzy logic technology, and Artificial Intelligence technology. The methodology adopted to conduct the research involved a thorough literature survey on risk management, informal and formal discussions with construction practitioners to assess the extent of the problem, a questionnaire survey to evaluate the importance of global risk factors and, finally, repertory grid interviews aimed at eliciting relevant knowledge. There are several approaches to categorising risks permeating construction projects. This research groups risks into three main categories, namely organisation-specific, global and Acts of God. It focuses on global risk factors because they are ill-defined, less understood by contractors and difficult to model, assess and manage although they have huge impact on cost performance. Generally, contractors, especially in developing countries, have insufficient experience and knowledge to manage them effectively. The research identified the following groups of global risk factors as having significant impact on cost performance: estimator related, project related, fraudulent practices related, competition related, construction related, economy related and political related factors. The model was tested for validity through a panel of validators (experts) and crosssectional cases studies, and the general conclusion was that it could provide valuable assistance in the management of global risk factors since it is effective, efficient, flexible and user-friendly. The findings stress the need to depart from traditional approaches and to explore new directions in order to equip contractors with effective risk management tools.