Investigation of Optimization of Risk Allocation in Construction Projects

This literature review provides an overview of the construction industry, risks prevalent in the industry, risk management, risk allocation, and optimal risk allocation. The review also highlights the gaps in the existing literature and sets the foundation for the research methodology to be used in the present study.

INVESTIGATION OF OPTIMIZATION OF RISK ALLOCATION IN CONSTRUCTION
PROJECTS

Abstract
ii

Table of Contents
Abstract......................................................................................................................................ii
Table of Contents......................................................................................................................iii
List of Figures...........................................................................................................................vi
List of Tables...........................................................................................................................vii
CHAPTER ONE: INTRODUCTION........................................................................................1
1.1 Introduction..........................................................................................................................1
1.2 Statement of the Problem.....................................................................................................1
1.3 Research Aim.......................................................................................................................3
1.4 Objectives of the Study........................................................................................................3
1.5 Research Questions..............................................................................................................3
1.6 Research Methodology.........................................................................................................4
1.7 Significance of the Study.....................................................................................................4
1.8 Organisation of Chapters......................................................................................................4
Chapter 2: LITERATURE REVIEW.........................................................................................6
2.1 Introduction..........................................................................................................................6
2.2 Construction Industry Overview: Global and United Kingdom..........................................6
2.2.1 Global Construction Industry........................................................................................6
2.2.2 Construction Industry in the United Kingdom..............................................................8
2.3 Risks in the Construction Industry.....................................................................................10
2.3.1 Construction Risks: Definitions and Meanings...........................................................10
iii

2.3.2 Types of risks in the construction industry.................................................................11
2.3.3 Classification of Risks in Building Construction Industry.........................................12
2.4 Risk Management...............................................................................................................16
2.4.1 Meaning and Implications...........................................................................................16
2.4.2 Conceptual Framework...............................................................................................16
2.4.3 Risk Management in construction industry: Scenario in United Kingdom................19
2.5 Risk Allocation in the Construction Industry.....................................................................19
2.5.1 Methods for Risk Allocation.......................................................................................20
2.5.2 Problems in existing Risk Allocation Methods...........................................................23
2.6. Optimal Risk Allocation...................................................................................................24
2.6.1 Definition and Implications.........................................................................................25
2.6.2 Factors for optimal allocation of risk..........................................................................25
2.7 Literature Gap....................................................................................................................26
Chapter 3: RESEARCH METHODOLOGY...........................................................................27
3.1 Introduction........................................................................................................................27
3.2 Problem Statement.............................................................................................................27
3.3 Research Design.................................................................................................................28
3.3.1 Research Approach.....................................................................................................28
3.3.2 Research Purpose........................................................................................................28
3.3.3 Research Methodology................................................................................................28
3.4 Research Objectives...........................................................................................................28
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3.5 Research Questions............................................................................................................29
3.6 Data Collection Questionnaire...........................................................................................29
3.7 Research Assumptions.......................................................................................................29
3.8 Target Population and Sampling methods.........................................................................30
References................................................................................................................................31
v

List of Figures
Figure 1: Region-wise division of the Global Construction Industry Output............................7
Figure 2: Trends of growth of global construction output over the years..................................8
Figure 3: Economic output of the construction sector of the UK over the years.......................9
Figure 4: Sector wise construction output in the United Kingdom over the years....................9
Figure 5: Risk Management Process in Construction Industry................................................17
Figure 6: Steps involved in a robust risk management............................................................18
Figure 7: Risk Management Approach....................................................................................19
Figure 8: Risk Allocation Procedure by the Contract Clauses Method...................................21
Figure 9: Risk Allocation in the Risk Assessment Model.......................................................22
Figure 10: Risk Analysis and Allocation of Risk in PPP Construction Projects.....................23
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List of Tables
Table 1: Construction output by types of work in UK (2015).................................................10
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CHAPTER ONE: INTRODUCTION
1.1 Introduction
In comparison to other industries (organisations involved in the production of goods
or services) the “Construction Industry” is different in largely due to the diversification of the
projects. Moreover, projects in the construction industry occur in a dynamic environment
(Zhang et al. 2014). The assortment of projects together with the dynamic environment of the
construction industry leads to an increase in situations of high uncertainty (Mitkus and
Mitkus 2014). Hence, risks involved in construction industry are higher as compared to other
industries.
A proper evaluation of the risks involved in a construction project would aid in
identification of processes to be allocated to minimize the risks (Arashpour at al. 2016).
Minimization of risks in the industry would translate into larger profits for the industry.
Moreover, judicious allocation of resources would lead to reduction in friction amongst the
workforce at the workplace, thus increasing the efficiency of the project (Hwang et al. 2013).
The present research would search for measures being taken in the construction
industry for risk optimisation and thus to suggest best possible measures. However, it is to be
taken into consideration that the practice of risk optimisation and allocation does not fully
lead to reduction of the risks. It is but just a means of reduction in risks and thus increase in
the probability of success of industry in a particular situation.
In the construction industry risks has a broad concept. Various researchers have
identified the risks prevalent in the construction industry. According to Shehu, Endut and
Akintoye (2014) the Malaysian construction industry is plagued with to time and financial
risks. Goh and Abdul-Rahman (2013) have emphasized on health and safety risks, schedule
risks and contractual risks. In the informal building construction industry in Nigeria sub-
contracting creates labour risks (Olusanya 2018).
1.2 Statement of the Problem
Every construction project is unique in the sense that it carries its own set of risks.
The risks involved in a construction project affect each and every stakeholder (Aminbakhsh
et al. 2013). All stakeholder involved in a project carry a proportion of the risk. The
difference between the actual results and the expected can be defined as risk. “Risk” in a
project cannot be ignored, however, the stakeholders through their endeavour can manage

and thus reduce the chances of risk. Risks can also be transferred to a third party –
subcontractors and suppliers (Yang and Zou 2014).
The construction industry completion of a project within the scheduled time as well as
the estimated budget is the ultimate objective. However, time and costs can be considered as
quid pro quo. Whereas loss of time for the industry can be related to escalation of costs,
saving of time would benefit both the stakeholders. Although, saving of time in a
construction project is related to an increase of both direct and indirect costs (Alinaitwe,
Apolot and Tindiwensi 2013).
Initiation of a construction project is a contract between owner and contractor. The
contract forms the basis of the apportionment of rights, risks, duties and responsibilities. The
risks in the industry can never be eliminated, they however can be transferred to a second
party (Marzouk and El-Rasas 2014). Thus the contract in other words means the process of
allocation of the risks. As a rule, the owner transfers most of the risks to the contactor, who in
turn increases the cost of the project for bearing the burden of the risks.
Risks in the construction industry is compounded by the fact that it a highly
fragmented industry. Fragmentation can be defined as separation of the design aspects from
the construction aspects. A construction can be viewed as a collaboration of multiple
stakeholders for a single project. At the industry level, the construction industry involves
multiple professionals and diverse organizations to deliver a project.
Further the industry is highly sensitive to economic cycles and presence of financial
competition between participants. In addition to this the industry is beset with management
problems, unforeseen events like natural calamities. The risks in the industry can be
categorised as Physical, Financial, political and Engineering. Optimisation of each of the risk
processes involves different approaches. The dynamic environment of construction projects
creates a situation of uncertainty. Moreover, the inter-relation between the risk factors hinders
an easy optimisation process.
The work wishes to investigate, evaluate and thus classify the risk allocation process
in the construction industry. Further, the project envisages to recognise the barriers to optimal
risk allocation. It is envisaged that an understanding of the risk would lead to addressing of
the barriers to the allocation of risks in the construction industry.
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Researchers have provided different definitions of risk. Risks can be defined as the
probability of a hazard occurring resulting in potential loss or gain. Risks in construction
industry may be Financial, Time, physical, personnel, design and technical, contractual,
political, regulatory and safety (Goh and Abdul-Rahman 2013). The present project considers
risks in the building construction industry. Risks in the building construction industry
involves times, quality, health and safety aspects and financial risk. Time risks involve
project schedule and as corollary allocation of time for every part of the project. Financial
risks take into account the problems of cash flow, price fluctuation, inflation and payment
schedule by the client. Health and safety risks are concerned with workers involved in the
project. Quality of construction projects is concerned with quality of work and materials used
in the project.
1.3 Research Aim
Construction project objective entails completion of the project in time within a given
budget. The probability of completion of a project in time within the allocated finances can
be defined as Risk. Hence optimization would mean the utilization of optimal resources to
complete the project within the given time frame. Moreover, the judicious allocation of the
resources is essential for the timely completion of the project. Further the research would
also investigate how quality risks in building construction projects are managed. In addition,
the research also focuses on how health and safety risks of construction projects are managed.
Aim of this research study is to identify and investigate the optimization techniques and risk
allocation process in construction project.
1.4 Objectives of the Study
The following research study has following research objectives-
1. To provide a review on how risks are allocated and optimized in construction projects
2. To identify the importance of risk optimization in determining project success
3. To propose a pathway through which construction project can manage risk and create
balance between project success as well as stakeholder’s standpoints.
1.5 Research Questions
The research questions provide answers to the research objectives. Thus the research
questions are formulated as-
1. How are risks identified in a construction project?
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2. How are risks allocated in a construction project?
3. How can risks be optimized in a construction project?
4. Does risks optimization lead to the success of a project?
5. What are the problems with sub-optimal risk optimization?
6. What are the hurdles to optimal risk management in the construction industry?
1.6 Research Methodology
In order to investigate the risk optimization and allocation features in the construction
industry both primary and secondary data analysis would be used.
For the primary evaluation of the research project managers associated with the
construction project would be interviewed. The interview would be analysed to understand
the risk optimisation and risk allocation process being used in the particular project (Osipova
and Eriksson 2013).
Secondary data analysis would involve previous published articles being analysed for
steps taken by the industry under similar circumstances (Al Haj and El-Sayegh 2015).
After the successful collection of the data by interviewing the project managers of the
different construction projects, the importance of the risk allocation will be evaluated on basis
of those data. The answers that are recorded from the survey will help in answer the
identified research questions and the objectives of the research (Ikpeze 2015).
1.7 Significance of the Study
Risk allocation and risk optimization is very important in ensuring the success of any
project. This is because every project is associated with certain risks, majority of which
cannot be mitigated. Therefore, the process of risk allocation helps in proper management of
such risk (Taylan et al. 2014). This research study will therefore be valuable to the industry
practitioners associated with the different construction projects in developing a better idea
about the process and importance of risk allocation and optimization in the different
construction projects.
1.8 Organisation of Chapters
For undertaking the present research, the thesis has conveniently been divided into
five chapters. The introductory chapter provides an overview together with the background of
the study, its aims, objectives and research questions. The prelude to the study is set forth
through the problem statement. Prior work done to understand and thus provide solutions to
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the problems associated with risk allocation in construction industry is presented in chapter
two. In chapter three we discuss the method to be used to investigate the optimisation process
of risk allocation in the construction industry. The analysis of the collected data and
evaluation of previous research is done in the fourth chapter. The final chapter draws a
conclusion to the project by evaluating the risk allocation and risk optimisation in the
construction industry.
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Chapter 2: LITERATURE REVIEW
2.1 Introduction
The construction industry, as discussed above, is one of the most dynamic industries
across the globe, with new developments and expansion of the industry taking place as a
continuous process. As asserted by Wang (2014), the concerned industry differs from that of
most of the other industries in the sense that the industry is highly diversified, both from the
demand side as well as from the supply side. This diverse nature of the construction industry,
across the global framework and the dynamic nature of the same contributes to higher than
normal probabilities of risks arising in the concerned industry. The risks involved in the
construction industry generally tends to be higher compared to other types of industries as
argued by Pinto, Nunes and Ribeiro (2011).
The aspects of risks and the methods to address and minimise the same have been
issues of immense concern in the construction industry and there exists substantial literary
evidences regarding the aspects of risks in the construction industry, the factors contributing
to the same, the types of risks as well as the ways to manage and mitigate the problems
optimally, in the country specific as well as in the global framework in the contemporary
scenario (Ball 2014).
Keeping this into consideration, the concerned section of the thesis tries to conduct an
extensive review of the existing literatures, scholarly works and interpretations of empirical
evidences, which are present in the global framework, in these aspects, thereby exploring the
different opinions and assertions existent in the concerned domains in the global construction
industry, emphasizing specifically on the building construction industries of the United
Kingdom.
2.2 Construction Industry Overview: Global and United Kingdom
2.2.1 Global Construction Industry
To gauge the types of risks and their management dynamics it is of utmost importance
to have an overview of the construction industry as a whole and the dynamics in the building
and housing construction industry in the United Kingdom. As shown by Hampson, Kraatz
and Sanchez (2014), the global construction industry is one of the most dynamic prospering
industry, with a projected global output of more than 10.1 trillion US dollars by 2021, as can
be seen from the following figure:
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Figure 1: Region-wise division of the Global Construction Industry Output
(Source: Insideconstruction.com.au 2018)
The reports of the National Research Council (2009), in this context argues that the
primary countries emerging as the top construction markets in the global scenario, over the
years and showing highly positive future trends of expansion and rise in productivities are:
 China
 USA
 India
 Japan
 European countries especially United Kingdom
The evidences provided by the above-mentioned report, is found to be augmented by
the empirically evidenced scholarly work of Ortiz, Castells and Sonnemann (2009),
according to whom, the construction industry can be seen to be growing even more in the
emerging economies than that of the developed economies, in the recent period, with the
trend of growth expected to be remaining the same over the coming years.
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Figure 2: Trends of growth of global construction output over the years
(Source: Insideconstruction.com.au 2018)
2.2.2 Construction Industry in the United Kingdom
The European countries can be seen to be expected to be consisting of a significant
share of the global output in the coming years, attributing to the growth in the concerned
industry of the country over the last few decades, a considerable share of the same being
coming from the construction industry of the United Kingdom (Ball 2014).
One of the most comprehensive overviews of the construction industry of the United
Kingdom can be seen to be present in the work of Sherratt (2014), according to whom, the
construction industry of the country, contributed nearly 103 billion pounds in the economic
output of the country (as per 2014 statistics). Apart from that, the industry also creates nearly
2.1 million jobs, thereby posing as one of the primary employment generating industries in
the country (Oluwole Akadiri and Olaniran Fadiya 2013). The gross value added of the
construction industry in the country, over the years, can be seen to be as follows:
8

Figure 3: Economic output of the construction sector of the UK over the years
(Source: Rhodes 2018)
As per Ashworth and Perera (2018), both the public sector as well as the public sector
contributes considerably in the total output generation in the construction sector of the
country, with the private sector contribution being considerably higher than the public sector:
Figure 4: Sector wise construction output in the United Kingdom over the years
(Source: Rhodes 2018)
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Table 1: Construction output by types of work in UK (2015)
(Source: Nadim and Goulding 2009)
Thus, from the above evidences it can be asserted that the construction industry as a
whole, can be considered to be one of the most prominent and economically contributing
industries in the United Kingdom, with both the private and the public sectors contributing
significantly in its development and the building construction industry forms a prominent
sub-group under the domain of the concerned industry (Brindley 2017).
2.3 Risks in the Construction Industry
2.3.1 Construction Risks: Definitions and Meanings
The term “risk”, being a broad conceptual one, generally refers to the situations which
involve exposure to some sort of danger, harm or loss. In this context, there exists different
interpretations of risks in the construction industry, of which the most comprehensive one can
be seen to be provided by Abdelgawad and Fayek (2010). As per the assertions of the
authors, the risks in construction industry refer to any exposure to the types of possible losses
which can occur in the supply side dynamics of the industry. Augmenting this perception,
Mhetre, Konnur and Landage (2016), suggest that risk in the construction industries are
generally the differences between the expected outcomes from the different construction
projects and the actual outcomes, which is turn affects different stakeholders in the project
and thus, have to be considered seriously for the businesses in the industry to sustain in the
long run.
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2.3.2 Types of risks in the construction industry
Venturing in the construction sector of Thailand, the empirically evidenced literary
work of Ghosh and Jintanapakanont (2004), identifies the main risks prevalent in the
construction sectors to be as follows:
 Fund unavailability- The primary risk endured by the concerned industry is the risk
of irregularity in fund gathering and allocation through the entire tenure of the
projects.
 Construction delays- Various exogenous as well as endogenous reasons can lead to
stagnation in operational activities of the companies, thereby leading to construction
delays (Chien, Wu and Huang 2014).
 Financial and Accounting Failures- The construction companies may often face the
risk of financial failure, mostly due to the lack of insights and accounting abilities as
well as lack of prediction of cash flows and problems with capitalization and
improper cost and project management frameworks (Renuka, Umarani and Kamal
2014).
 Unclear work scopes- This type of risk, as suggested by Bryde and Volm (2009), is
considerably subjected to the construction industry itself, where there often remains
confusion regarding the project milestones, deliverables and end products from the
supply side providers.
 Contractual delays- One of the most common form of risk in the construction
industry, arises from the differences between the expected and actual durations of the
construction projects. Eybpoosh, Dikmen and Talat Birgonul (2011), in this context,
indicates that the delay in the construction process often leads to the creation of risks
of loss of profits on part of the project owners and higher costs on part of the
contractors.
 Third party delays- Marzouk and El-Rasas (2014), in their paper exploring the risk
factors in the construction industry of Egypt, emphasizes on the problems of delays by
the third parties which lead to the creation of risks in the construction industries. The
third parties, in this context, refers to the participants in the construction sector, apart
from the direct contractors or companies, who play crucial roles in the different
intermediate operational activities (Hamzah et al. 2011). Delay on part of them leads
to an overall risk in the construction sector.
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Although the above-mentioned risk factors can be frequently observed in the
operational framework of the construction industries, there however remains many other
diverse forms of risks arising in the concerned industries. In their elaborate research paper
over the building construction industry in Indonesia, Wiguna and Scott (2005), the authors
identify more elementary and targeted risks, unlike those broad ones mentioned above. The
primary risks identified in the building construction sector, by the authors, include the
following:
 Cost burdens in construction due to presence of high inflations
 Risks arising out of the defective designs of the buildings
 Frequent changes in project and building designs by the owners
 Risks of climatic fluctuations
 Unforeseen risks of conditions of the site ground
 Defective works of construction (Olawale and Sun 2010)
 Problems related to availability of factors of production, including labours as well as
equipment and raw materials
 Clashes with the labour unions
The works of Goh and Abdul-Rahman (2013), in the Malaysian construction industry
also found more or less similar types of risks to be associated with the industry as found by
the previous authors, however they also found some additional risk factors, which can be seen
to be as follows:
 The ambiguous contract provisions often lead to confusions, thereby leading to
increase in the risk factors
 Project schedule mismatches
 Defaulting of personnel
 Safety and health risks of the workers in the construction sector
 Unstable politics
 Accidents
 Poor communication among the construction stakeholders and parties
Thus, from the above discussion of the existing literatures and scholarly evidences it
can be asserted that there exist different types of risks in the construction sector, in a
globalised framework, attributing to the diversified nature of the industry itself and the
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exogenous as well as the endogenous attributes which the industry is subjected to in different
regions at different points of time.
2.3.3 Classification of Risks in Building Construction Industry
Keeping into account the different types of risks in the construction industry as a
whole and in the building construction industry in particular, the risks which generally arise
in the industry can be classified into several sub-groups, depending on their nature, reason for
occurrence and impacts. These classifications, with the help of the existent literary and
empirical evidences are discussed in the concerned section, as follows:
2.3.3.1 Financial Risks
As per the assertions of Antón, Rodríguez and López (2011), one of the primary
forms of risks associated with the construction industry is that of the financial risks which the
industry experiences. According to the authors, the significant forms of financial risks arise
from fluctuations in the inflation, tax rate dynamics, exchange rate dynamics as well as
fluctuations in the availability and allocation of funds in the construction projects and these
types of risks are usually aggravated in the construction industry due to their diversified
nature of operations and supply side dynamics.
2.3.3.2 Technical Risks
Another highly frequent form of risk which the construction industry as a whole and
the building construction industry in particular faces, as per the arguments put forward by
Ling and Hoi (2006), is that of the technical risks in the operational framework of the
concerned industry. Exploring the risks experienced by the construction firms of Singapore in
India, their paper highlights that often the construction firms face delays in provision of their
promises to their clients due to technical risks which include uncertainty of availability of
resources and construction materials as well as efficient and skilled workers. These types of
risks also arise from inadequate investigation of sites and frequent changes in the
requirements and scopes of projects, which jeopardise the flow of the projects (Dikmen and
Birgonul 2006).
2.3.3.3 Health and Safety Risks
According to the arguments put forward by Zhou, Goh and Li (2015), one of the
negative aspects of construction industry in general is the presence of high health hazard
issues, most of which are experienced by the workers due to the nature of the jobs and the
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harmful substances which they are exposed to, in the construction industry. Zainon et al.
(2018), in this context, identified different risks in the Construction industry.
 Risks involved due to heights
 Health risks due to exposure to harmful chemicals
 Presence of Soil-dust and Asbestos
 Calcium Oxide
 Crystalline Silica and Portland Cement (Lacourt et al., 2015)
 Presence of Asbestos at Construction industry increases the risk of Cancer amongst
construction workers (Järvholm 2014)
 Risks of unintended collapses which may include the following types of risks:
 Falling into the excavations
 Faults in determination of the integrity of the surrounding buildings which
leads to their collapse
 Injuries from falling substances (Gillen et al. 2002)
 Scaffolding of vehicles due to overloading
 Presence of high amount of noise
 Risks of damages of soft tissues like neck, wrists, legs, hips, arms and feet due to
moving, lifting and carrying of material loads
 Non-fatal risks of most common forms of injuries related to slips and trips
 Risks of working from height, which causes nearly fifty per cent of the fatal injuries
in the construction industries in the global framework as per the assertions of Haslam
et al. (2005). As per the authors, these forms of risks in the construction sites mostly
arise due to the following issues:
 Lack of edge protection
 Absence of guardrails
 Unsecured ladders
 Scaffolding problems
 Loose tools and improperly stored materials
 Exhaustion and mental health related risks which are also highly common in the
concerned industry
d. Design Risks
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Behm (2005) highlights the different design related risks which arise in the construction
industry, which may arise from:
 Involvement of owners in designing process
 Incomplete, inadequate and faulty construction project design
 Seismic criteria related confusions
 Errors in structural and geotechnical aspects
 Material selection problems
 Risks of faulty take-off data (which include water, traffic and other aspects)
 Choice of wrong equipment
2.3.3.4 Environmental Risks
Kartam and Kartam (2001), while portraying the risks in the construction industry,
from the contractors’ points of view, highlight the construction industry, in the global
domain, is frequently subjected to risks related to environment as a whole, which arise
primarily due to the faulty or incomplete environmental analysis, presence of wetlands,
creation of hazardous wastes, lack of skilled and specialised personnel and others
(Thevendran and Mawdesley 2004). These risks in turn have immense negative implications
in terms of increase in costs and delay in delivery of different construction projects.
In this context, several risks identified in building or residential constructions are identified in
the report of International Risk Management Institute, to be as follows:
Fumes, emissions, spills of chemicals
Heating and ventilations and their maintenance errors which increase carbon
monoxide formation in air
Risks of environmental damage from lead containing painting materials
Disturbance and increase in contamination due to excavation works (Irmi.com 2018)
Underground lines and constructions causing damages
Risks from leakage of underground or aboveground tanks
Improper waste disposal methods
2.3.3.5 Construction Risks
Different types of risks also arise in the operational framework of the construction
industries, owing to the glitches or issues faced in the construction process only. Menzel and
Gutierrez (2010), in this context, identifies the primary construction risks to be those arising
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from inaccurate estimates of contract line, troubles related to occupational safety,
construction procedure related glitches, late surveys, work permission related risks.
2.3.3.6 Project Management Risks
Banaitiene and Banaitis (2012) studied project management risks at Lithuania.
According to the researchers apart from the above mentioned types of risks, there are also
several risks which arise in terms of project management which primarily arise due to the
design errors, inability to carry out changes according to the stakeholder, tax change,
presence of inadequate or inexperienced workforce or resources, incomplete environmental
analysis, cost overruns and project team conflicts.
One considerably different and unique form of classification of risks can be seen to be
provided in the work of Mbachu and Taylor (2014), where the author classifies the different
risks arising in the construction industry in terms of the different stakeholders in the
construction and also talks about the allocation of risks to the stakeholders by classifying the
risk factors as follows:
Client related risk factors
Contractor related risk factors
Consultant related risk factors
Exogenously related risk factors
2.4 Risk Management
2.4.1 Meaning and Implications
From the above discussion and review of the existing literatures, it becomes evident
that risk is one of the most crucial aspects of construction industries in general, across the
globe and attributing to the nature of works and operations in the concerned industry, the
level, nature, types and occurrences of different risks are also high. This in turn indicates
towards the need for proper risk management processes and frameworks, which the
construction companies need to incorporate in order to maximise their profits, prospects,
competitiveness and also in order to ensure their sustainability in the long run.
Jorion (2009) defines the term “risk management” in commercial scenario to be the
process in which the business organizations assess, identify and control the possible threats
and risks which arise in their operational framework, which in turn have the potentials to
hamper the companies’ capital and earnings. As per Mhetre, Konnur and Landage (2016),
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this phenomenon is of absolute importance especially in the construction industry, in which
the probabilities and occurrences of various types of risks are considerably high.
2.4.2 Conceptual Framework
There exists substantial debates and opinions regarding the steps and ways in which
risks can be managed in the construction industry as scholars differ in their perceptions of
risks and the need to eliminate or mitigate the same. Mead (2007), in this context, provides a
detailed and one of the most comprehensive conceptual frameworks for risk management,
emphasizing on the construction industries, which is as follows:
Figure 5: Risk Management Process in Construction Industry
(Source: Mead 2007)
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Augmenting the above conceptual model, in their elaborate research paper, Motiar
Rahman and Kumaraswamy (2002), explains the steps involved in a robust risk management
plan and their chronology in the construction industry elaborately.
Figure 6: Steps involved in a robust risk management
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(Source: Motiar, Rahman and Kumaraswamy 2002 )
According to the Ehsan et al. (2010), there can be four distinct responses which can
be implemented by the companies, as per the nature and types of risks. These primary
responses to risk, by the construction companies are as follows:
1. Risk acceptance or risk retention
2. Risk mitigation or risk reduction
3. Risk elimination or risk avoidance
4. Risk transfer or risk allocation
2.4.3 Risk Management in construction industry: Scenario in United Kingdom
The general risk management plan, which can be seen to be implemented by the
construction businesses in the United Kingdom, can be shown with the help of the following
diagrammatical interpretation:
Figure 7: Risk Management Approach
(Source: Pwc.co.uk, 2018)
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Risk Management Approach:
Identification
Assessment
Risk Reduction
Implementation of actions
Business
Policies
Business
Culture
Resources and
tools Organizations

2.5 Risk Allocation in the Construction Industry
One of the major steps of management of risks arising in any industry in general and
construction industry in particular is that of the allocation of risks. As per the assertions of
Iqbal et al. (2015), due to the presence of diverse construction risks, it is often not possible
for the participants in this industry to eliminate or mitigate all the risks which are associated
with a particular project. There also exist several risks which cannot be avoided by the
stakeholders of the projects and have to be endured by some of them. In such cases, the
different parties involved in the construction projects try to transfer or shift major shares of
the projected risks from their shoulders to other parties (Ng and Loosemore 2007).
The above argument is supported by Loosemore and McCarthy (2008), according to
whom risk allocation, being the decision of the parties which need to bear the consequences
of the risks evolving in any project, is even more significant in the construction industry in a
generalised global framework as usually these types of businesses consists of different
parties or stakeholders in most of the projects- owner, contractors, sub-contractors, project
designers as well as material suppliers and those other in the supply-side dynamics of the
projects. In his paper, exploring the risks in the construction industry in the UAE, El-Sayegh
(2008), argues that not only in the UAE but also in the global framework, there remains a
tendency amongst the different stakeholders of the construction industry, to shift most of the
burdens of projected risks from them to other stakeholders, thereby trying to maximizing
their individual profits from the projects.
Cheung et al., (2014), in this context highlights that one of the most widely used
mediums or provisions for allocation of any kind of risk in the construction industry is that of
contracts. The contractual forms, in these types of projects, generally contain various
provisions for desired allocations or shifts of risks from one party to another, in the supply-
side of the industry. However, as rightly argued by Ward, Chapman and Curtis (1991), there
should exist proper and robust risk allocation frameworks with the construction companies as
much of the behaviour of the participants as well as success of the construction projects and
the costs endured in the process depend on the patterns of allocation of risks existing in the
construction projects among the different stakeholders and skewed and biased allocations of
the same can jeopardise the projects in the long-run, in the quest to maximise the profits of
discrete interest groups at the cost of all the other stakeholders in the concerned construction .
20

2.5.1 Methods for Risk Allocation
Different researchers and scholars have put forward different methods of risk
allocation, especially emphasizing the construction industry. The primary and comprehensive
ones, as can be seen to be existent in the global literary framework, are discussed as follows:
2.5.1.1 Contract Clauses Method
According to the working paper of Wang and Chou (2003), risks, in the construction
industry, can be allocated between the different participants or stakeholders, both with the
help of the contracts as well as outside the contractual agreements. The authors show the
procedure of allocation of the risks, both in contract and out of the same with the help of the
following flow chart:
Figure 8: Risk Allocation Procedure by the Contract Clauses Method
(Source: Wang and Chou 2003)
As can be seen from the above figure, the risks can be shifted to the different
stakeholders like the owners or the contractors, both with or without contracts and also with
or without consensus on part of the different stakeholders.
2.5.1.2 Risk Assessment Model
One of the most robust models formed to deal with the risks arising in any kind of
projects is that of the Risk Assessment Model. Yafai et al. (2014), in this context, uses this
model to analyse the aspects of risk identification, analysis, assessment and allocation in the
construction industry of Oman, which the authors show with the help of the following figure:
21

Figure 9: Risk Allocation in the Risk Assessment Model
(Source: Yafai et al. 2014)
The model, as seen in the above figure, indicates that after identification of the risk
factors, they are analysed under various categories like Financial, Contractual,
Environmental, Resources, Design or Cultural. Post classification of the risks and analysis of
the intensity of the same (very high, high, moderate, low or very low) the nature and extent of
allocations of the risks to various stakeholders are analysed.
2.5.1.3 Risk allocation in PPP Projects
Li, Akintoye and Hardcastle (2001), in their paper, venturing in the construction
projects carried out in Public Private Partnerships, proposes a three-tier classification of risk
factors, which are as followed:
Macro- Ecological, Political, Economic, Natural, Social and Environmental
22

Meso- Project engineering risks
Micro- Soft or low intensity risks
In their model, the risks arising out of the public and the private sector collaboration
are analysed and their costs are estimated by the private sector, which are then submitted in
the tenders to the public sector. Depending on the costs of risks, proposed by the private
sector, the public sector either accepts the proposal or goes into negotiation with the private
sectors. This in turn leads to the decision of the public and the private sectors, regarding
accepting, allocating, sharing or retaining the risks and their consequences. The process of
risk allocation, as per the concerned model can be diagrammatically shown as follows:
Figure 10: Risk Analysis and Allocation of Risk in PPP Construction Projects
(Source: Li, Akintoye and Hardcastle 2001)
2.5.2 Problems in existing Risk Allocation Methods
There are various other models and procedures of risk allocation apart from the
previous three models which are discussed in the above section. However, there are several
flaws in the existing risk allocation methods, especially in the contemporary construction
industry, which, often leads to disputes, cost overrun, delays, quality issues and tensions in
the construction industry very frequently (Dubois and Gadde 2002). These issues, with
23

reference to the existing literatures and scholarly evidences are discussed in the concerned
section of the literature review:
2.5.2.1 Mistrusts and Disputes
As per the assertions of Chalker and Loosemore (2016), contracts in the construction
industry in Australia, the major contractual methods for avoidance of any kind of disputes is
that of fair allocation of risks among the contracting parties in the industry. However, the
study conducted by Chan et al. (2011), indicates that the contractual risk misallocation acts as
one of the leading factors creating major disputes in the construction across the globe as a
whole and in the USA, in particular.
2.5.2.2 Claims and Tensions
The research finding of Cheung et al. (2014), on that of the construction industry,
indicates that in this industry, as the different participants try to consistently shift their risks
to other parties, this in turn, leads to more claims and disputes, which in turn results in
involvement of more lawyers and legal procedures, thereby affecting costs, quality, potentials
and time of the construction projects.
2.5.2.3 Increase in costs
According to Baloi and Price (2003), one of the most obvious fallouts of
misallocation of risks in the construction industry, across the world, which leads to higher
disputes, claims, legal activities and delays, automatically raises the costs of the construction
projects, which are accrued to both the demand and the supply side parties and also affect the
performance of the concerned projects, thereby making this one of the significant issues
underlying the risk allocation procedures in the construction industry.
2.6. Optimal Risk Allocation
The above fallouts of unfair risk allocation and their possible impacts on the different
stakeholders of the industry indicates towards the need for optimal allocation of risks, such
that the welfare of each of the stakeholders are maximised and the costs and disputes in the
industry is minimised as a whole.
24

2.6.1 Definition and Implications
The term “Optimal Risk Allocation” has been defined by various scholars from
various perspectives. As per Chen, Yan and Chen (2017), Risk allocation possess a major
challenge in PPP projects
a. It is the most important feature for managing projects efficiently
b. Reduces the cost
c. Can assume the same at the lowest cost
Ke, Wang and Chan (2011), in this context, argue that optimal allocation of risks does
not imply passing of risks from one party to another and is more of seeking the ways to
minimize the costs arising out of risks in the project as a whole. Several rules, in this aspect,
are found to be suggested by Ng and Loosemore (2007), which are as follows:
As per the authors, the party receiving the risks should be:
a. Fully aware of the same
b. Should be capable enough to manage the risk most efficiently
c. The party the resources with them to deal with consequences
d. Desires to take the risks
e. Has sufficient incentives to take the risks
2.6.2 Factors for optimal allocation of risk
i. Communication and Negotiation- As per the assertions of the authors as the construction
industry, in general, consists of many stakeholders, strong communication channels among
them can help in effective negotiations among the parties, thereby facilitating efficient risk
management and allocation, by facilitating free flow of information and optimum decision-
making for conducting the projects.
ii. Trust- Imbeah and Guikema (2009), rightly points out that for any positive and effective
collaboration, trust is a primary component and there also exist significant positive
relationship between the trust among the different parties and the optimal allocation of risks
among them, especially in the construction industry, which in turn can help in cost reduction
and smooth operations.
iii. Risk aversion- In the construction industry, the owners are mainly risk averse or risk
neutral people while the contractors are the risk takers. According to Froud (2003), in such a
scenario often the risk allocation takes place by aversion of risks, which in turn leads to
25

transfer of the same to the weakest ones, which in turn poses as significant hurdle for optimal
allocation of risks in the concerned industry.
iv. Perceptions- The construction industry, generally being a multi-player setup, with each
interest group having their own set of aims, interests and objectives, which in turn leads to
different perceptions of risks by different parties and their capabilities to manage and tackle
the risks (Wang, Zou and Li 2016). The perceptions regarding the costs of risks also vary
across different stakeholders and thus the perceptions regarding risks play a crucial role in the
optimal allocation of risks among the stakeholders, especially in the construction industry.
2.7 Literature Gap
As can be seen from the above discussion of the existing literatures, the construction
industry, consisting of huge diversifications in activities and stakeholders, are subjected to
different types of risks, for which it is essential to have proper risk management framework
with the companies. The literatures can be seen to be discussion in details, the types of risks,
risk management processes, aspects of risk allocation, issues in the same, optimality in
allocation of risks and the components of optimal risk allocation in the construction industry
as a whole. However, not substantial literary or scholarly evidences can be seen to be existing
in the aspects of the building construction industry in specific, especially in the United
Kingdom as most of the literatures can be seen to be generic. The concerned research tries to
address these particular gaps found in the literatures, thereby studying the aspects of
optimization of allocation of different types of risks arising specifically in the building
construction industry, in the business framework of the United Kingdom.
26

Chapter 3: RESEARCH METHODOLOGY
3.1 Introduction
Methodology used to carry out the present research is highlighted in this chapter. The chapter
starts with defining the research problem. Research design process followed in the present
chapter is detailed next. We follow this us with the research approach, purpose and
methodology used to investigate optimization of risk allocation in construction projects. The
objective of the present research and research questions used to evaluate optimisation of risk
allocation is presented later. Sampling technique along with statistical tests used to assess the
suitability of optimization techniques is also presented.
3.2 Problem Statement
One of the primary objectives of a construction project is to complete the project within the
given time frame without escalation of cost. Stakeholders in a construction project thus
estimate budget of a construction project prior to starting of the venture. A construction
project is a trade-off between time and cost. The trade-off has influenced projects to transfer
the burden of costs to other members of the firm like contractors and designers in order to
escape the situation (Al Haj and El-Sayegh 2015).
Risks in the construction industry have been identified as due to unavailability of funds,
delays in construction, financial and contractual delays (Jarkas and Haupt 2015). Financial
and technical risks are the most frequent of the risks in construction projects. While financial
risks arise out of market dynamics (Antón, Rodríguez and López 2011), technical risks arise
due to shortage of construction materials as well as skilled labour (Durdyev et al., 2017).
According to Iqbal et al., (2015) risks in construction projects is negatively affected by time,
quality of product and finance. Under such circumstances the industry tries to shift major
shares of the projected risks from their shoulders to other parties (Ng and Loosemore 2007).
Thus risk allocation becomes essential since parties have to bear the consequences of the
risks (Loosemore and McCarthy 2008). Risks in the industry are thus distributed through
either of contract or through risk assessment.
Construction industry tends to optimise the risk allocation through various means.
Communication and negotiation is an essential technique in optimisation. Risk aversion by
27

contractors is based on his evaluation of the upside and downside uncertainties of the
construction project (Kim and Reinschmidt 2010).
Researchers argue optimisation process of risk allocation in the industry. The present work is
a study to investigate the optimal risk allocation techniques being supported by professionals.
3.3 Research Design
Framework for collection of data and its analysis is provided by research design (Bryman
2016). A perspective on how the research questions would be answered is presented in
research design. The present section in addition explains the research approach, purpose,
methodology for conducting the present research.
3.3.1 Research Approach
A deductive research approach has been used in order to derive information on optimization
of risk allocation in construction projects. Questionnaire has been developed based on
previous research done by Yafai et al. (2014), Iqbal et al., (2015) on risks – optimization and
allocation in construction projects.
3.3.2 Research Purpose
The research critically examines the optimization of risk allocation in construction projects.
Thus the research is explanatory in nature since it investigates the suitability of optimization
techniques in risk allocation in construction projects. Further, the research is descriptive
since it provides an understanding of the participant’s perception into risk optimisation in the
construction industry.
3.3.3 Research Methodology
Quantitative research methodology is used to investigate optimization of risk allocation in
construction projects. Quantitative research methodology uses numeric data analysis of which
is easily understandable. The numerical data is collected through the distribution of survey
questionnaire (Saunders et al., 2009).
3.4 Research Objectives
The following research study has following research objectives-
1. To provide a review on how risks are allocated and optimized in construction projects
2. To identify the importance of risk optimization in determining project success
28

3. To propose a pathway through which construction project can manage risk and create
balance between project success as well as stakeholder’s standpoints;
3.5 Research Questions
The research questions provide answers to the research objectives. Thus the research
questions are formulated as-
1. How are risks identified in a construction project?
2. How are risks allocated in a construction project?
3. How can risks be optimized in a construction project?
4. Does risks optimization lead to the success of a project?
5. What are the problems with sub-optimal risk optimization?
6. What are the hurdles to optimal risk management in the construction industry?
3.6 Data Collection Questionnaire
Survey questionnaire was designed to collect information regarding the effectivity of
optimisation techniques in risk allocation in construction projects. After the questions were
developed were developed in word, they were circulated to two professionals from the
construction industry. This was done to check the reliability of the questionnaires. Feedback
from the professionals was used to make adjustments to the questionnaire.
The survey questionnaire related to the testing of the effectivity of the optimization
techniques in risk allocation. A five-point scale was used to test the effectiveness of the
optimization techniques. The scale was designed with score 1 being least effective and 5
being most effective.
3.7 Research Assumptions
For the research the following assumptions have been considered:
 The responses to the survey questionnaire are personal opinions of the professionals.
 Professionals are in knowledge of optimisation techniques of risk allocation in
construction projects
 Professionals filed the survey questionnaire without any bias.
29

3.8 Target Population and Sampling methods
Industry professionals involved in construction projects were target population for the
research. Convenience sampling was used to select industry professionals. The sampling
procedure used is a non-probability sampling process. Non-probability sampling is used since
they provide easy access to professionals in knowhow of the subject.
30

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