Investigation of Risk Allocation Optimization in Construction Projects

This report investigates the optimization of risk allocation in construction projects, focusing on the construction industry's unique challenges due to project diversification and dynamic environments. It addresses the higher risks involved compared to other industries and emphasizes the importance of proper risk evaluation for minimization and increased profits. The research explores risk identification, allocation methods, and optimization techniques, aiming to provide insights into managing time, financial, health, safety, and quality risks. It reviews existing literature, proposes a research methodology involving primary and secondary data analysis, and highlights the significance of risk allocation and optimization for project success. The study seeks to identify barriers to optimal risk allocation and propose pathways to balance project success with stakeholder standpoints.

INVESTIGATION OF OPTIMIZATION OF RISK ALLOCATION IN CONSTRUCTION
PROJECTS

Abstract
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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
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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
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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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