When a risk event is identified and assessed, a decision must be made concerning which
response is appropriate for the specific event. Risk responses are chosen based on the
situation. Risk response can be considered in terms of elimination, mitigation, transfer,
sharing and retention.
a) Risk Elimination
Risk event can be avoided if a contractor is not placing a bid or the owner not
proceeding with project funding. It is perhaps more likely that risk identification and
analysis will indicate the need for redesign, more detailed design, further site
investigation, different packaging of the work content, alternative contract strategies or
different methods of the construction in order to reduce or avoid risks (Smith, 2003).
Risk elimination or avoidance is synonymous with refusal to accept risks. There are a
number of ways through which the risks can be eliminated, such as submitting a very
high bid, placing conditions on the bid, pre-contract negotiations as to which party takes
certain risks, and not bidding on the high-risk portion of the contract (Project
Management Institute, 2004). This strategy is to cease the possibility of the risk to
occur, or completely eliminate the possibility of the risk.
The easiest way to eliminate a risk is to remove it from the project deliverables. Without
the deliverable, the risk will not exist. However, taking away risks signifies taking away
37 or avoid the risks by designing around them. This strategy works by designing the
project so that the risk cannot happen. For instance, during the designing stage to build
an extra storey for a building, it was discovered that the local authority will not approve
the plan as it is against the law. Building the extra storey for the building could result in
dismantling the storey, incurring extra costs and time. This is clearly not an acceptable
risk therefore the strategy is to eliminate the risk.
b) Risk Mitigation
Certain risks that are above the risk tolerance level are not acceptable risks and
something has to be done. Risk mitigation is a strategy to reduce the probability or the
impact of these unacceptable risks to a point where the risk’s severity falls below the
unacceptable risk tolerance level (Project Management Institute, 2004).
There are basically two strategies for mitigating risk namely: (a) reduce the likelihood
that the event will occur and or, (b) reduce the impact that the adverse event would have
on the project (Gray & Larson, 2003). The risk management team will develop and
execute a plan to reduce the probability and or impact of an adverse risk event on the
project.
One of the ways to reduce the risk exposure is to share the risks with other parties
(Flanagan & Norman, 1993). For instance, the general contractor will attempt to reduce
his exposure to pay liquidated damages for late completion by imposing liquidated
damages clauses in domestic sub-contract agreements.
Risk can be reduced by educating and training the staff to be alert to potential risks and
38 is prudent to apply adequate quality management to project and to have systems
implemented to ensure consistency. For example, to install sprinkler system even
though the regulation might not require the sprinklers to reduce the likelihood of loss
from fire damage.
Hence, the risk mitigation strategy involves spending some money from the contingency
budget, which was expected value of the risk before mitigation. Certain amount of
money is allocated into the project’s operating budget to carry out the mitigation
strategy. As probability or impact is reduced, the expected value of the risk is as well
reduced, and the contingency budget is to be reduced accordingly (Newell & Grashina,
2003).
c) Risk Transfer
Passing risk to another party is common; this transfer does not change risk. Risk transfer
does not reduce the criticality of the risk; it just removes it to another party. If the risk
occurs, the consequences of risk are carried by the party other than the client. The client
is expected to pay the premium for this privilege (Gray & Larson, 2003).
Risk transfer can take two basic forms, either the property or activity responsible for the
risk may be transferred to a subcontractor to work on a hazardous process or the
property or activity may be retained thus the financial risk is transferred through
insurance (Thompson & Perry, 1992).
Risk can be transferred from an owner to a contractor through a fixed price contract.
The contractor is to bear any risk event so a monetary risk factor is added to the contract
39 transferring the risk to the particular contractor. In a nutshell, if the risk does not occur,
the vendor makes extra money. If risk is transferred this way, the impact of the risk
whether it happens or not have been paid or insured (Bajari & Tadelis, 2001).
Perhaps the most common form of risk transfer is by means of insurance which changes
an uncertainty exposure to a certain cost (Flanagan & Norman, 1993). In construction
industry, insurance cover is becoming more expensive (Edwards, 1995). For some
project, risk transfer to insurance is impractical because defining the risk event to an
insurance broker unfamiliar with the project is difficult and expensive. The low
probability and high severity of impact risk event can be easily defined and insured,
such as earthquake and force majeure.
Performance bonds, warranties, and guarantees are other financial instruments used to
transfer risk (Gray & Larson, 2003). Withholding retention money on interim payment
to the contractor is a way of covering residual risks that may arise. Retention sum is
held to ensure the contractor completes their work properly to cover the risk of loss
arising from the liquidation of the contractor. Performance bond is provided by an
insurance company or bank to ensure that the project will be completed in the event of
default by the contractor (Edwards, 1995).
d) Risk Sharing
Risk sharing allocates proportions of risk to different parties. Sharing risk has drawn
more attention recently as a tool to reduce risk and cutting project cost as well.
Partnering between owner and contractors has prompted the development of continuous
40 implementation (Gray & Larson, 2003). If the risk events occur, the consequences are
shared by both parties who enter into the partnership contract.
Risk can be shared with the insurance company. The four forms of risk sharing are co-
insurance, re-insurance, excess or deductible, and first loss cover (Hertz, 1964). A
captive insurance company is a privately owned insurance company directly related to
risk management, which is created and owned by an organization; it insures all the risks
encountered by its parent organization (Edwards, 1995).
e) Risk Retention
If a risk significance level is low enough, nothing will be done on the risk unless it
occurs. This signifies retention or acceptance of that particular risk, where the
significance of the risk is lower than the risk tolerance level (Nocco & Stulz, 2006).
Retaining a risk does not signify that nothing will be done when the risk occurs; it
simply means that something will be done only when it occurs. Many of the project
risks will fall into this category, where the many insignificant risks are placed. Many of
these risks cost little to fix when they occur than it would cost to investigate and plan
for them. In some cases, the decision is made to retain the risk event either actively or
passively (Carter & Doherty, 1974; Aabo, et al., 2010). Active retention is a deliberate
management strategy after a conscious evaluation of the possible losses and costs of
alternative ways of handling risk. Passive retention occurs through abandon, ignorance
or absence of decision.
There are some risk events that cannot be transferred or reduced such as act of God.
41 The risk is retained by developing a contingency plan to implement if the risk
materializes (Gray & Larson, 2003).
A contingency plan is an alternative plan that will be used if a possible foreseen risk
event becomes a reality. This is a preventive action that will reduce or mitigate the
adverse impact of the risk events. The contingency plan contains a description of a risk;
any assumptions used to develop the plan, the probability of risk occurring, its impact,
and appropriate responses. The contingency plan should be conducted for the tasks on
the critical path of a schedule as risks on such tasks have an impact on the completion
date for the entire project (Oberlender, 1993).
2.6 Gap in the Knowledge
Generally, the quest for success in international construction has been one of the
important themes in the field of construction risk management. Different models and
tools have been proposed based on different assumptions. Their approaches to manage
risks are different and are due to certain contexts stemmed from their ideas. Since the
models and tools are based on different assumptions, it can be said that no one strategy
is perfect.
This study focuses on risk assessment where the identified risks are evaluated and
ranked to prioritize risks for management. Wang, Dulaimi and Aguria (2004) carried out
a detailed analysis of international construction risks and identified twenty-eight critical
risks associated with international construction projects in developing countries. Bing
and Tiong (1999) proposed a risk management model for international construction
42 analysis, and treatment). They then identified a set of twenty-five risk factors applicable
to international construction joint ventures.
Hastak and Shaked (2000) recommended an international construction risk assessment
model (ICRAM-1) which can assist the user in evaluating the potential risk involved in
expanding operations in an international market by analyzing risk at the macro (or
country environment), market and project levels. Hence, ICRAM-1 provides a
structured approach, designed to examine a specific project in a foreign country, to
evaluate the risk indicators involved in an international construction operation.
Previous researchers who studied the area of risk management for international
construction in various contexts mostly worked on the area of risk identification,
classification and assessment in order to develop strategies or responses toward the risks
encountered. They are contributing to the knowledge of international construction risk
management in the various scenarios of joint venture (Bing & Tiong, 1999; Shen, Wu,
& Ng, 2001), developing countries (Wang, et al., 2004), and foreign foray (Hastak &
Shaked, 2000; Han, et al., 2008; Bu-Qammaz et al., 2009). Despite the vast number of
articles on construction risk management, Taroun, Yang and Lowe (2011) concluded
from their critical review of the construction risk modeling and assessment literatures
published over the last 27 years that construction risk modeling is a developing and
ongoing process with no satisfactory theory or tool for assessing construction risk has
been developed or proposed.
One of the knowledge gaps is that “probability and impact values are neither constant
for each project nor for each company; instead, they depend on many factors related to
43 (Dikmen & Birgonul, 2006, p. 61). In that particular paper, the flowchart, which depicts
the factors that affect risk level in an international project, begins with a company’s
strength and weaknesses consisting of experience, availability of resources, capabilities,
and company strategy. Having ascertained the firm’s capabilities, the effect on ability to
manage various project risks can then be determined.
If a risk factor is within reasonable control of a company or transferable to other parties
through contract conditions, a lower risk rating may be assigned. Thus, the ability of a
company to manage risk should be considered during risk modeling (Dikmen, et al.,
2007b). Similarly, Keizera, Halman, and Song (2002) mentioned that the magnitude of
risk is determined not only by its likelihood and impact but also by a firm’s ability to
influence risk factors. These again suggest that the influence of firm’s capability is
crucial to be considered in risk assessment.
According to Dikmen and Birgonul (2006), any strategy used by the firm may reduce
the probability of occurrence of a risk event. “Strategy is defined as the determination of
the basic long-term goals and objectives of an enterprise, and the adoption of courses of
action and the allocation of resources necessary for carrying out these goals” (Chandler,
2003, p. 13). Since resources are part of strategies and capabilities, this research adopted
the term ‘firm’s capability(ies)’ throughout the thesis. It is hypothesized that there is
significant relationship between firm’s capabilities and risk significance values in
44
2.7 Summary of Chapter
This chapter begins with the background of the international construction and the
complexities of the entry decisions. There are four categories of entry decision and this
study focuses on the project selection decision. After reviewing the existing tools for
project selection decision, risk analysis or assessment tool is found suitable to cover the
breadth of the complexity and intricacy of international construction industry. Later, the
risk management is reviewed according to the three main steps. The review on risk
identification step revealed the measurement scale for the dependent variables involved
in the main study of this research. The previous researches concerning risk assessment
are also reviewed to derive the knowledge gap. Risk assessment methodologies are then
reviewed to justify the chosen method- structural equation modeling. The risk response
step is reviewed to introduce the generic risk response measures available. Finally, the
knowledge gap is recapped for further discussion in the following chapter. The
following chapter will reinforce the knowledge gap mentioned here and reveal the
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