The increasing pace of change, customer demands and market globalization all put risk management high on the agenda for forward thinking companies. Risks cause cost overrun and schedule delay in many projects. The effectiveness of risk management becomes an important issue in project management. To make risk management more efficient and effective, all parties must understand risk responsibilities, risk event conditions, risk preference, and risk management capabilities (Wehrung et al. 1988; Al-Bahar and Crandall 1990)
Different parties involved in a construction project face a variety of uncertain factors. These factors can be compiled under the category of risk. Making decisions on the basis of assumptions, expectations, estimates and forecasts of future events involves taking risks. Risk and uncertainty characterize situations where the actual outcome for a particular event or activity is likely to deviate from the estimate or forecast value (Raftery 1994).
The definition of risk management varies; risk management is generally defined as, ‘A formal orderly process for systematically identifying, analysing, and responding to risk events throughout the life of a project to obtain the optimum or acceptable degree of risk elimination or control’ (Al-Bahar & Crandall 1990).
The objective of my research is to present the perception of typical Chinese contractor towards construction risk. The result of surveys should further clarify the current perception of contractors regarding current construction circumstance in the industry.
The data and information will be collected from published statistics, individual interviews and questionnaires, and the data will be used to compare with previous published surveys. The purpose of this comparison is to identify perception and trends in construction risk management. A basic understanding of current attitudes and trends therefore will be indicated. Then I will adopt some appropriate case to enhance my understanding of my view point.
The following proposal presents the ‘What’ and ‘How’ of my study, using an integrated approach to study risk and its management in Chinese construction industry.
Brief introduction of Chinese construction industry
China’s economy has shown remarkable growth over the past several years and many foreign economists predict a healthy growth in the near future. According to the Chinese Statistical Yearbook 2002, China’s construction industry achieved 646.2 billion yuan in total output value in 2001, accounting for 6.7 percent of the nation’s gross domestic product (GDP). China’s construction industry realized 704.7 billion yuan in total output value in 2002 — an increase of 10.54 percent from the previous year’s 637.5 billion yuan — accounting for 6.9 percent of the national GDP.
Construction enterprises reached 45,893 by the end of 2001, employing 21,106,600 people and generating 1,536.156 billion yuan in output value and 402.357 billion yuan in added value. Areas under construction totaled 1,883,286,800 square meters; completed areas covered 976.99 million square meters. Profits totaled 29.439 billion yuan in the year, with taxes at 49.903 billion yuan.
Of the enterprises, 44,997 were Chinese with 20,986,800 staff members. The companies reaped 1,518.595 billion yuan in output value in 2001 and 398.022 billion yuan in added value. Areas under construction numbered 1,874,480,800 square meters and completed areas completed covered 972.532,300 square meters. Profits reached 28.83 billion yuan, with taxes at 49.392 billion yuan. (China Statistical Yearbook, 2002)
Recent trends of risk management in Chinese construction industry
For years, the Chinese construction industry has had a very poor reputation for coping with risk, with many projects failing to meet deadlines and cost targets. This can be traced to many causes as Lu mentioned, including: Technical, quality or performance reasons, such as employment of inexperienced designers, changes to the technology used or to industry standards during the project.
Organizational problems, such as cost, time and scope objectives that are internally inconsistent, lack of prioritization of projects, inadequacy or interruption of funding, and resource conflicts with other projects in the organization. External problems, such as shifting legal or regulatory environment, poor geological conditions and weather, force majeure. Project management, such as poor allocation of time and resources, inadequate quality of project plan, and poor use of project management disciplines. (Lu 2003)
Risk management is still new to China; it was introduced and applied in construction industry for a relative short period. Survey showed that Chinese contractors are often responsible for most risk factors, meanwhile, the use of risk analysis techniques for managing and controlling risk are generally low among the Chinese construction industry. Basically, most contractors still resort to the subjective judgment and practice experience for perceiving and managing risks. However, according to Chinese Statistical Yearbook 2004, situation was improving. During the Tenth Five-Year Plan, China’s construction industry has so far enjoyed a good opportunity for development, more and more parties involved in the construction projects raised their perception of risk and the attitude towards risk management improved. (China Statistical Yearbook, 2004)
The literature review in this part is mainly about the identification of risk resources, classification of risk, perception of risk and basic theory of risk management as well.
Sources of risk
There are many resources of risk that an organization must take into account before a decision is made. It is therefore important that these sources of risk are identified allowing the necessary analysis and response to take place. According to Merna and Smith, sources of risk to business from projects including as follows: political, environmental, planning, market, economic, financial, natural, project, technical, regulatory, human, criminal, safety, legal. (Merna and Smith 1996). A source of risk is any factor that can affect project or business performance, and risk arises when this is both uncertain and significance in its impact on project or business performance.
Classification of risk
It is helpful to try to categorize risk associated with projects both as a guide to identification and to facilitate the selection of the most appropriate risk management strategy. Merna and smith proposed one method to separate the more general risks which might influence a project but may be outside the control of elements; these are referred to as global and elemental risks.
Global risks originate from sources external to the project environment. They are often predictable but not always controllable. Global risks can be subdivided into four sections: political, legal, commercial and environmental risk. Elemental risks are those risks associated with elements of the project, namely implementation risks and operation risks, and for some projects there will be financial risks and revenue risks. These risks are more likely to be controllable or manageable by project parties. (Smith 2003)
Perceptions of risk
Different people will respond to seemingly similar risky situation in very different ways. Risk perception has a crucial influence on risk taking behavior. The perceived importance attached to decisions influences team behavior and the consequent implementation methods. Subjectivity, according to Merna, is a key factor in assessing risk. Whether a problem is perceived in terms of potential gains or losses will not be assessed as a simple mathematical calculation of the problem, but as a subjective fear, often linked to consequences of outcomes. Furthermore, he stated that risks are perceived by different stakeholders at different business level.
Risk management process
In construction projects each of the three primary targets of cost, time and quality is likely to be subject to risks. In terms of project implementation, managers need to be able to undertake or propose action which reduce or eliminate the effects of risks. To achieve this aim, a suggested systematic approach to the management of risk is followed:
*Risk Identification: To identify the risk resource;
*Risk Analysis: To quantify the effects;
*Risk Response: To develop management response to risk
In order to collect data and information for the research and examine the main questions raised, the following methodology will be possibly employed:
Since direct observation is not very accessible in construction industry in China, secondary analysis is more preferable. Secondary analysis is the reanalysis of data that was originally compiled by another researcher for other purposes than the one the present researcher intends to use it for. The sources that I would use include archives, newspaper, and magazine articles. I will try to choose the sources which are more objective. I will adopt appropriate methods to find the useful data and information for my research on risk management.
Questionnaires are an inexpensive way to gather data from a potentially large number of respondents. Often they are the only feasible way to reach a number of reviewers large enough to allow statistically analysis of the results. For my study, the questionnaire is designed to collect data. The data will be compared with data collected from a similar survey conducted in 1979 by the American Society of Civil Engineers (ASCE). The purpose of this comparison is to identify ant trends in construction risk that will facilitate risk management.
The reasons for me to choose questionnaire as research method as follows: Firstly, a Questionnaire can save resources and money. Although preparation may be costly, any data collection scheme will have similar preparation expenses. The administration cost per person of a questionnaire can be as low as postage and a few photocopies. Time is also an important resource that questionnaires can maximize. Secondly, Questionnaires are easy to administer confidentially. Thirdly, in studies that have resources to pursue other data collection strategies, questionnaires can be a useful confirmation tools. Thus, questionnaires are versatile, allowing the collection of both subjective and objective data through the use of open or closed format questions. Modern computers have only made the task of collecting and extracting valuable material more efficient.
Interviews will enable me to do most of the qualitative part of my research, and the information gained here is usually more realistic. I plan to interview some engineers, some project management team and some experienced project managers as well. In addition, Individual interviews by a way of structured questionnaire will also be used to collect information about the risk management perception. The interview is especially important for some proposed examining questions. I will also attempt to interview some professional journal editors relating to construction industry.
Case study research is the most common qualitative method used in risk management. As Yin (2002) defined, the scope of a case study as follows: A case study is an empirical inquiry that:
*investigates a contemporary phenomenon within its real-life context,
*especially when the boundaries between phenomenon and context are not clearly evident.
For my research on risk management, I will choose some recent cases which relating to risk management as a way of identifying the perception and trends of risk management in construction industry in China. I will select both success and failing cases in Chinese construction industry.
Proposed research Timetable
I will spend about 4 months for my studies. I plan to spend the first month developing my proposal and methodology and completing the literature review. During this time, I will also try to obtain relevant published data and information. Then I plan to spend about one month in China obtaining statistics, doing questionnaires and interviews. I will spend the next two months in China so as to do some intensive fieldwork, and some follow-up jobs as well.
May 2005 – June 2005
*Develop proposal and methodology and complete the literature review
*Obtain relevant published statistics
June 2005 – July 2005
*Intensive fieldwork in China
*Analysis the statistics and data obtained
July 2005 – August 2005
*Follow-up questionnaires and interviews and fieldwork in China
August 2005 – September 2005
*Mainly work on the thesis
(Details see attached Gantt chart)
Al-Bahar, J. F., and Crandall, K. C. (1990) Systematic risk management approach for construction projects. Journal of Construction Engineering Management, 116~3, 533-546.
China Statistical Yearbook, 2002, China Statistics Press.
China Statistical Yearbook 2004, China Statistics Press.
Lu, Y. J. (2003) Risk Management for Large-scale Infrastructure Projects in China, 11
Merna, A. and Smith, N. J. (1996) Projects procured by privately financial concession contracts, vol.1. Asia Law and Practice, Hong Kong.
Raftery, J. (1994) Risk Analysis in Project Management. E & FN Spon, London.
Smith, N. J. (2003) Appraisal, Risk and Uncertainty. 6, 42-43
Wehrung, D. A., Lee, K., Tse, D. K., and Vertinsky, I. B. (1988). Adjusting risky situations: A theoretical framework and empirical test. Journal of Risk Uncertainty, 2, 189-212.
Yin, R. K. (2002) Case Study Research, Design and Methods, 3rd ed. Newbury Park, Sage Publications.