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Weekly Updates1. BACK GROUND
Every human endeavor involves risk (Dey and Ogunlana, 2004; Poh and Tah, 2006). The success or failure therefore of any venture depends crucially on how we deal with it (Dey, 2001). The construction industry is more prone to risk and uncertainty than most other industries (Flanagan and Norman, 1993; Kim and Bajaj, 2000; Tah and Car, 2000), the element of uncertainty having to do with its inherent characteristics (Hayes et al., 1986; Bunni, 1997; Kangari and Riggs, 1989; Bing et al., 1999). But these risks are not always dealt with properly by the industry (Thomson and Perry, 1992; Mills, 2001).
According to Mills (2001), the productivity, performance, quality and cost of the project are affected by the risk. Edward and Bowen (1998) identified risk management as an important tool to cope with construction risks and to overcome above problems of a project. Dey (2002) also shows that there are many examples of non-achievement of time, cost and quality of projects due to the absence of risk management techniques in project management. Therefore, the success parameters of a construction project, namely, the timely completion, staying within the specified budget, and achieving requisite performance would depend upon the capability of each party in risk management. Baker et al. (1999a) argued that risk management is also useful in maximizing profits. The construction industry however has been very slow in moving towards understanding the benefits of risk management (Flanagan and Norman, 1993; Raftery, 1994; and Ward et al., 1999).
The Road Development Authority (RDA) of Sri Lanka, due to the ever-increasing traffic volume, is planning for the future development of a national highway network (RDA, 2006). Road projects however often confront many uncertainties due to factors such as the presence of interest groups, resource availability, the physical, economic and political environments, statutory regulations, etc. According to Wang and Chou (2003), such risks have a significant effect on the outcome of a road construction process.
Proper risk allocation in construction contracts will reduce the impacts of adverse conditions, and increase efficiency and effectiveness in management (Barnes, 1983; Abrahamson, 1984; Thompson and Perry, 1992; McCallum, 2000; Rahman and Kumaraswamy, 2002). Risk allocation upon risk handling of road projects in Sri Lanka has not been satisfactorily established because of different interpretations of risk allocation between owners and contractors. This research highlights the significance of understanding proper risk allocation between contractual parties in Sri Lankan road projects. It aims at assisting Sri Lankan road contractors and employers to a) identify the risk sources inherent in road projects, b) understand their risk responsibilities, and c) improve their risk handling strategies so that they would optimize the scarce resources and enhance the socio-economic value of Sri Lankan road projects. Section 2 of this paper discusses the literature pertaining to risk management in construction highlighting risk identification, risk allocation and risk handling. Section 3 gives the research methodology followed by results in section 4. Section 5 concludes the paper with a discussion on risk handling techniques to be followed in road projects.
2. THE LITERATURE ON RISK MANAGEMENT IN CONSTRUCTION
Bufaied (1987 cited in Akintoye and Macleod, 1997) has described risk in relation to construction as "a variable in the process of a construction project whose variation results in uncertainty as to the final cost, duration and quality of the project". According to Dey (2001), such variation is due to the absence of risk management techniques in project management. Hence, risk management, as defined by Toakley (1989 cited in Uher and Toakley, 1999) describes a procedure which controls the level of risk and mitigates its effects. A number of scholars have come up with definitions of risk management (Boehm, 1991; Edwards, 1995; Jaafari et al., 1995; Kerzner, 2001; Chapman and Ward, 1997; Edwards and Bowen, 1998; Hastak and Shaked, 2000; Lyons and Skitmore, 2004; Project Risk Management Handbook, 2003; Gray and Larson, 2005). The proposed definitions divide the risk management process into a number of steps which varies from three steps to more. However, the definitions are consistent in recognizing risk identification, risk analysis, and risk handling/ risk response as the key steps of the risk management process. Only the important elements of this procedure are discussed in terms of their relevance to the stipulated objectives of this research.
2.1. Risk identification and classification
Hayes et al. (1986), Williams (1995), and Godfrey (1996) have seen risk identification as the first important step in the risk management process. Dawood (1998) has shown that systematic risk management enables the early detection of risks. This eliminates the need for contingency plans to cover almost every eventuality. Risk identification involves identifying the source and type of risks. According to Flanagan and Norman (1993), an identified risk is no longer a risk but a management problem. It has also been pointed out that a bad definition of a risk may precipitate other risks. Therefore, obtaining a clear view of the risk event is the first step when focusing on the sources of risk and their potential effects.
Classification of risks entails identifying the type, consequence and impact of risk. Wiguna and Scott (2006) have derived a risk hierarchy under four risk categories: external and site condition risks, economic and financial risks, technical and contractual risks, and managerial risks. This classification of risks adopted in this study. According to Bunni (1997), when a risk has been identified, assessed and analyzed, it must be allocated to various parties in order to keep it under control and to prevent the occurrence of harmful consequences.
2.2. Risk allocation
Andi (2006) has argued that "construction risks, can hardly ever be eliminated. They can merely be transferred or shared from one party to another through contract clauses". This is supported by Mak and Picken (2000) who emphasize the fact that contractors should be ready to accept a certain level of risk due to unforeseen costs they incur during construction and that risk is also an issue for clients. Such allocation of risk becomes part of the risk management process.
Thompson and Perry (1992) suggest that a carefully drawn up contract will ensure the right allocation of responsibilities in the same way as the procedure which determines the type of contract and the tendering procedure for a project. It will define the role of each constituent in the contract, such as the contract agreement, conditions of contract, specifications, preamble notes, bills of quantities and drawings, etc., which determine the allocation of risks. Although risks can be transferred beyond the limits of contract clauses that can only be with the concurrence of both parties as seen in the study by Wang and Chou (2003).
A party to whom a risk is allocated is considered to have the "ownership of risk," which according to Uff (1995) and Godfrey (1996) has several meanings: a) having a stake in the benefit or harm that may arise from the activity that leads to the risk; b) responsibility for the risk; c) accountability for the control of risk; and d) financial responsibility for the whole or part of the harm arising from the risk should it materialize. Kartam and Kartam (2001) have argued that all the risks should rightfully reside with the owner and transfer to another party should entail fair compensation. However, the common understanding on risk allocation has it that the receiving party has both the competence and expertise to fairly assess the risk and to control or minimize it (Hartman, 1996; Fisk, 1997; Godfrey, 1996; Perry and Hayes, 1985).
2.3. Risk handling/risk response
Risk handling by lessening their impact is a critical component of risk management. Managers need to realize the contents and effects of all alternatives before making decisions about an appropriate strategy for risk handling (Wang and Chou, 2003). Risk handling is the choice of a proper strategy to reduce the negative impact of the risk (Miller and Lessard, 2001). It is defined as the first step in risk control by Baker et al. (1999a). But Kim and Bajaj (2000) define risk handling/response as the way risk issues are dealt with. According to Flanagan and Norman (1993), risk response refers to how the risk should be managed either by transferring it to another party or by retaining it. Further, risk handling principles are classified mainly into four categories, i.e. risk retention, risk reduction, risk transfer and risk avoidance (Carter and Doherty, 1974; Flanagan and Norman, 1993; Raftery, 1994; Baker et al., 1999b; Dey, 2001; Wang and Chou, 2003). Wang and Chou (2003) see risk handling strategies as consisting of one, or a combination, of the above methods. Studies have proved the validity of various strategies chosen on the basis of individual projects. However, the study by Fan et al. (2008) has established that the risk-handling decisions of a project are determined by project characteristics (e.g. project size, slack, unit prevention cost, risk situation, etc.).
3. METHODOLOGY
The research adopted the Multiple Case Studies approach. According to Yin (1994), multiple case studies validate results through replication as the approach uses different cases. Further Yin stresses that the criteria for selecting cases is a matter of discretion and judgment, convenience, access and to be those which are subjective for purpose of the research. Therefore this research focused on two mega foreign-funded road projects which were near completion to avoid complexities which may arise in evaluating different types of road projects simultaneously. Projects which adopt traditional procurement method with ad-measurement were selected as it is the most widely used procurement method used in Sri Lanka. The cases selected on the basis of having a project duration of about twenty four months or more, as researchers believe that a longer period is necessary to get risk related information. The Table 1 gives the details of the two cases.
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