Risk Definition and sources in Construction Industry

Risk Definition and sources in Construction Industry

Risk – Definition

Risk can be defined as an uncertain event or condition that, if it occurs, has a positive or a negative effect on a project objective. A risk has a cause and, if it occurs, a consequence (Office of project management process improvement, 2003)”. “Risk is part of every human endeavor. From the moment we get up in the morning, drive or take public transportation to get to school or to work until we get back into our beds ( and perhaps even afterwards ), we are exposed to risks of different degrees.

What makes the study of risks fascinating is that while some of this risk bearing may not be completely voluntary, we seek out some risks on our own (speeding on the highways or gambling, for instance) and enjoy them. In 1921, Frank Knight summarized the difference between risk and uncertainty as “uncertainty must be taken in a sense radically distinct from the familiar notion of Risk, from which it has never been properly separated. The essential fact is that “risk” means in some cases a quantity susceptible of measurement, while at other times it is something distinctly not of this character; and there are far reaching and crucial differences in the bearings of the phenomena depending on which of the two is really present and operating.

The Project Management Institute (1996) introduced a simple definition for risks as a discrete occurrence that may affect the project for better or worse. In order to emphasize the major objectives of survey on risks management actions, risk has been defined as the probability of occurrence of some uncertain, unpredictable and even undesirable events that would change the prospects for the profitability on a given investment (Kartam, 2001). Chicken and Posner (cited in Greene, 2001) provide their interpretation of what a risk constituents:

                                                   Risk = Hazard x Exposure

They defined hazard as “the way in which a thing or a situation can cause harm”, and exposure as “the extent to which the likely recipient of the harm can be influenced by the hazard”. Harm is taken to imply injury, damage, loss of performance and finance, whilst exposure imbues the notions of frequency and probability. Risks are the triple characteristic of any project decision in the situation of uncertainty. It can be defined as a trinity of risk event (A), risk probability (P) and function of risk losses (u):

                                                                 R= (A,P,u)

The risks event (A) is a random event which is connected with any project decision (Titarenko, 1997). Uncertainty is a situation in which a number of possibilities exist and which of them has occurred, or will occur, is unknown. Considering all risks are uncertain but not all uncertainty is risky (Yoe, 2000)”.

Causes of Risk

“There is little or no comprehensive study explaining the causes of risks among construction companies, moreover research covering the subject matter has tried to identify the symptoms rather than causes, a number of authors have attempted in their studies to ascertain the causes of threats in the construction industry, Kangari (cited in Rwelamila and Lobelo, 1997) ascribed the high threats to:

1. A highly fragmented industry.
2. Industry highly sensitive to economic cycles.
3. Fierce competition as result of an over-capacitated market.
4. Relative ease of entry.
5. Management problems.
6. Trading including:

a. Competitive quoting.

b. Outsize projects.

c. High gearing.

d. Resistance to change.

7. Accounting, where inconsistencies occur in the financial data generated for management.

8. Increase in project size.

9. Unfamiliarity with new geographic area.

10. Moving into new type of construction.

11. Change in key personnel.

Sources of Risks

According to (Estate Management Manual, 2001) sources of risks include:

1. Commercial risks.
2. Financial risks.
3. Legal risks.
4. Political risks.
5. Social risks.
6. Environmental risks.
7. Communications risks.
8. Geographical risks.
9. Geotechnical risks.
10. Construction risks.
11. Technological risks.
12. Operational risks.
13. Demand/product risks.
14. Management risks.

These sources of risks are related to project-specific and non-project-specific risks, as both types of risk need to be considered when identifying the risks in a project or a process.

The division of risks into source elements can be difficult. It also creates the potential for increased personal subjectivity. It can also lead to the possibility of “double-counting” some risks by attributing the same risk to more than on source. This may, however, beneficial in understanding the relationships between risk sources and elements (Estate Management Manual, 2001)”.