literature review

1 INTRODUCTION

1.1 Background of Indian construction industry

1.2 Purpose of study

1.3 Scope of study

1.4 Main Aim and Objectives

1.4.1 Aim

1.4.2 Objectives

1.5 Chapter Description

2 LITERATURE REVIEW

2.1 Introduction

2.2 Indian construction procurement

2.3 Risk Management Process

2.3.1 Risk identification

2.3.2 Risk assessment

2.3.3 Risk Response and Mitigation

2.3.4 Risk Monitoring and Control

2.4 Types of risks

2.4.1 Resource Risks

2.4.2 Technical Risks

2.4.3 Site Risks

2.4.4 Planning and Selection Risks

2.4.5 Market Risks

2.4.6 Management Risks

2.4.7 Policy and Political Risks

2.4.8 Financial Risks

2.5 Impact of Risks

2.6 Summery

CHAPTER 2

LITERATURE REVIEW

2.1 Introduction

The construction industry in India in more complex and subjected to greater risk as compared

to any other business and thus it is important for the selection as well as implementation of

effective strategies of risk management in order for the project to be successful and thus

forms the core introductory principles of risk management (Risk Management Standards,

2002). The completion of construction projects within the projected time span has always

been the most challenging task for the construction companies and it is found that many

construction projects have been unsuccessful in the delivering the projects at time, cost and

quality which the clients and their consultants had perceived before the starting of the project

(Veeralli, 2008) and thus it is important for the management to efficiently design a plan of

action to achieve the goals and requirements.

Many construction management institutions have recently recognized the need to include risk

management as an integral and one of the most important element of project management

(Simon et al, 1997). Al-Bahar and Cradall (1990) have suggested using the project risk

management processes within four to five phases and these phases includes initiation,

identification, analysis, response planning and control and these processes can be applied in

general and also for specific project sizes and types. Flanagan and Norman (1993) has

emphasized two aspects of any construction project which comprises of; the process i.e. the

project phases and the organization i.e. the project actors. From the construction perspective,

the entire construction project consists of many sequential phases. Simon et al (1997)have

suggested PRAM as the most effective and comprehensive Project Risk Management (PRM)

processes in today’s environment and PRAM enjoys such a special importance because it is

the first highly comprehensive process which has been designed by extensive team

comprising of practitioners as well as academics. Project Management Institute (2000) had

presented Project Uncertainty Management (PUMA) as an integrated methodology based on

the hierarchically structure, flexible and generic PRM process which is developed keeping in

view the owners and the consultants assisting the owners

In India, the problem of selection of risk management strategy has been a great concern for

government and project financers and as well as those in private sector, because a

construction project usually needs an enormous number of people with extraordinary skills

and requires the organization of a broad variety of unlike, yet incorporated activities. Such

complexity is further compounded by the unique features of each project and many other

external uncertainties. The author found, there is a lack of literature that has focused on the

practices, results or progress of risk management methods for Indian construction projects.

This is one of the key motivations for the author to investigate the subject in Indian context

and produce data that currently is sparse.

Although in this context risk can be associated with the possibility of greater reward, it is the

necessary balance between risk exposure and risk tolerance that management seeks to meet

strategic goals (Olsen, 2004).

2.2 Risk/ Risk Management

Definition of risk

The word ‘risk’ is derived from a Latin term risicare, means ‘to dare’; clearly conveying the

message that risk is a choice rather than a fate. Risk is inherent in almost each construction

activity. The author Willett (1951) defined risk is the objective uncertainty as to the

occurrence of an undesirable event. It varies with uncertainty and not with the degree of

probability, “The greater probable of the actual loss from the average, the greater the degree

of uncertainty.” According to BS 6079 (British Standards Institution 1996) risk is the

uncertainty inherent in plans and possibility of something happening that can affect the

prospects project goals. Association of project management (2002) defines risk as a

combination or frequency of occurrence of a defined threat or opportunity and the magnitude

of that occurrence. Smith (2002) identified risk is adverse but an unknown by its nature can

have both positive and negative effects. A guide of project Management body of Knowledge

PMBOK GUIDE (2000) defines risk is an uncertain event or condition that, if it occurs, has a

positive or a negative effect on a project objective. Businessdictionary.com identifies risk as a

Probability of loss associated with the physical (construction) phase of a construction project.

These definitions suggested that the purpose of this study ‘risk’ is defined as something that

causes loss or negative influences and which were not foreseen in the project description. In

the context of construction industry, RISK is the probability of the suffering loss and the

impact that the loss has on the involved party.

According to Smith et al. (2006) all project risks can be divided into three main categories:

known risks, known unknowns and unknown unknowns. The difference between the

categories is the decreasing ability to predict or foresee the risks. Taking into account the

probability of the occurrence and the consequence for project objectives, those events that

have high probability and high impact are subject to risk management (Figure 2.1).

Figure 2.1 Classification of risk events

Source: (Smith et al. 2006)

Definition of risk management

Risk management is “a systematic way of looking at areas of risk and consciously

determining how each should be treated. It is a management tool which aims at identifying

sources of risk and uncertainty, determining their impact, and developing management

responses” (Uher, 2004). A guide of project Management body of Knowledge PMBOK

GUIDE (2000) defines risk management is a systematic process of identifying, analyzing,

and responding to project risk. It comprises maximizing the chance and consequences of

optimistic occasions and minimizing the chance and consequences of undesirable occasions

to project objectives. Chapman and ward (1995) clearly point out that as the project starts,

risk management needs to be an on-going process- risk analysis alone is not sufficient. Thus,

risk management is the art and science of planning, assessing, and handling future events to

ensure favourable outcomes. From the above definitions, it is identified that the Projects

sometimes overrun because of unforeseen events, this is because projects have their different

criteria’s and thus identifying the source of risk is critical for every construction projects.

Construction projects involve a great deal of time and capital, so effective risk management

skills are required if the projects are to be completed within he established time line to meet

cost limitations and quality requirements.

2.3 Risk Management Process

Risk management is a systematic process of identifying, assessing and responding to project

risk. The overall goal of the risk management process is to maximize the opportunities and

minimize the consequences of a risk event. A variety of risk management models with

different numbers of stages can be found in the literature. The international standard “Project

risk management – Application guidelines” (BS IEC 2001) offers a model with four steps:

risk identification, risk assessment, risk treatment, and risk review and monitoring.

PMBOK’s model (PMI 2000) is similar but divides risk assessment into two processes of

qualitative risk analysis and quantitative risk analysis. Baloi and Price (2003) include an

additional step of risk communication. Chapman and Ward (2003) present the SHAMPU

(Shape, Harness, and Manage Project Uncertainty) framework which involves nine stages:

define the project, focus the project, identify the issues, structure the issues, clarify

ownership, estimate variability, evaluate implication, harness the plans, and manage

implementation. Del Cano and de la Cruz (2002) propose an integrated methodology for

project risk management in large and complex construction projects. The model is divided

into four process phases: initiation, balancing, maintenance and learning. Each phase consists

of several stages, which, in turn, are divided into different activities. Despite the variety of

models, risk identification, assessment and response form the core of project risk

management. Therefore, a model consisting of these three stages is mostly used in

construction projects (see figure 2.2)

Figure 2.2 Three Stages Mostly Used In Construction Projects

Source: theconstructor.org, 2009

2.3.1 Risk identification

Risk identification is the first step of the risk management process. It is aimed at determining

potential risks, i.e. those that may affect the project. PMBOK (PMI 2000) suggests that as

many project stakeholders as possible should participate in the risk identification process.

There are a number of tools and techniques for identifying the project risks these are

brainstorming, expert opinion, structured interviews, questionnaires, checklists, historical

data, previous experience, testing and modeling, evaluation of other projects. Empirical

studies of risk management practice show that checklists and brainstorming are the most

usable techniques in risk identification. They also highlight that risk identification often relies

on individual judgments of the project participants. Similarly, veeravalli (2008) stated in her

thesis report that the risk identification is the initial step for risk management process. Risk

must be identified and stated clearly and unambiguously so that that project team can come to

agreement and move on to analysis and planning. The goal of the risk identification step is

mainly to create a list of the risks that the team will face in project. If risk management is

seen as part of the overall decision making process and the identification of risks is perhaps

the most important element of risk management , then this action must be taken early in a

project’s life. She also added that it is well known that many of the major decisions that have

the greatest impact on the project are made during its early feasibility and design

development stages. It is at this stage where changes can be made with the least disruption

and also that the information upon which decisions are made, is most likely to be incomplete

or inaccurate. Hence in order to ensure that the right decisions are made, all the important

risks must be identified and assessed at the earliest possible point in the projects life cycle.

Shen (1997) identified the most serious project delay risks and the effective actions for

managing these risks through a questionnaire survey. This thesis work revealed that methods

where knowledge workers experience and subjective judgment are used are the most effective

and important risk management action, and that methods using quantitative analytical

techniques have been rarely used due to limited understanding and experience.

In today’s competitive world it is very necessary to use the developed software’s to manage

and develop the projects, Dey (2000) published a case study to manage projects in fast track

in case of public sector organization in India. Using conventional tools and techniques of

project management, it is impossible to handle the problem of reducing the project duration

from normal period. This study proposed the use of coexisting engineering in managing

projects for radically reducing project duration. The phases of project are accomplished

concurrently/simultaneously instead of in series. The complexities that arise in managing

projects are tackled through restructuring project organization, improving management

commitment, strengthening project-planning activities, ensuring project quality, managing

project risk objectively and integrating project activities through management information

systems. These issues ensure completion of projects in fast track, but also improve project

effectiveness in terms of quality, cost effectiveness team building, etc; and in turn overall

productivity of project organization would improve.

Thompson and Perry, (1992) published a book stating that the purpose of risk analysis and

management is to help stakeholders avoid these failures. Risk analysis helps in estimating

potential impacts of risk and in making decisions regarding which risks to retain and which

risks transferring to other parties. Chapman and Ward (1997) stated that both quantitative and

qualitative techniques are available for risk analysis in India. The quantitative methods rely

on probability distribution of risks and may give more accurate results than the qualitative

methods, if the available data is strong and reliable. On the other hand, qualitative methods

depend on the personal judgment and past experiences of the analyst and the results may vary

from person to person. Hence the quantitative methods should be given precedence if both

choices are available.

Successful completion of the project is very vial thing in Indian construction. Rubin and

Seeling (1967) were the first to initiate success and failure method. They thoroughly studied

the structure of construction, and the findings from their study concluded that the wrong

choice of project manager, unplanned project termination, unplanned risk management and

unsupportive senior management were the main reasons for project failure.

Russell & Jaselskis (1992) and Abidali & Harris (1995) measured project success by using

financial ratios derived by statistical search through a number of plausible financial

indicators. Their research was based on investigating the impact of a project manager’s

experience on project’s success or failure. Technical performance was worn as a measure of

achievement. It was concluded that project manager’s previous experience had minimal

impact on the project’s success or failure. Belassi et al (1996) have done concurrent research

on time, cost and quality, and he found that they were basic criteria for that success of the

project. Further he deeply discussed in other articles on project success, such as that of

Skitmore (1997) and Shenhar & Levy (1997). Atkinson (1999) called these measures as the

‘iron triangle’. Similarly, the recent report by Iyer & Jha, (2006) focused on the project

management issues based on the time, cost and quality and stated that the fundamental focus

of project management has been to deliver projects on time, on budget and meet

specifications. However, many major projects still fail to meet these targets, especially on

cost and schedule. Owners and shareholders have always been concerned with fast-tracking

projects, cutting costs and building safer buildings. The means of achieving these goals are

not very clear to the industry. We occasionally read about successful projects that meet all of

these goals; nonetheless, stories about failed projects, cost and time overruns, and drawn out

court cases continue to dominate the headlines. Focusing on project management issues, a

projects success is measured in terms of its performance on schedule, cost, and quality.

Schedule and cost are still widely used as performance measures of a project. Hence, the

discussion on this paper is limited to schedule performance of commercial construction

projects. Apart from cost, there are many other factors that affect construction time.

International survey has been done by Pinto and Pinto (1991), Pinto and Slevin (1987) and

Morris and Hough (1987) on interpersonal relationship between the project team, based on

their findings on soft measures such as satisfaction levels and suggested that success

measures should also include psychosocial outcomes such as safety, litigation and others that

relate to interpersonal relationship within the project team and they also identified that

communication, environment events, community involvement, team member conflict, lack of

negotiation and arbitration, legal disputes, management inability to understand site people,

and stakeholders value were likely to be identified for measuring project success or failures

and warranted the need of including them along Cost, Time, Quality and Safety.

Leslie Edwards (1995) conducted the questionnaire survey to identify the risks in

construction industry, the research found that there are so many risks that might affect the

aims of an organization to achieve the goals, so it necessary to identify the risks in early

period of the project, so as a part of an organization, or a project, needs to be identified. The

aims are usually commercial, the maximization or maintenance of profit margins, dividends,

and share price. So for completion of the project on time it is vital to do risk analysis.

Peldschus, F (1986) carried out a thesis work on identification of risks in construction

projects, the researcher identifies that all potential risks are determined by experience of other

projects and the knowledge about the environment. On the basis of the project goals and, as

far as it exists, on the basis of the project structure plan all work packages are examined with

regard to potential risks. Consequences not directly related to the projects, such as the

reputation of the company, which could be damaged by project delay, or the customer needs,

have to be taken into account. The identification of risks is a creative process, in which

internal and external experts and decision-makers are involved. On the basis of empirically

established check lists or by means of creative methods such as brainstorming/ - writing

possible influences are assessed. The aim is to get a project-specific risk catalogue. It is

useful to produce risk hierarchies to ascertain the mutual influence.

In this context, it is interesting to mention a recent study by Maytorena et al. (2005) that

suggests that the role of experience in risk identification is less significant than is commonly

assumed. During the risk identification process the potential risks fall in the different groups.

There are several approaches to classifying project risks and risk sources. Risk identification

is the initial process for assessment and analysis of risk (see figure 2.3). It consists of risk

management steps, risk assessment is step to step process for successful completion of project

which consist of risk elimination, risk reduction, risk re-evaluation, risk assumption, risk

transfer.

Figure 2.3 Risk Management Steps

SOURCE: FICCI Conference, 2002

2.3.2 Risk assessment

During risk assessment, identified risks are evaluated and ranked. The goal is to priorities

risks for management. The research literature offers a large number of models that use both

qualitative and quantitative methods for assessment of project risks. Tah and Carr (2000)

develop a formal model for qualitative risk assessment based on fuzzy estimates of risk

components. Baccarini and Archer (2001) describe a methodology for risk ranking of

projects, which allows an effective and efficient allocation of the resources for the

management of project risks. The JRAP (Judgemental risk analysis process) model proposed

by Öztas and Ökmen (2005) is a pessimistic risk analysis methodology, which is effective in

uncertain conditions within construction projects. Zeng et al. (2007) propose a risk

assessment methodology based on fuzzy reasoning techniques and aimed at dealing with risks

in complex projects. A fuzzy system is also used by Motawa et al. (2006) to evaluate the risk

of change in construction projects. Poh and Tah (2006) have developed an integrated model

that takes into account both duration and cost risks and can be used for modeling risk impacts

that affect the project. Dikmen and Birgonul (2006) propose a methodology for both risk and

opportunity assessment of international projects.

Empirical research on risk assessment practice investigates the use of the different risk

assessment techniques in construction projects. A study by Baker et al. (1998) shows that the

construction companies in UK use both qualitative and quantitative techniques for assessing

the project risks, personal and corporate experience and engineering judgment are the most

successful qualitative techniques, while quantitative techniques include break-even analysis,

expected monetary value and scenario analysis. Several authors report rather opposite results

on the usage of quantitative techniques. The studies of risk management practice in Indian

construction industry show that the practitioners rely mostly on professional judgment,

intuition and experience (Akintoye and MacLeod 1997, Wood and Ellis 2003). A

questionnaire survey conducted by Tang et al. (2003) shows that qualitative analysis is the

most commonly used technique in the Chinese construction industry, while the use of

quantitative methods is very low. Kahkonen (2007) argues that the quantitative methods used

in risk management have advantages in comparison with the qualitative methods but their use

is limited due to difficulties that practitioners face. He also discusses the elements that

contribute to development of a workable solution for quantitative risk assessment.

2.3.3 Risk Response and Evaluation

The risk response process is directed at identifying a way of dealing with the identified and

assessed project risks. There are four main risk response strategies: risk avoidance, risk

reduction, risk transfer and risk retention (IEC 2001, PMI 2000, Smith et al. 2006). Risk

avoidance deals with the risks by changing the project plan or finding methods to eliminate

the risks. Risk reduction aims at reducing the probability and/or consequences of a risk event.

Those risks that remain in the project after risk avoidance and reduction may be transferred to

another party either inside or outside the project. Risk retention or acceptance indicates that

the risk remains present in the project. Two options are available when retaining the risk:

either to develop a contingency plan in case a risk occurs, or to make no actions until the risk

is triggered. Several studies (Baker et al. 1999, Lyons and Skitmore 2004) have identified

risk reduction as the most frequently used technique within the construction industry. The

results of a questionnaire survey (Akintoye and MacLeod 1997) report that risk transfer is the

most preferable strategy among the UK practitioners.

In the risk response step the action is taken to reduce, eradicate or avoid the potential impact

of risks on a project. Veeravalli (2008) stated in her report, that there are two types of

response to risk; one is an immediate change or alteration to the project which usually results

in the elimination of risks; second is a contingency plan that will only be implemented if an

identified risk should materialize. Djoen et al. (2003) conducted questionnaire survey and

interview in Jakarta for response of risks in high rise building construction in Jakarta. They

identify ranks and categorize high potential risks in high rise building projects in Jakarta.

This shows that the risks related to management and design are the most significant in high

rise construction projects. The main conclusion from survey, is client interference should be

avoided or reduced in tandem with good communication and teamwork between contractors

and consultants to minimize defects and contractors need to pay attention to the maintenance

of equipment in order to sustain high productivity levels. Yuh-Huei and Ching-Song (2005)

carried out thesis work on the topic of “Implementing the risk analysis in evaluation phase to

increase the project value”. This research found that by integrating the risk management

directly into the evaluation procedure, the project can easily reach the consensus of risk

control and the project cost will be reduced. Omran et al. (1998) conducted the questionnaire

survey with the help of risk evaluation, the effects of potential risks on the project and its

work packages are looked at. This is done through estimation of the probability of the risk

occurring and the effects the occurring of the risk has on the project and the project

environment. These effects are measurable or are assessed qualitatively, i.e. cardinally or or-

dinally scaled or nominally recorded.

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.).

2.3.4 Risk allocation

It is impossible to eliminate all potential risks in a construction project. Therefore, an

appropriate allocation of risks among project actors is very important. Risk allocation

influences the behavior of project actors and, therefore, has a significant impact on the project

performance in terms of the total cost. Unclear allocation of the project risks leads to disputes

between the client and the contractor. One of the problems identified in the literature is the

actors’ different perceptions of to whom a specific risk or group of risks should be allocated.

Usually, contractors indicate that they have to bear the majority of project risks and price

these risks through adding a contingency to the bid price (Andi 2006). Using contingency

funds has been identified by the researchers and practitioners as a significant source of the

project’s cost increase (Hartman 2003). Evaluation and conscious allocation of risks to the

appropriate actor under the contract allows reducing the bid price by decreasing contingency

funds and, therefore, leads to lower total cost (Zack 1996). A number of models providing a

framework for risk allocation decisions can be found in the literature (Leung 2007, Li et al.

2005, Olsen and Osmundsen 2005).

Smith et al. (2006) highlight the importance of considering the following issues when making

risk allocation decision:

➢ Who has the best ability to control risk events;

➢ Who has the best conditions to manage risks;

➢ Who should carry the risks that cannot be controlled;

➢ How much does it cost to transfer the risks?

Risk allocation strategy in construction projects is defined through the contractual

arrangements. The contract is a written agreement between a client and a contractor where

the liabilities and responsibilities of each party are assigned. The contract can also be defined

as a trade-off between the contractor’s price for executing the project and his willingness to

take the risks (Flanagan and Norman 1993). There are different contract strategies available.

The objective of clients is to choose the strategy that ensures achievement of the project

objectives in the most efficient way.

2.4 Types of risks

Thesis report by Deviprasadh (2007) stated that risks can be viewed as business, technical, or

operational. A technical risk is the incapability to build the product that will gratify

requirements. An operational risk is the incapacity of the customer to work with core team

members. Risks are moreover adequate or inadequate. A suitable risk negatively affects a

task on the non-critical path. An undesirable risk is one that depressingly concerns the

essential path. Risk are either short or long term. A short-range risk has an instant impact,

such as varying the needs for a deliverable. A long-standing risk has an impact for a time in

the distant future, such as releasing a product without ample testing. According to Research

and Markets Brochure (2008), Construction is an essential part of any country’s infrastructure

and industrial development. Construction industry, with its backward and forward

connections with various other industries like cement, steel bricks etc, catalyses employment

generation in the country. Construction is the second biggest economic movement

subsequently to agriculture. Broadly construction can be classified into 3 segments –

Infrastructure, Industrial and Real Estate. This chapter is further sub divided in categories for

deep knowledge of the risks which can be investigated in questionnaires.

Al- Bahar (1990) and Leslie Edwards (1995) stated that the Construction risk is generally

perceived as events that influence project objectives of cost, time and quality. Some of the

risks associated with the construction process are fairly predictable or readily identifiable;

others may be totally unforeseen. Construction risk can be classified in 8 categories, resource

risk, Technical Risks, Site Risks, Planning and Selection Risks, Market Risks, Management

Risks, Policy and Political Risks, Financial Risks. Similarly Nigel (1998) stated that Risk

management is an organized method of identifying and measuring risk and then developing,

selecting, implementing and managing options for addressing risks. There are several types of

risk that an owner should consider as part of risk management methodology. These include:

Schedule risk

Cost risk

Technical feasibility

Risk of technical obsolescence

Dependencies between a new project and other projects

Physical events beyond direct control

Further he explained that the risk management seeks to identify and ultimately control

possible future events and should be proactive rather than reactive. To be effective, risk

management must rely on tools and techniques that help predict the likelihood of future

events, the effects of these future events and methods to deal with these future events. Risk

management is the responsibility of everyone involved in a project.

Finnerty (1996) published book on project financing describes nine types of risk that are

Supply, technological, completion, economic, financial, currency, political, environmental,

force majeure. Miller and Lessard (2001) constructed a list of risks from a project financing

erspective, and correspond with the construction-project specific risk categorizations (see

table 1). The reason for this similarity is probably that most project financing projects

typically concern large engineering and construction projects. From these lists, it is harder to

detect classes that would be sources for the risks caused by other actors or network dynamics.

Table 1: Typical construction risk categorization

Technical Social

Construction Economic

Legal Financial

Natural Commercial

Logistics Political

Categorizations help to form risk lists that are useful when identifying risks, but are

inadequate when forming the whole picture. Obviously, many of the Finnerty’s and Miller

and Lessard’s risks relate to the network structure; supply risks and political risks are the best

examples of the risks that are caused by the other than the main contractor. Both of these lists

are done from the main contractor’s perspective, and are not that much concerning the

optimisation of the whole network.

A four-level categorisation is presented by Artto and Kähkönen (2000) this categorisation

tries to fade a project type and be a general categorisation. Risks are divided into pure risks

(e.g. hazards and weather conditions), financial risks (e.g. cash flow or credit risk), business

risks (almost anything that can happen in a project) and political risks, which refer to the

certain political environment and risks that are caused mostly by extreme conditions, such as,

among others, war. Risks in the project network can relate to any one of this list’s categories.

Project actors can cause hazards to one and other because of inexperience, lateness of their

products, delivery failure or unmade payments (bankruptcy) or new government laws either

in favour or disfavour of the project. Similarly Turner (1999) suggested that risks can be

divided either according to their impact or by where the control lies. Thus these categories

can be further divided into business risks, insurable risks, external risks and internal risks, for

example bad weather is external risks since it can’t be controlled by a project manager and

business risks are those risks that in generally have to be accepted in order to have an

opportunity to take advantage of positive outcomes of a risk.

2.4.1 Technical Risk and Market Risk

Miller and Lessard (2001) studied large engineering projects (for example constructing a new

factory) and categorised risks according to their source. Market, completion and institutional

risks are divided into three categories. Market risk is mainly caused by the demand

uncertainty, completion risks refer to technical risks during and after the completion of a

project (for example, will the capacity of a factory be as designed and planned). Institutional

risks are related to the political uncertainties in a specific situation. They see that the whole

project network should be utilised to manage risks, but their perspective is not that much co-

operation than financially efficient risk allocation. They propose “a layering process” to

systemically transfer, diversify and sell risks with financial instruments, real options and

contract incentives. Beakaert and Harvey (1995) stated that the consensus of those studies is

that only covariance with the world portfolio matters in developed markets, and the market

price of covariance risk reflects how investors expect to be rewarded to change in risk in

the world market. However, in fewer included markets, relationship with the world

collection is characteristically weaker. In the recent reports that only local market variance

explains the cross-section in emerging markets; in such markets, market price of variance

risk reflects how risk is treated locally. Simply put, only covariance with the world market

matters in entirely integrated markets and only local deviation matters in simply segmented

markets. Technology risk is the risk that the technology used in the project is not sufficiently

proven. Kathuria (1996) observed that the main aim of the present study is to find out how

the firms in the Indian industry have benefited indirectly from either of the means of

technology transfer (i.e., FDI or arm's length transaction). The study has an added relevance

in the present global context as not only India but other developing countries also have

recently "opened their doors" to the multinationals who are supposed to bring in new and

advanced technology in an unprecedented large scale.

2.4.2 Management Risks

Maier and Remus (2003) emphasizes that, the organization could increase project

performance and purposely accumulate knowledge for future usage. Based on literature

review, the construction industry's project surroundings were regularly exposed to a superior

degree of risk and faced an important quantity of uncertainties. Under such conditions, those

decisions made by engineers and project managers were generally under uncertainty.

Subsequently, project presentation for the construction project was subject to risk factors and

most projects unsuccessful to deal with the risk. Olson and Austin (2006) suggested to

improving the process for managing risks and opportunities within a project organization.

This research contains the improvement of four methodologies, based on industrial need. A

holistic approach with a schemes perception has been worn in order to handle the difficulty of

the research task. Both experiential and hypothetical material has been used for developing

the proposed methodologies. The developed methodologies for project risk management and

the ways of its usefulness have been tested and improved over a five- year period within the

complete case company. Afterwards, two of them were executed.

2.4.3 POLICY AND POLITICAL RISKS

In the recent report, Koehn et al. (2000) identified that the risk relates to matters such as

increased taxes and royalties, revocations or changes to the concession, exchange controls on

proceeds, forced government participation in shares and refusal of import licenses for

essential equipment. A growing global presence brings the danger of a greater exposure to

political risk. Manager of Associated Chambers of Commerce and Industry (ASSOCHAM),

New Delhi (2007), explained in this context, how are India’s new globalizes approaching the

issue of political risk in the markets in which they are investing? To what extent are these

perceptions – together with the availability of suitable risk insurance products – determining

where they are choosing to invest? Most importantly, how is the current surge in outward

investment impacting India’s political risk insurance industry? Further to get the answers of

these questions, five Indian multinational enterprises were interviewed. This sample of

companies included some of India’s top ‘globalisers’, namely, Tata Steel, NIIT (a global IT

learning solutions corporation) and Ranbaxy Laboratories Ltd. (pharmaceuticals), as well as

two recent outward investors, SRF (technical textiles, refrigerant gases) and DCM Sriram

Consolidated Limited (DSCL) (chloro-vinyl and agribusiness). Also interviewed were India’s

political risk insurance provider, the Export Credit Guarantee Corporation, and three general

insurers, namely, Bajaj Allianz, IFFCO-Tokio General Insurance Co. Ltd. and New India

Assurance.

2.4.4 FINANCIAL RISKS

This is the risk that the project might not reach financial closure, Agarwal and Pandey (2009)

observed that due to financial crunch and economic recession, the construction industry is

facing many problems and slow pace of running construction projects. The construction

industry in India is one of the major employment generators as large construction work across

various infrastructures, real estate projects. However, with the onset of financial crisis, the

funding has become a major problem for the construction sector which led to slow down in

the activity. There are various reasons behind this site slowdown. This study enables us to

know about the relationship of sites slowdowns due to financial crunch and the new emerging

recent trends in the construction industry.

2.5 Impact of Risks

Three of the most important risks in construction projects include weather, productivity of

labor and plant and quality of material. Cohen and Palmer (2004) identified risk trends in

construction projects. They found that typically, risks are determined at the very early phases

of the project (feasibility and planning) while the impacts are not experienced until the

construction and production start-up phases. Dubois and Gadded (2001) found that

complexity in construction projects comes from two basic sources; interdependence of tasks

and uncertainty. Uncertainty has four sources: management is unfamiliar with local resources

and local environment, lack of complete specifications for activities at the construction site,

lack of uniformity of materials, work, and teams with regard to time and place and

unpredictability of environment. Again, the bolded phrases indicate the sources with the

highest relevance to this study.

Jha and Devaya (2008) conducted research survey on position of Indian construction

companies on international level and they found out that there are just two Indian

construction companies in the ENR 'Top 225 Global Contractors 2006' list and Indian

construction companies have only a 0.05% market share of the $3-4 trillion global

construction business. International construction knowledge in India is inadequate, but

massive extent for development exists. This research presents the worldwide construction risk

factors from the Indian construction professional’s point of view, in an inclusive format to

facilitate consultants to prioritize the attempts to manage the risk factors. Further Kellner et

al, (1999) based on their study categories the main impact of tight project schedule is

development cost in short staff software project, manager must optimize project schedule.

The duration of time to develop the software project is extremely difficult as the time needed

to complete activity is hard to estimate. Process stimulation is an important technique to

evaluate the impact of proposed changes in the process.

Koskela (1997 p. 102) conducted the international survey and found in his survey in “Latin

American countries, it is estimated that between 20% to 25% of the total construction period

is lost as a product of design deficiencies, and in Indian construction industry these rate of

percentages of deficiencies is very high nearly 45% to 55% and these deficiencies produce

because of improper risk management and impact of risks that had not been taken into

consideration at initial stage of projects. Coordination is one of the major factor in India,

because there are lots of risks in Indian construction industry that has to be taken into

consideration, Higgin and Jessop (1965) recognized coordination as one of the three critical

functions in the risk management process along with ‘‘design’’ and ‘‘construction’’, if these

three functions have been taken into consideration, then it will be very useful in construction

industry to avoid the impacts of risks. Similarly, Rad (1979) conducted interviews with the

experts in India, through interviews with experts; He concluded coordination as the single

most important factor in construction industry, when multiple participant’s viz. design and

construction contractors and subcontractors are occupied. He also observed that active

synchronization could reduce, predict and cure problems caused by design construct lead-

time, materials availability, manpower, and equipment availability.

Richardson (2008) recently did research on Indian construction industry, Dubai construction

industry and Singapore construction industry, she analyzed that the scale of price of

construction industry increased in Dubai between October 2007 and July 2008 because of

impact of risks. The single country with superior inflation was Singapore, where prices rose

18.7%. The inflation rate in India is nearly 15.2%.The consultant’s latest cost commentary

warns that there are “serious capacity constraints” in Dubai, despite the flood of construction

firms that are moving into the region. It says these will influence building costs and

programmes. The report includes that 300,000 workers have recently returned to India from

the United Arab Emirates due to economic increase in the Subcontinent and the high cost of

living in Dubai. This has led to a tightening of the labour market, exacerbated by intense local

demand and global cost rises in items such as steel, aluminium, concrete and glass, which can

be further investigated in questionnaire.

Mehta (2008) identified that any construction company ability is depend or success of effort

is defined on its continuous changing situation, rework more effectively, evolve efficient

business processes and enable every function to contribute to its mission goal. Real estate

developer additionally contends regional demand fluctuation and varying customer

expectation. Engineering is very much about responding to context. It is interesting to note

how different locations affect the design of a structure – not just physical location, and

financial constraints, but cultural context, willingness of the team members to innovate, and

the differing manners in which teams organize and operate. But despite these differences

there are a number of consistent factors that contribute to a successful project and to avoid the

impact of risks. Srinivasan (2007)- conducted the survey on quality control and found that the

fundamental engineering principle has to be clarity in the structural form. This immediately

ensures that the structure is economical in the use of materials, which straight away reduces

the impact of risks and also leads to the ability to break the structure into components with a

specific purpose, which then allows repetition and economy in risk management process.

Proper risk management leads to improved quality control and accuracy. Where there is

complexity and potential inexperience in the site phase, proper knowledge of impact of risk

allows the design team to follow the construction with care and also allows texture and finish

to be applied to the projects with little or no cost due to the repetition and reuse. Research has

been done on assessment and impact of risks by Sheeran (1976) considered in her study,

functions of management, ranking along with planning, organizing, directing and controlling

are vital part in study of impact of risks. The author identified classified and assessed risks

inherent to joint venture projects at international level and provides a recommendation for

risk management.

2.6 Summary of Literature Review:

Overall review of the literature indicates that risk management is very important for the

success of projects in Indian construction industry. In this thesis the author indicated the

affect of types of risks which leads to the improvement in the Indian construction industry.

Risk management system has been adopted by some of the organizations, but for a success of

projects it is necessary for every organization to adopt the risk management system. There are

many risks in construction industry that has been outlined by the author in this thesis work;

many risk management systems available in market to resolve the impact of risks. Risk

identification is the initial stage for the risk assessment in construction industry. There are

many organizations working all around the world and providing services for risk management

like Township Development & Construction Company, GE Equipment & Services India,

CPWD (central public works department) etc. the author noticed that there is shortage of

labour in Indian construction industry as compared to international industries. Health and

safety is one of the major factors in Indian construction industry, question generally might

emerge what type of risks are most important in Indian construction industry and how they

can be prevented? Details of methodology are discussed in the next chapter