TECHNICAL PAPPER

FOR CCE CERTIFICATION

APPLIED RISK MANAGEMENT PRACTICES FOR KEY

RISK IN CONSTRUCTION PROJECTS IN EGYPT

:Submitted by
Membership ID: 299240

A Technical Paper Submitted in Partial Fulfillment of The Requirement for

Certified Cost Professional (CCP)

0
Table of Content Page
Table of Content I
List of Figure II
List of Tables III
Abstract IV

Introduction 1

1.0 Literature Review

1.1 Definition of Project Risk 2
1.2 Definition of Project Risk Management 2
1.3 Function of Project Risk Management 3
1.4 Project Risk Management Processes 3
1.4.1 Phases of Risk Management Process 4
1.4.2 Risk Classification / Categorization 5

2.0 Research Approach and Methodology

2.1 Research Approach and Methodology 7

3.0 Data Collection and Analysis

3.1 Sample Description and Characteristic 8
3.2 Survey Results and Analysis 8
3.2.1 Organization Culture and Support 8
3.2.2 Consideration of PRM Tools and Techniques 9
3.2.2.1 Risk Identification Techniques 9
3.2.2.2 Approaches of Estimating Contingency Reserves 10
3.2.2.3 Risk Reponses Practices 10
3.2.3 Risk Factors Significant and Response Strategy 11
3.2.3.1 Ranking and Recommended Risk Response Strategy for 11
Contractors allocated Risk Factors
3.2.3.2 Ranking and Recommended Risk Response Strategy for 13
Clients allocated Risk Factors
3.2.3.3 Comparison of Response Strategy Employed by Each Party 14
3.2.4 Recommended Response Strategies to Key Risk Factors 16
4.0 Conclusions and Recommendations
4.1 Conclusion 19
4.2 Recommendation 20
References 20
Appendix I- Results of Risk Importance Index (Contractor's Perspective)
Appendix II- Results of Risk Importance Index (Clients Perspective)

I
List of Figures Page
1-1 The Phases of The Risk 2
1-2 Project Risk Management Process Flow Diagram 4
1-3 Hierarchical Risk Breakdown Structure 7
Frequency of developing Close Links Between Firms Strategic
3.1 9
Objectives and Management of Risks.
3.2 Frequency of Having PRM Standard Guide. 9
3.3 Frequency of Employing Each Identify Risks Techniques. 9
3.4 Frequency of Recognized Techniques to Estimate Contingency Reserves. 10
3.5 Frequency of Employing Each Risk Response Techniques. 11

II
List of Tables Page
3-1 Profile of the Survey Respondents 8
3-2 Ranking and Response Strategy for Key Risk Factors Affecting 12
Contractors Firms
3-3 Ranking and Response Strategy for Key Risk Factors Affecting Clients 14
3-4 Total Computed Results of Risk Importance Index and Response 16
Strategy

III
 ABSTRACT

A question of major relevance to any individual or organizations working in

construction industry requesting to considering the adoption or improvement of PRM
process is what is the key risk factors and which tools and techniques can provide the
greatest benefits.

The purpose of this paper is to formulating and answering the above question. It aim to
identify the key risk factors in construction projects in Egypt and help project managers
and project teams working in Egyptian construction industry to focus on those few
crucial tools and applications that are recognized as the key contributors to the
effectiveness of PRM process and could provide the greatest benefits to the projects
they participated in.

The paper set out the various elements of PRM through a literature review and shaded
light on related previous related researches. Then, via, a questionnaire survey and in
depth interviews evaluate the current PRM process tools & techniques employed by
each of main project parties (clients, consultants and clients) working in Egyptian
construction industry. Also, the survey undertaken to determine and evaluate the
characteristic of the most critical risk factors affect Egyptian construction industry in
perspective of each project party and Explore the existing most effective practical
response strategy employed for the aforementioned risk factors .

IV
Introduction:

The construction industry is subjected to more risk and uncertainty than many other
industries. The process of taking a project from initial investment appraisal to
completion and into use is complex, generally bespoke, and entails time-consuming
design and production processes. Such complexity is further compounded by many
uncontrollable external factors.

While, the risks cannot be eliminated, directions taken by the project sponsors toward
risks in each of project stages have the greatest influence on the project objectives. A
failure to identify the implied can lead to misunderstanding and even conflict for which
the project manager will not prepared. Thus, employing effective risk management
technique becomes an important issue for the realistic appraisal of factors affecting the
accomplishment phases and controls the many factors that influence project results. It
becomes even greater in the construction industry which rapidly growth and embraces
many uncertainties as the case with Egypt.

A question of major relevance to any individual or organizations working in

construction industry requesting to considering the adoption or improvement of project
risk management process is what is the key risk factors and which tools and techniques
can provide the greatest benefits.

Thus, the objective of this paper is to formulate and answer this question to help in
improving the management of risks and opportunities in Egyptian construction projects,
evaluate the effectiveness of different project risk management practices applications
used by the Organizations working in Egypt construction industry to find out the most
suitable way of managing the identified key risk factors in Egypt construction.

This paper provides a literature review of the most common practices of PRM,
identifying risk breakdown structure and check list of the key risk factors that may
affect construction projects in Egypt. With the aid of questioner survey, the paper
further moves to evaluating the characteristic of the identified risk factors and ranking
the most critical risk factors encountered by the main project parties. Finally, the paper
will explore the most effective practical response strategy employed for the
aforementioned risk factors in the Egypt construction industry.

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1.0 Literature Review

1.1 Definition of Project Risk.

Risk as a word is defined in Webster's dictionary as the chance of injury or damage or
loss. While this obviously is a general definition of risk, project risk can extended to be
related to the chance of loss or opportunity to improve associated with project time,
cost and quality. The origin of Risks might arising from outside the company or
Existing within the company or Transmitted to the company.

Recent research emphasize the definition of risk as a function of its three primary
components which are, an event of what could happen; a probability of occurrence; and
its impact or consequence on a defined project objectives.

Risk = (event, probability, impact of that event)

Fig (1.1 ) The Phases of The Risk (Pipattanapiwong, 2004)

The source of danger as the hazard; certain hazards can be overcome to great extent by
knowing them and taking action to overcome them. The implication of this equation is
that good project management should be structured to identify hazards and to allow
safeguards to develop to overcome them, if enough safeguards are available, then the
risk can be reduced to an acceptable level. Strategies for managing risk cannot be
divorced from strategies for managing project objectives.

1.2 Definition of Project Risk Management:

The main goals of PRM are to identify project risks and develop strategies which either
significantly reduce risks or take steps to avoid them altogether. At the same time, steps
should be taken to maximize associated opportunities (Kipling, 1999).

PMPOK defined PRM as Systematic Process of identifying, analyzing, response

planning, and control risk on a project. Enisa, 2006 added that Risk Management is a
process aimed at an efficient balance between realizing Opportunities for gains and
minimizing vulnerabilities and losses to project objectives,.

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It is an integral part of management practice and an essential element of good corporate
governance. In Line with these definition, Kipling (1999) added that Risk management
implies control of possible future events, and is proactive rather than reactive since risk
will be probably developed to the last phase of its potential loss or harm. It will reduce
not only the like hood of an event occurring, but also the magnitude of its impact.

1.3 Function of Project Risk Management:

Recent Researches tend to emphasis the function of PRM to any organizations, which
can be summarized as follows:

1. identify factors that are likely to impact the project objectives.

2. Quantify the likely impact & increase awareness of the consequences of each factor.
3. More centralized management control.
4. Better risk information transfer between concerned and those responsible for risks
5. Mitigate impacts by exercising influence over project controllable.
6. Reduce long-term loss expenditure & hence corresponding increased profits.

And also asserts that there are many benefits to employing a risk management includes
setting realistic project expectations by maintaining visibility of risks, quicker recovery
of problems through previously conceived contingency plans, and lower impact of
potential problems through preventive actions.

1.4 Risk Management Processes

PRM process attempts to facilitate and utilize the decision maker's intuition and
experience in a more systematic and effective way. It can separate process for risk
management and opportunity management, but it gives several advantage to managing
both in an integrated manner through a common process to ensure that opportunities are
indeed and managed, minimizing additional overhead and increasing efficiency.

There was some difference in how researchers organized or call this process. This paper
is followed the process recommended by PMBOK which are six major processes for
risk management as follows risk management planning, risk identification, qualitative
risk analysis, quantitative risk analysis, risk response planning, and risk monitoring and
control as shown in Figure (1-2).

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 Plan Risk Identify Risks Qualitative risk
Management analysis
Tailored risk List of Risks Probability & Impact
management process Risk Owners Root Causes
Risk Thresholds Risk Characteristic Importance
Process Rules Prioritized list

Risk monitoring & Risk response Quantitative risk

control planning analysis
Status and trends Strategies Numerical Models
Reports Actions Combined outcomes
Trends in Risk exposure Action owners Sensitivity Analysis
Analysis Prioritized List Update

Fig (1.2) - Project Risk Management Process Flow Diagram

PRM process are fit together into a simple circular procedure, which if maintained,
yields a controlled risk environment. Each Risk goes through these function
sequentially, but the activity occurs continuously, concurrently (e.g., risk are tracked
parallel to new risks are identified, analyzed), and iteratively (e.g., mitigation plan for
one risk may yield another risk). Added that its interact with each other & with the
processes in the other knowledge area and in practice they may overlap.

1.4.1 Phases of Risk Management Processes:

Whilst most risk management literature promotes risk identification as the first step of
PRM. PMI, Tweeds (1995), Simister and Turner (2001), Chapman (1997) and Tweeds
(1995), Standards Australia highlights the need to firstly plan risk management to define
how to conduct risk management activities for a project, what its overall strategy and to
integrate the RMP with all project management activity.

A risk cannot be managed properly unless it is first identified, lack of identify risk, is
one of the key reasons that project fail. Identify risks and responses involve two specific
tasks, Search for sources and responses, employing a range of techniques; Classify: to
provide a suitable structure for defining risks and responses (Chapman1999) through a
range of tools and Techniques falls in three categories of Historical review; Current
Assessment; and Creativity Techniques

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Risk Analysis are the Central to the Risk Management, it is the vital link between
systematic identification of risks and rational management of the significant risks. The
Risk assessment provides a formalism and structure for selecting strategy alternatives.
Risk Analysis falls into two distinct phases: qualitative and quantitative risk Analysis.

Qualitative Risk Analysis for assess and evaluates characteristic of individual identified
project risks and prioritize for further analysis or action by assessing and combining
their probability of occurrence and impact on project objective if the risk is occur. On
other side, Quantitative Risk Analysis provide a numerical estimate of the overall effect
of risk on the objective of the project when considering risks simultaneously.

Although, it's recognized that quantitative risk analysis is not always required or
appropriate for all projects. Qualitative risk analysis may provide enough information
for development of effective risk responses, especially for smaller projects.

The target of that process mainly is to determine the efficient response actions from a
range of responses strategy to Advanced planning actions (Proactive) and risk
containment actions (Active) to enhance opportunities and reduce threats to project
objective, while complying with applicable organization and project constraints taking
into account the Stakeholders' risk attitudes.

Most of RMPs emphasis a need to monitor and control risks to track identified risks,
monitor residual risks, identify new risks, ensure that risk response plan are executed at
the appropriate time, and evaluate their effectiveness throughout the project life cycle,
as well as monitoring changes in overall project risk exposure as the project progress
and may choosing alternative strategies.

1.4.2 Risk Classification / Categorization.

Risk Categorization is an important step in order to facilitate the risk identification and
then control and manage risk. It attempts to structure the diverse risks that may affect a
project& reflect common sources of risk for the industry or application area categories.

Many approaches have been suggested for classifying risks, it can be classified
according to their (type, source nature, magnitude, party retaining risk, location of their
impact, or time of occurrence). It can be a combination of more than one classification
technique, or make these categorizations under the project work packages.

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Kerzner (1998) & Wideman1995 classified risk into business risk & pure or insurable
risk. Weeds (1996) classified risk into controllable & uncontrollable. Tah and Carr
(2000), modify the pervious classification by presenting the hierarchical risk
breakdown structure (HRBS) that allows risks to be separated into those that are related
to the management of internal resources and those that are prevalent in the external
environment. Another hierarchical structure presented by Zhi (1995), Classifying risks
by sources and each of these sources is sub-categorized.

In this paper, the RBS has been developed with consideration of "mutually exclusive"
classification among risk categories. Based on integration of multiple parties, as shown
in Figure (1.3), risk factors have been classified according its sources (External &
Internal). According to source nature of risk events, External risk factors has divided
into (6) sub- category and Internal risks factors has classified to two levels, for Activity
level & Global internal risks) . Those two levels subdivided to fourteen (14)
subcategories.

Figur
Project
Project Risks
Risks

Internal
Internal Risks
Risks External
External Risks
Risks

Global
Global Economic
Economic Social
Social &&
Risk
Risk Culture
Culture

Project
Project Procuremen
Procuremen Design
Design && Constructio
Constructio Contractual
Contractual Environmen
Environmen Political
Political
Location
Location tt Process
Process Spec.
Spec. nn && Legal
Legal t-t-
Process
Process

Client
Client Consultant
Consultant Contractor
Contractor Project
Project Natural
Natural Others
Others
Management
Management

Activity
Activity
Risk
Risk

Labor
Labor Material
Material Sub-contract
Sub-contract Equipment
Equipment Geo-
Geo-
&
& Supplier
Supplier technical
technical

e (1.3) Hierarchical Risk Breakdown Structure

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2.0 Research Approach and Methodology

This paper aims to assess the most significant risk factors encountered in Egypt
construction industry, and focusing on those recognized crucial tools and techniques as
the key contributors to the effectiveness of PRM process & could provide the greatest
benefits to enterprises working in construction industry.

The paper first set out the various elements of PRM through a literature review and
shaded light on related previous related researches. Then data collected by
administrating a questioner survey to a group of professional associated with Egypt
construction industry and processed by the means of statistical analysis for the
generalizing its findings.

Following the results from the survey will considered as the most commonly used with
the current state of the practice in the field, and showing the most significant risk events
now encountered in the Egypt market and current response strategy, which will provide
important guide line used to recommend the tools that aid the companies in construction
industry to apply effective PRM in their projects.

The questionnaire consisted of three sections. Section I: related to the respondent's

experience and background. Section II: to investigate the extend the use of risk
management tools and techniques and Section III: contain 43 risk factor (For
Contractors) and 33 risk factors (For Clients' and Consultants') classified by their
source in RBS introduced in Fig 1-3 and selected considering the highest rating risk
factors in previous studies to evaluate of risk significant / criticality rank and strategies
to handle identified risk factors that affecting each project parties roles.

The answer technique that were utilized for the RM questions are the four scale ranking
technique for questions relating to the use of application, the box method with a simple
yes/no question and few open ended answering technique.

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3.0 Data Collection and Analysis
3.1 Sample Description and Characteristics:
There are 27 companies participated in responding to this questionnaires survey out of
39 companies invited to participate with a response rate of 69%. Averages of 2
respondents from each participated company were received with a total number of Fifty
Three (53) respondents. The respondents were all industry practitioners, including
public and private sectors. They had an average of 15 years work experience in the
construction industry. The construction projects they have been committed to include
infrastructure and heavy construction, housing, industrial buildings and commercial
buildings. More details of the respondents profiles are presented in table 3.1.

The respondents long experience, education and professional background infer that the
respondents have adequate knowledge of construction project management and the
associated risks.

Table (3.1) Profile of the Survey Respondents

Respondent Profile Categorize and Percentage
Respondents 5-10 years (18.87%)
Experience 15-20 years (20.75%)
>25 years (18.87%)
Business Type Contractors (60.00%)
Consultants (36.00%)
Companies Public Sector (10.00%)
Ownership Others (22.07%)
Companies Residential Housing (5.70 %)
Turnover Infrastructure (26.40%)
10 -15 years (30.19%)
20 -25 years (11.32%)
Design/ PM (04.00%)
Private Sector (67.93%)
More than one Type (24.50%)
All Types (43.40%)

3.2 Survey Results and Analysis

3.2.1 Organization Culture and support:
Based on the results of questionnaire survey, its observed that the level of risk been
increased during last 5 years due to today's market condition with heavy competition,
advanced technology and tough economic condition which lead to participate in a
projects with a high degree of uncertainties and risk taking has assumed significant
greater proportions. In same time, most respondents demonstrated the lack in employing
a PRM as core part in planning their strategic by linked their strategic objectives to the
risks might face.

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However, there is a promising indication shown since there is some level of risk
analysis and management was performed by vast majority of respondents when
undertaking their projects and there is availability of PRM Standard Guide.

3.2.2 Consideration PRM Process Tools and Techniques

3.2.2.1 Risk Identification Techniques:
The results of questioner survey indicate that the majority of companies have
experience in information gathering tools and techniques to identify risks using
Interviewing /focus group discussions, Expert Judgment & checklist techniques which
are relatively simple tools and not required significant technical experience, while more
involved or complicated tools as Risk Documentation Form, Assumption Analysis and
Cause and effect method were rarely used.

Fig (3.3) the Frequency of Employing Each Identify Risks Techniques

Through interviewing the respondents, it was found that the reasons of not using
checklists in a regular basis is absents of historical records from pervious projects and
unavailability of checklist for identified potentially possible risk/uncertainties factors
affecting construction industry objective.

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3.2.2.2 Approaches to Estimate Contingency Reserves.
For most of the respondents from different project parties, the deterministic approach by
adding a fixed or variable percentage to the project direct cost and Expert Judgment are
the highest frequency technique used to estimate contingency reserves.it also indicate
that there no evidence of formal or standardized approach /techniques, the estimate of
contingency reserves against uncertainties / risk might affect the project.

Fig (3.4) Frequency of Recognized Techniques to Estimate Contingency Reserves

The reasons provided for not using modeling techniques are that there is a lack of
familiarity with those techniques which also may be unwanted if compared to project
size and that estimate contingency reserves as well as its management are not organized
by clearly defined procedures compared to many other component of estimated cost.

3.2.2.3 Risk Response Practices.

The results of questionnaire reveal that risk mitigation and risk transfer are the most
favorite risk response methods employed by different group organizations working in
Egypt response to the highest significant risks, with a total response rate of 45.28% &
26.75% respectively.

It was found when companies encountered significant risks, they try to reduce
probability and/ or impact of adverse risk event by either add resources, or bind a
contract with more stable subcontractor or supplier to mitigate risks or at least transfer
the risks through financial means such as insurance company.

This is not surprising since most construction firms answering these questionnaires are
not probably concerns of considering RM when perform strategic planning and in link it
with the organization's objectives as shown above, as a result they most common
response will be to direct deal with risks to reduce its impact.

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Another point of view, this technique is a desirable means to deal with risk and its
recognized that risk should be transferred to the party that is in the best position to deal
with it.

3.2.3 Risk Factors Significant and Response Strategies:

The purpose of this section of survey is to rank the most critical risk factors encountered
by the main project parties in Egypt, and to explore the existing practical response
strategy employed for the aforementioned risk factors.

Fifty Six (56) well- recognized risk factors were identified and provided in the
questionnaires Forms, 23 risk factors has been allocated to the contractor covers
activity internal risk factors and global project risk factors, 13 risk factors has been
allocated to both client and consultant including design risks and client or consultant
generated risks, and a total of 20 risk factors has considered to be shared or affected
each party which includes external risk factors and risk related to variations, claims and
work quantities. Determining the risk score for importance /criticality Index and
response strategy for each was sought as it leads to the main objectives.

Based on the survey results from participants working with contractor organizations, the
relevance importance risk index (RSi) was calculated for each risk based on the
combining of its probability and impact.

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3.2.3.1 Ranking and Recommended Risk Response Strategy for
Contractors Allocated Risk Factors :
The relevance importance risk index (RSi) for the risk factors allocated to contractors
and factors shared between contractors and clients in contractor's perspective was
calculated for each risk (results presented in Appendix I), then the respondents were
asked to define the recommended risk response strategy out of the four principle
methods identified earlier. The results for the top 25 risk factors presented in Table 3.2
and further discussion for the detailed actions against the key risk are taken place

Table (3.2) Ranking and Recommended Risk Response Strategy for Key Risk Factors
affecting Contractors Firms:
S.I. Risk Factor Rank Importance Recommended Response Strategy
No. Index
(RSi ) TR ER MR AC
C.28 Owner's Delay Payments & 1 58.00% 55.0% 0.0% 35.0% 10.0%
Financial Ability
C.7 Owners unreasonably imposed 2 55.10% 0.0% 25.0% 55.0% 20.0%
tight schedule.
C.18 Difference between Estimated 3 52.36% 50.0% 0.0% 20.0% 30.0%
quantities & Actual quantities
A.2 Inflation 4 51.45% 70.0% 0.0% 15.0% 15.0%
C.19 Variation order 5 50.91% 45.0% 5.0% 25.0% 25.0%
B.9 Subcontractor's Delay & Poor 6 50.54% 50.0% 15.0% 35.0% 15.0%
Management qualification
C.22 Prices Changes during construction 7 45.82% 35.0% 0.0% 40.0% 25.0%
stage
C.20 Claims and dispute procedure 8 45.63% 0.0% 10.0% 55.0% 35.0%
C.36 Owner's Refuses to compensate the 9 44.72% 20.0% 15.0% 60.0% 5.0%
claims
C.30 Delay in provide Contractor with 10 44.36% 45.0% 15.0% 40.0% 0.0%
requested information
B.6 Sub-Contractor Qualification 11 42.73% 25.0% 10.0% 65.0% 0.0%
&Poor Performance
A.3 Competition Risk &Unfairness 12 43.64% 10.0% 10.0% 60.0% 30.0%
opportunities:
C.21 Inaccurate or incomplete cost 13 43.27% 10.0% 20.0% 70.0% 0.0%
estimate for the work
C.31 Delay in Approval of Contractor 14 42.45% 55.0% 10.0% 35.0% 0.0%
Submission / delay in Inspection or
Testing
C.32 Contractor's Capital Return 15 42.45% 30.0% 25.0% 30.0% 15.0%
Difficulty
A.1 Currency Fluctuation, Foreign 16 40.00% 50.0% 0.0% 30.0% 20.0%
Exchange and Convertibility
C.3 Lack of As Built drawing for 17 39.10% 55.0% 15.0% 30.0% 0.0%
Existing Utility
C.13 Conflicts between contract 18 38.18% 45.0% 15.00% 10.0% 30.0%
documents.
B.2 Low productivity of labors or 19 36.54% 30.0% 15.00% 55.0% 0.0%
Equipment
B.3 Labor Skills Level and Large Wage 20 35.81% 35.0% 5.0% 65.0% 0.0%
Scales:
C.16 Health, Safety and Environmental 21 35.45% 15.0% 55.0% 30.0% 0.0%
C.8 Accident during construction: 22 35.10% 50.0% 25.0% 25.0% 0.0%
C.25 Changing of Executing key staff 23 32.72% 0.0% 15.0% 75.0% 10.0%
during construction
C.25 Changing of Executing key staff 23 32.72% 0.0% 15.0% 75.0% 10.0%
during construction
TR: Risk Transfer ER: Risk Elimination MR: Risk AR: Risk Acceptance
Mitigation
(Continued )- Table( 3.2)
S.I. Risk Factor Rank Importance Recommended Response Strategy
No. Index

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 (RSi ) TR ER MR AC
A.5 Unforeseen /Differing Site 24 32.36% 55.0% 15.0% 30.0% 0.0%
Conditions
C.34 Poor Management & 25 31.63% 0.0% 20.0% 70.0% 10.0%
Administration Facilities
TR: Risk Transfer ER: Risk Elimination MR: Risk AR: Risk Acceptance
Mitigation
The statistical results shown in tables 3.2 & Appendix I disclose the fact that in the
present Egypt construction market, the top 10 risk factors affecting contractors firms are
mainly related to Funds of the project and oriented from other party. Five (5) of the top
ten most significant risk factors was an internal risk factor generated by the client which
are ;Owner's Delay Payments & Financial Ability; Owners unreasonably imposed tight
schedule; Variation order; and Owner's refuses to compensate the claims . One factor
was consultant generated risk by delay in provide contractor with requested information.

Two factors are related to Financial and economic risk rated which are inflation and
Prices Changes during construction stage with a rate of 51.45% & 45.82%. Difference
between Estimated quantities and Actual quantities is ranked as the 3rd top explored risk
factor with importance index of 52.36. Claims and dispute taken place in the highest
risk factors affecting the contractor since the Claims and dispute procedure, and
Owner's Refuses to compensate the claims risk factors are ranked as 8th &9th top risk
factors. Where contractors is considering the long procedures for claims is a highly
impacted, his firm especially that claim is a response against other risk factors.

The Second fact presented that risk transfer & mitigation is the most favorite response
methods employed by contractors working in Egypt. Since, mitigation is the most
frequency recommended response for the ten ranking risk factors, the recommended
strategies are transfer for six (6) and mitigation recommended for four (4) factors.

3.2.3.2 Ranking and Recommended Risk Response strategy for Risk

Factors allocated to Clients:
Risk factors allocated to the clients and factors shared between contractors and clients in
consultant's & client's perspective have been evaluated and existing most effective
practical response strategy employed for the aforementioned risk factors are explored
based on the survey results from participants working with clients and consultants
organizations as presented in Appendix II.

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 The results for the to 25 risk factors presented in Table 3.3 and further discussion for
the different between key risk factors in perspectives of project parties are presented.

Table (3.3) Ranking and Recommended Risk Response Strategy for Key Risk Factors
affecting Clients (Consultants Perspective)
S.I. Risk Factor Rank Importance Recommended Response Strategy
No. Index
(RSi ) TR ER MR AC
C.7 Owners' unreasonable imposed tight 1 68.80% 75.0% 10.0% 15.0% 00.0%
schedule for Design
C.19 Variation order: 2 66.40% 25.0% 15.0% 50.0% 10.0%
C.18 Difference between Estimated 3 64.80% 25.0% 10.0% 25.0% 40.0%
quantities and Actual quantities:
C.35 Delay in finishing the project. 4 62.40% 55.0% 0.0% 30.0% 15.0%
C.28 Owner's Delay Payments & Financial 5 62.40% 20.0% 20.0% 60.0% 00.0%
Ability.
C.9 Consultant Diligence and care of the 6 59.20% 30.0% 0.0% 70.0% 0.0%
project.
C.6 Delay in Design Stage 7 57.60% 10.0% 30.0% 60.0% 0.0%
C.34 Poor Management & Administration 8 52.80% 0.0% 25.0% 60.0% 10.0%
Facilities
A.2 Inflation 9 51.20% 60.0% 0.0% 20.0% 20.0%
C.33 Clients Capital Return Difficulty 10 51.20% 0.0% 55.0% 25.0% 15.0%
C.5 Difficulties in Procurement of 11 50.40% 0.0% 15.0% 75.0% 10.0%
Contractor
A.1 Currency Fluctuation, Foreign 12 49.60% 65.0% 0.0% 20.0% 15.0%
Exchange and Convertibility:
C.17 Main Contractor's Qualification and 13 49.60% 50.0% 15.0% 35.0% 00.0%
Performance risk
C.30 Delay in provide Contractor with 14 47.20% 35.0% 0.0% 65.0% 00.0%
requested information:
C.2 Late Cabinet's Approval / Delay in 15 47.20% 15.0% 20.0% 45.0% 20.0%
issuing Non objective
C.12 Defective / Incomplete Design: 16 44.80% 45.0% 10.0% 45.0% 00.0%
C.3 Lack of As Built drawing for Existing 17 44.00% 0.0% 15.0% 35.0% 50.0%
Utility
A.11 Difficulty in Claiming Insurance 18 41.60% 70.0% 5.0% 25.0% 00.0%
A.5 Unforeseen Site Conditions 19 43.20% 0.0% 10.0% 40.0% 40.0%
C.13 Conflicts between contract 20 43.20% 35.0% 20.00% 45.0% 30.0%
documents.
C.10 Errors in Design 21 42.40% 60.0% 00.0% 40.0% 00.0%
A.6 Import/Export Restriction 23 36.10% 25.0% 45.0% 10.0% 20.0%
C.26 Changing of Supervision staff during 24 35.20% 0.0% 20.0% 70.0% 10.0%
construction.
C.27 Breach of Contract by One of 25 34.40% 55.0% 25.0% 20.0% 00.0%
Contract parties
TR: Risk Transfer ER: Risk Elimination MR: Risk AR: Risk Acceptance
Mitigation

According to the results of investigating the most significant risk factors affecting the
project objectives and assumed by clients or their representative, there is six (6) of out
of the ten (10) most significant risk factors assumed by clients are shared with or
affected contractor as well, but its noted that client and consultant are proposed different
response strategy for their perspectives than the proposed strategy by contractor.

P a g e | 14
The Ten (10) key risk factors ranked by the clients and consultants participant are
categorized under global risks and one factor was categorized under external risks. Two
risk factor which are C.9 & C.6 falls under design and specification risks sub category.
Three (3) risk factors (C.7, C.28, and C.35) categorized under client generated risks sub
category, Risk factor C.18& C.19 under construction related risks, Risk factor C.34
under management general risks, C.33 risk factor under client's financial risks.

In same line with the contractors, consultants most favorite risk response methods are
risk transfer and mitigation. Since For the top ten ranking risk factors the recommended
strategies are transfer for three (3) factors and mitigation for five (5) risk factors.

3.2.3.3 Comparison of Response Strategy Employed by Each Party:

Table 3.4 present the ranking of the top 20 risk factors out of explored Fifty-Six risk
factors and the different between employed response strategies recommended by each
party. The rank presented in table is based on the average importance index in each
party perspective presented in table 3.2& 3.3 above.
Table (3.4), Total Computed Results of Risk Importance Index and Response Strategy.
S.I. Risk Factor Rank Risk Allocation Most Recommended
No. Response Strategy
Contr. Client Contr. Client
C.35 Delay in finishing the project. 1 MR TR
C.7 Owners unreasonably imposed tight 2 MR TR
schedule.
C.28 Owner's Delay Payments & Financial 3 TR MR
Ability
C.9 Consultant Diligence and care of the 4 ___ MR&TR
project.
C.19 Variation order 5 TR MR
C.18 Difference between Estimated quantities 6 TR AC
and Actual quantities
C.6 Delay in Design Stage 7 ___ MR
A.2 Inflation 8 TR TR
C.33 Clients Capital Return Difficulty 9 ___ ER
B.9 Subcontractor's Delay & Poor Management 10 TR ___
qualification
C.5 Difficulties in Procurement of Main 11 ___ MR
Contractor
C.17 Main Contractor's Qualification and 12 ___ TR
Performance risk
C.22 Prices Changes during construction 13 MR ___
C.30 Delay in provide Contractor with requested 14 TR MR
information
C.20 Claims and dispute procedure 15 MR ___
A.1 Currency Fluctuation, Foreign Exchange and 16 TR TR
Convertibility:
C.12 Defective / Incomplete Design: 17 ____ TR&MR
(Continued )- Table( 3.4)

P a g e | 15
S.I. Risk Factor Rank Risk Allocation Most Recommended
No. Response Strategy
Contr. Client Contr. Client
C.36 Owner's Refuses to compensate the claims 18 MR ___
A.3 Competition Risk &Unfairness opportunities: 19 MR ___
C.21 Inaccurate or incomplete cost estimate for 20 MR ___
the work

Table 3.4 shows that most of high ranked risk are mainly allocated to contractors or
shared between clients and contractors. Also clients for those risks are more frequent
transfer it to other part even contractors, consultant or insurance agent.

Also, it's noted that most of shared risk factors dont have the same most frequency
response strategy from both parties, as client transfer the shared risk factors to the
contractor through a contract and contractor try to mitigate or accept this risk, or reverse
scenario. Transfer those risks from any party to another is depending on responsibilities,
obligations and liabilities under the provisions of the contract between those parties.

3.2.4 Response Strategies to the Key Project Risks :

The following are the detailed action recommended for each project party as the
response to the highest significant risk factors highlighted above in table 3.4. Those
actions are not limited to one response methods but vary and each party to select even to
use a sole action or combining more than one depending on project status and his
strategical plan.

Response strategy to Owners unreasonably imposed tight schedule & Delay in

Finishing of the project :
Tight Project Schedule was perceived to extensively influence all project objectives
which infers that formulating an appropriate schedule .This risk normally transferred
from client to contractors , but this will not solve the root of the problem it just open the
door for a claim cases and disputes.

Accordingly, its recommended that Client to Award the project to more technical
qualified contractor (Risk Mitigation); State a milestone for each project stage to
measure the progress and take the proper corrective action (Risk Mitigation); Follow up
time schedule regularly and update the schedule to cope any delay (Risk Mitigation) or
Propose alternative method of construction or technology/ fast track the project could

P a g e | 16
finish in less time (Risk Elimination). On other hand, Contractors should Employ more
resources & crash the time schedule to finish the project on time (Risk Mitigation).

Response strategy to Owner's Delay Payments & Financial Ability :

Its a common practice that Contract specify time limit for proceeding Contractors
payment. Clients should Pay the contractors against work done on time in accordance
to contract documents (Risk Mitigation); To secure an alternative Finance agent for your
business as banks or insurance company (Risk Mitigation) and to Agree with the cash
flow plan with the contractor prior to start the project (Risk Mitigation).

Contractors advised to notice the clients for any delay in payment and the subsequent
impact on the project progress (Risk Transfer); Ensure that a reputable owner finances
the project (Risk Mitigation) and to Assure that the cash flow plan has been noticed ant
approved by client in early stage of the project (Risk Mitigation).

Response strategy Consultant Diligence and care of the project.

The Consultant Diligence and care of the project is risk owned by the Client. In order to
avoid any consequence of this risk the clients should state in consultancy agreement
that the consultant shall exercise all possible skill, care and diligence in the discharge of
the duties agreed to be performed by him (Risk Transfer); Employ more qualified
experienced consultants (Risk Mitigation); Employ a technical clients perspectives team
to review the consultant design and follow up his performance. (Risk Mitigation) and in
case this event take place the client should Claim the consequence of any error, lack of
care or negligence on consultant part from the consultant (Risk Transfer).

Response strategy to Variations and Difference between Estimated quantities

and Actual quantities:
Variation and Difference between Estimated & actual quantities have a high probability
of occurrence during the construction stage .it could affect the construction execution
plan as well as the business plan.

Clients should take actions against this risk factor such as Employ more qualified
designer to assure the design is complete and to minimize the changes during
construction stages (Risk Mitigation); can state a condition in the consultancy
agreement make the consultant responsible for compensate a percentage of any
variations due to uncompleted design or design faults (Risk Transfer) and should

P a g e | 17
compensate the contractor against any additional cost and time as a result of this
variation (Risk Acceptance).

Sometimes Employ a Lump sum contract type which shift the risk of quantities
completely to contractor firm (Risk Transfer) since just Reimburse the contractor
against the actual quantities for work done consider (Risk Acceptance).

Contractor on another side have an options to accept the contract rates stated in BOQ
for additional works /variation if reasonable as stated in contract or propose a change on
method of statement for the work to reduce the impact of variation (Risk Mitigation);
Quantities take off for the project during Tender stage (Risk Mitigation); Accept the
difference quantity with the same contract rate up to the limited percentage (Risk
Acceptance) and to claim additional cost if the difference quantity is more that stated in
contract conditions (Risk Transfer).

Response strategy to Inflation:

No one in the market can doubt the high inflation percentage in latest years, and how its
affect construction industry in Egypt. Normally Clients State in the contract documents
that inflation is contractor responsibility throughout the project duration which transfer
risk to contractor. Also client add a contingency reserve amount in the estimated budget
against inflation (Risk Acceptance) and Record the inflation rate in recent years to
expect the inflation percentage through the project duration (Risk Mitigation).

Contractor actions as a result are binding a Contract with supplier in early stage of
project with a fixed rate through the project life time (Risk Transfer) and add a
contingency reserve amount in the estimated budget against inflation (Risk Acceptance).
The governments contractors law has compensate the contractor for major changes in
material prices (Risk Transfer).

Response strategy to Subcontractor's Delay & Poor Management qualification:

This risk factors is mainly allocated to the contractor. However, it affect the overall
project objectives. Contractors should be insured against this risk through obtaining a
performance bank guarantee from subcontractor payable for any sub-contractor faults
( Insurance) also to state a contract clause with subcontractor to protect the contractor
from subcontractor faults (Risk Transfer); Employ a more trained and experienced
subcontractors (Risk Mitigation); Employ specialist and qualified subcontractors

P a g e | 18
subcontractor if he could not complete the work (Risk Mitigation) and to subcontract
wok packages to financially stable subcontractors only.

The notable point in the recommended response strategy above is that same action is
valid for response more than one risk factors. Another notable point that risk response
strategy for most of risk factors is mainly generated from contract conditions and
employ well trained and experienced staff.

4.0 Conclusion & Recommendations

4.1 Conclusion
The successful implementation of risk management depends on a written and clear risk
management policy, this policy must clearly describe the main goal of the project, the
strategic consideration, the financial strength and the willingness to assume which risks
of the project. Through the analysis of the survey found There is a general agreement in
the Egyptian market that the level of risks has increased in recent years due to the today's
market conditions with heavy competition, advanced technology and tough economic
conditions which lead to participate in a projects with a high degree of uncertainties and
risk taking has assumed significant greater proportions.

Due to absent of historical records from pervious projects, there is unavailability of

checklists of identified potentially possible risks. As a result Brainstorming & Interview/
focus group discussions is the most frequent employed tools used in Egypt for identify
risks. A similar finding observed in the approach of estimating contingency reserves,
where deterministic approach and expert judgment are the most frequent employed.

Client's unreasonable imposed tight schedule and delay of payment from the clients
were the highest significant risks in contractor's perspectives. Further, its observed that
the highest ten significant risks affecting contractors are included, inflation; variations;
different between estimated and actual quantities; subcontractors delay& management
qualification; prices change during construction; claims procedures; and owner's refuse
to compensate the claims. In client's perspectives, the delay in finishing the project,
consultant diligence and care, the delay in design stage and capital return difficulty risks
should include in the list of the top highest significant risks.

P a g e | 19
Due to the different roles and responsibility every party employs different response
strategy to the same risks. However, Risk mitigation and risk transfer is the most favorite
risk response method employed by different Egyptian organizations against significant
risk factors. Risk retention with adding contingencies is preferred over insurance.

4.2 Recommendations
From studying the PRM process through the different project stages, its recommend that
the clients & contractors should realize the objective and the benefit will be gained from
the implementation of this process through project life cycle. The construction
practitioners should increase their experience in the implementation of PRM ; use the
integration between it and the other project management discipline in construction as an
aid to enhance the quality of the construction projects.

Managing risk is an ongoing process throughout the project life cycle as risk will be
constantly changing, risk management plans should be in place to deal quickly and
effectively with risk if they arise, it is important to work as an integrated team from the
earliest possible stages to identify risk throughout the team supply chain. The risk
analysis studies should be conducted on government projects in order to be executed at
the lowest cost with maintaining required function and performance, A training plan on
risk management techniques should be developed to be spread and applied especially in
government sector.

Before contracting stage contractor, designer, owner must study the financial condition,
experience, performance. Based on those factors they can specify the party who can
manage each risk may happen during the project, that can help to reduce the risk cost
add to the project cost.

REFERENCES
A. Books
1. Barry Fryer &Marilyn Fryer, "The Practice of Construction Management, People
and Business Performance", Blackwell Publishing 2004.
2. Chris Chapman and Stephen Ward, "Project Risk Management Processes
Techniques and Insights", John Wiley &Sons, ltd, Second Edition 2003.
3. Harold kerzner, "Applied Project Management Best Practices on Implementation",
John Wiley &Sons, Inc, 2000.

P a g e | 20
4. Max Wideman," Project and Program, Risk Management, A Guide to Managing
Project Risks and Opportunities", A Publication of the Project Management
Institute, USA, 1992.
5. PMBOK A Guide to the Project Management Body of Knowledge, Project
Management Institute, four campus boulevard, Newtown Squuare, USA, Fourth
Edition, 2008.
6. Project Management Institute (PMI), "Practice Standard for Project
Risk Management", Newtown Square, USA, 2009.
B. Researches
7. A. Ahmed, R. Kusumo, S Savaci, "Application of Analytical Hierarchy Process and
Bayesian Belief Networks for Risk Analysis", Complexity International, Volume 12,
2005.
8. Bing li, Akintola Akintoye, P.J Edward, "The Allocating of Risk in PPP,PFI
Construction Projects in the UK", International Journal of Project Management,
2004.
9. Chris Chapman &d Stephen Ward,"Project Uncertainty Management as a Desirable
Future", Proceedings of the Project Management Institute Annual Seminars &
Symposium Houston, Texas, USA, September 2002.
10. Crispin Piney, " Risk Response Planning: Selecting the Right
Strategy", The Fifth European Project Management Conference, PMI Europe 2002.
11. Chris Chapman, "Key Points of Contention in Framing
Assumptions for Risk & Uncertainty Management", International Journal of Project
Management, 2006.
12. David N. Ford, "Achieving Multiple project objectives through
contingency Management", Journal of Construction Engineering and management,
2002.
13. J. H. M. Tah & V. Carr, "Knowledge Based Approach to
Construction Project Risk Management", Journal of Computing in Civil
Engineering, July 2001.
14. K.C. Lam, D. Wang Patricia T.K. Lee, & Y.T. Tsang, "Modeling
Risk Allocation Decision in Construction Contracts", International Journal of
Project Management, July 2007.
15. Patrick X.W Zou, Guomin Zhang & Jiayuan Wang,
"Understanding the Key Risks in Construction Projects in China", International
Journal of Project Management, 2007.
16. Patrck Sik & Liyin Shen, "Risk in Chinese Construction Market-
Contractors' Perspective", Journal of Construction Engineering & Management
(November 2004).

P a g e | 21
17. Syed Ahmed, Salman Azhar & Irtishad Ahmad, "Evaluation of
Florida General Contractors Risk Management PRACTICS", Florida International
University, Miami, Florida, USA, 2000.

P a g e | 22
 Appendix I
Results of Risk Importance Index (Contractor's Perspective)
S.I. Risk Factor Average Average Importance Rank
No. Probability Impact Index
(P) (I) RSi
External Risk Factors :
A.1 Currency Fluctuation, Foreign 52.72% 59.10% 40.00% 16
Exchange and Convertibility
A.2 Inflation 67.27% 66.36% 51.45% 4
A.3 Competition Risk &Unfairness 61.81% 56.36% 43.64% 11
opportunities:
A.4 Unexpected incident weather 45.45% 39.10% 20.00% 43
A.5 Unforeseen /Differing Site 49.10% 56.33% 32.36% 24
Conditions :
A.6 Import/Export Restriction 50.91% 51.81% 30.36% 31
A.7 Difficulty to connect with existing 49.10% 53.64% 30.18% 32
utility :
A.8 Government's improper intervention 40.91% 60.00% 27.27% 37
:
A.9 War threats and Political instability 39.10% 64.54% 30.18% 33
Activity Internal Risk Factors :
B.1 Labor , Material and Equipment 40.00% 64.54% 25.81% 39
Availability
B.2 Low productivity of labors or 51.82% 63.64% 36.54% 19
Equipment
B.3 Labor Skills Level and Large Wage 50.00% 64.54% 35.81% 20
Scales:
B.4 Difficulties in Material Procurement 48.18% 55.54% 30.91% 28
B.5 Material Waste 51.81% 50.91% 30.00% 34
B.6 Sub-Contractor Qualification 57.27% 68.18% 42.73% 13
&Poor Performance
B.7 Monopoly / Poor Competitions Risk 36.36% 50.00% 20.91% 42
B.8 Quality problem and Defective 42.72% 62.73% 29.10% 36
works
B.9 Subcontractor's Delay & Poor 66.36% 69.09% 50.54% 6
Management qualification
Global Internal Risk Factors
C.1 Site Access /Right of way and 47.27% 60.91% 31.63% 26
Traffic Condition :
C.2 Late Cabinet's Approval / Delay in 44.55% 60.91% 31.10% 27
issuing NOCs and work permits
C.3 Lack of As Built drawing for 57.27% 61.81% 39.10% 17
Existing Utility
C.4 Difficulties in Procurement of 47.27% 58.81% 30.54% 30
subcontractor/ supplier
C.7 Owners unreasonably imposed 72.73% 69.10% 55.10% 2
tight schedule.
C.8 Accident during construction: 50.91% 45.45% 35.10% 22
C.13 Conflicts between contract 60.00% 60.00% 38.18% 18
documents.
C.18 Difference between Estimated 66.36% 70.91% 52.36% 3
quantities and Actual quantities
C.19 Variation order 58.20% 65.45% 50.91% 5

C.20 Claims and dispute procedure 61.18% 64.55% 45.63% 8

C.21 Inaccurate or incomplete cost 55.46% 71.82% 43.27% 12
estimate for the work
C.22 Prices Changes during construction 61.82% 65.46% 45.82% 7
C.23 Difficulty in measuring the 34.55% 53.63% 26.18% 38
quantities and Reimbursement
S.I. Risk Factor Average Average Importance Rank
No. Probability Impact Index
(P) (I) RSi

/Appendix I 1
C.23 Difficulty in measuring the 34.55% 53.63% 26.18% 38
quantities and Reimbursement
C.24 Unavailability of Design 47.207% 56.37% 29.45% 35
requirements in local market
C.25 Changing of Executing key staff 53.64% 54.55% 32.72% 23
during construction
C.27 Breach of Contract by One of 40.00% 70.91% 30.91% 29
Contract parties
C.28 Owner's Delay Payments & 70.00% 66.40% 58.00% 1
Financial Ability
C.30 Delay in provide Contractor with 65.45% 56.36% 44.36% 10
requested information
C.31 Delay in Approval of Submission / 62.72% 60.91% 42.45% 14
delay in Inspection or Testing
C.32 Contractors Capital Return 48.18% 60.00% 42.45% 15
Difficulty
C.34 Poor Management & 49.10% 50.00% 31.63% 25
Administration Facilities
C.36 Owner's Refuses to compensate the 58.19% 62.73% 44.72% 9
claims

/Appendix I 2
 Appendix II
Results of Risk Importance Index (Clients Perspective)
S.I. Risk Factor Average Average Importance Rank
No. Probability Impact Index
(P) (I) RSi
External Risk Factors :
A.1 Currency Fluctuation, Foreign 75.91% 64.10% 49.60% 12
Exchange and Convertibility:
A.2 Inflation 76.27% 64.54% 51.20% 9
A.5 Unforeseen Site Conditions 68.00% 60.10% 43.20% 19
A.6 Import/Export Restriction 67.83% 52.00% 36.10% 23
A.7 Difficulty to connect with existing 36.10% 40.00% 16.80% 32
utility
A.8 Government's improper intervention 64.10% 52.00% 34.40% 27
A.9 War threats and Political instability 36.09% 64.00% 22.40% 31
A.10 Social and Culture Risk Factors 36.00% 40.00% 14.40% 33
A.11 Difficulty in Claiming Insurance 63.45% 64.73% 41.60% 18
Global Internal Risk Factors
C.1 Site Access /Right of way and Traffic 48.91% 52.10% 32.00% 30
Condition
C.2 Late Cabinet's Approval / Delay in 64.00% 67.36% 47.20% 15
issuing Non objective certificates
and work permits
C.3 Lack of As Built drawing for 67.83% 60.36% 44.00% 17
Existing Utility
C.5 Difficulties in Procurement of Main 60.00% 80.10% 50.40% 11
Contractor
C.6 Delay in Design Stage 72.37% 76.33% 57.60% 7
C.7 Owners' unreasonable imposed tight 84.45% 79.81% 68.80% 1
schedule for Design
C.9 Consultant Diligence and care of the 72.00% 80.64% 59.20% 6
project.
C.10 Errors in Design 56.10% 72.00% 42.40% 21
C.11 Inaccurate interpretation of terms of 63.91% 68.54% 32.00% 29
reference issued by the client.
C.26 Changing of Supervision staff during 60.82% 63.45% 35.20% 24
construction.
C.27 Breach of Contract by One of 52.19% 67.83% 34.40% 25
Contract parties
C.28 Owner's Delay Payments & 84.10% 72.00% 62.40% 5
Financial Ability.
C.29 Miss understanding of project nature 48.18% 55.52% 33.60% 26
by executing Agency.
C.30 Delay in provide Contractor with 68.00% 68.00% 47.20% 14
requested information:
C.31 Delay in Approval of Contractor 60.00% 64.00% 38.40% 22
Submission / delay in Inspection or
Testing.
C.33 Clients Capital Return Difficulty 68.00% 76.36% 51.20% 10

C.34 Poor Management & Administration 67.27% 80.00% 52.80% 8

Facilities
C.35 Delay in finishing the project. 80.36% 80.00% 62.40% 4

/Appendix II 1
/Appendix II 2