THE IMPORTANCE AND ALLOCATION OF RISKS IN MALAYSIA
CONSTRUCTION PROJECT
WONG MING YIEN
UNIVERSITI TEKNOLOGI MALAYSIA
PSZ 19:16 (Pind. 1/07)
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(full text)
WONG MING YIEN
28th JANUARY 1986
THE IMPORTANCE AND ALLOCATION OF RISKS IN
MALAYSIA CONSTRUCTION PROJECT
2010/2011
860128-13-5546
22 July 2011
DR. KHAIRULZAN YAHYA
22 July 2011
“I hereby declare that I have read this project report and in my opinion this project
report is sufficient in terms of scope and quality for the award of the degree of
Master of Science (Construction Management)”
Signature : .................................................
Name of Supervisor : DR. KHAIRULZAN YAHYA
Date : 22 JULY 2011
i
THE IMPORTANCE AND ALLOCATION OF RISKS IN MALAYSIA
CONSTRUCTION PROJECT
WONG MING YIEN
A project report submitted in fulfillment of the
requirements for the awards of the degree of
Master of Science (Construction Management)
Faculty of Civil Engineering
Universiti Teknologi Malaysia
JULY 2011
ii
DECLARATION
I declare that this project report entitled “The Importance and Allocation of
Risks in Malaysia Construction Project” is the result of my own project
except as cited in the references. The project report has not been accepted for
any degree and is not concurrently submitted in candidature of any other
degree.
Signature : ....................................................
Name : WONG MING YIEN
Date : 22 JULY 2011
iii
DEDICATION
Special thanks to my beloved father, mother, brother,
and all my friends for their help and understanding.
Thanks for Everything….
iv
ACKNOWLEDGEMENT
I would like to take this opportunity to record my sincere appreciation to
those who has been helping me throughout the project. This project report would not
have been possible successful without the great support, guidance, sacrifice and
generous contributions from various parties.
First of all, I would like to thank Dr. Khairulzan Yahya who is my project
supervisor. I am really thankful to him for the impressive ideas, knowledge, patience
and understanding that he has contributed throughout the whole duration of preparing
this project. His contributions are much appreciated.
Besides that, I would like to extend my appreciation to those parties involved
whom have lending their hand in helping me getting the related information during
the project process.
Lastly, I would like to thank all my family members, relatives and friends for
their support and dedication in helping me to complete this project. Thank you very
much.
v
ABSTRACT
The risks naturally exist in every construction project and they are hardly to
eliminate and only can be transferred or shared by contractual parties. Generally the
overrun of the cost and time in project are mainly caused by risks. Therefore, in order
to effectively manage risks in construction projects, it is essential to identify
important risks, and properly allocate them to the contractual parties. This means it is
essential for contractual parties to understand well in allocation of risks. The
objective of this study was to identify the importance of risks, evaluate respondents‟
perception in risk allocation and the contribution of risks to increase project cost. A
questionnaires survey was conducted and distributed to the contractors Grade 7 and
developers in Johor. A total of 33 construction project risks were identified and
evaluated. Methods of analysis used in this study were frequency analysis, mean
index analysis, Mann-Whitney test and risk analysis matrix. The finding of the study
shows that the most of risks identified were under medium level of risks and „change
in work‟ was the most important influenced risk on the delivery of project as it has
the highest ranked. As compared the perception of contractors and developers, both
of them have similar view on the importance of risks and the allocation of risks. The
most contribution risk to increase construction project cost was „inflation‟.
vi
ABSTRAK
Risiko wujud secara semulajadi dalam setiap projek pembinaan. Risiko sukar
untuk dielakkan dan hanya boleh dipindahkan atau dikongsi oleh pihak-pihak yang
terlibat dalam sesuatu kontrak. Umumnya, kebanyakan lebihan masa dan kos dalam
sesuatu projek adalah disebabkan oleh risiko. Oleh itu, mengenalpasti kepentingan
risiko dan mengagihan risiko kepada pihak-pihak berkontrak adalah penting dalam
usaha untuk menguruskan risiko dalam projek pembinaan. Dengan kata lain, adalah
penting bagi pihak-pihak yang berkontrak memahami dengan baik dalam pengagihan
risiko. Objektif kajian ini adalah untuk mengenalpasti kepentingan risiko, menilai
persepsi responden dalam pengagihan risiko dan sumbangan risiko untuk
meningkatkan kos projek. Satu kajian soal selidik telah dijalankan terhadap pemaju
dan kontraktor Gred 7 di negeri Johor. Sebanyak 33 jenis risiko dalam projek
pembinaan telah dikenalpasti dan dinilai. Kaedah analisis yang digunakan
termasuklah analisis kekerapan, analisis indeks purata, ujian Mann-Whitney dan
matriks analisis risiko. Penemuan kajian menunjukkan kebanyakan risiko yang
dikenalpastikan adalah dalam kategori sederhana dan fakto „perubahan dalam risiko
kerja‟ adalah merupakan risiko yang paling mempengaruhi dalam menyiapkan
projek. Dalam perbandingan antara persepsi kontraktor dan pemaju, kedua-dua pihak
mempunyai pandangan yang sama mengenai tahap kepentingan risiko dan begitu
juga dalam pengagihan risiko. Kajian juga mendapati bahawa faktor „inflation‟
adalah penyumbang utama dalam peningkatkan suatu kos projek.
vii
TABLE OF CONTENTS
CHAPTER TITLE PAGE
DECLARATION ii
DEDICATION iii
ACKNOWLEDGEMENTS iv
ABSTRACT v
ABSTRAK vi
TABLE OF CONTENTS vii
LIST OF TABLES xi
LIST OF FIGURES xiii
LIST OF ABBREVIATIONS xiv
LIST OF APPENDICES xv
1 INTRODUCTION
1.1 Introduction 1
1.2 Background of Study 2
1.3 Problem Statements 4
1.4 Aims and Objectives of the Study 6
1.5 Scope of the Study 6
1.6 Significance of the Study 7
1.7 Research Methodology 7
viii
2 LITERATURE REVIEW
2.1 Introduction 9
2.2 Risk 10
2.3 Risk Management 11
2.3.1 Risk Identification 12
2.3.2 Risk Analysis 14
2.3.3 Risk Response 15
2.4 Risk in Construction Project 16
2.5 Construction Project Risk Classification 18
2.6 Types of Construction Project Risks 19
2.6.1 Physical Risks 20
2.6.2 Design Risks 20
2.6.3 Construction Risks 20
2.6.4 Financial Risks 21
2.6.5 Environmental Risks 22
2.6.6 Safety-Accident Risks 22
2.6.7 Legal-Contractual Risks 22
2.6.8 Political Risks 23
2.7 Risk Allocation 23
2.7.1 Definition and Theory of Risk Allocation 25
2.7.2 Benefits of Risk Allocation 26
2.7.3 Importance of Understanding Risk Allocation 28
2.7.4 Risk Allocation and Pricing 29
2.8 Role of Contract in Allocation of Risk 30
2.9 Risk and Project Cost Relationship 31
2.10 Risk Perception 33
2.11 Summary 34
3 RESEARCH METHODOLOGY
3.1 Introduction 35
3.2 Research Design 36
ix
3.3 Location of Study 36
3.4 Research Population 37
3.5 Research Sampling 37
3.6 Research Instruments 39
3.6.1 Section A: Personal and Company Details 39
3.6.2 Section B: Perception on Importance of
Construction Project Risks 40
3.6.3 Section C: Perception of on Allocation of
Construction Project Risks 41
3.6.4 Section D: Perception of the Contribution of Risks
to Increase Project Cost 41
3.7 Data Collection 42
3.8 Data Analysis 43
3.9 Summary 47
4 RESULTS AND DISCUSSIONS
4.1 Introduction 48
4.2 Data Collection 48
4.3 Data Analysis and Findings 49
4.4 Personal and Company Details 49
4.4.1 Type of Firm 50
4.4.2 Year of Experience in Construction Project 51
4.4.3 Type of Project Involved 52
4.4.4 ISO 9001 Certified Company 53
4.5 Perception on the Importance of Construction Project Risks 54
4.5.1 Analysis on Type, Risk Score and Level of
Importance of Construction Project Risks 56
4.5.2 Rank the Importance of Construction Project Risks 60
4.5.3 Comparison of Contractors‟ and Developers‟
Perception on the Importance of Construction
Project Risks 63
x
4.5.4 Comparison of Contractors‟ and Developers‟
Perception in Level of Frequency of Risks‟
Occurrence 66
4.5.5 Comparison of Contractors‟ and Developers‟
Perception in Level of Impact of Risks 70
4.6 Perception on the Allocation of Construction Project Risks 74
4.6.1 Contractors‟ Perception of Risk Allocation 74
4.6.2 Developers‟ Perception of Risk Allocation 77
4.6.3 Comparison of Contractors‟ and Developers‟
Perception of Risk Allocation 79
4.7 Perception on the Contribution of Risks to Increase
Project Cost 80
4.8 Summary 84
5 CONCLUSION AND RECOMMENDATION
5.1 Introduction 85
5.2 Conclusion 86
5.2.1 The Importance of Construction Project Risks 86
5.2.2 Comparison of Contractors‟ and Developers‟
Perception on the Importance of Construction
Project Risks 87
5.2.3 The Allocation of Construction Project Risks 87
5.2.4 The Contribution of Risks to Increase Project Cost 89
5.3 Problem Encounter 89
5.4 Recommendations for Future Research 90
REFFERENCES AND BIBLIOGRAPHY
APPENDIX A - FORM OF QUESTIONNAIRE
xi
LIST OF TABLES
TABLE NO. TITLE PAGE
2.1 Risk factors under the risks classification 24
3.1 Number of contractors G7 and developers at Johor 37
3.2 Krejcie and Morgan‟s Table 38
3.3 Likert Scale for the frequency level of construction risk‟s occurrence 40
3.4 Likert Scale for the impact level of construction risk 41
3.5 The Classification of Mean Index for Section D 44
3.6 Risk Analysis Matrix Table 45
3.7 Level of Risk 46
4.1 Frequency and Percentage of Type of Firms 50
4.2 Frequency and Percentage of Year of Experience in Construction Project 51
4.3 Frequency and Percentage of Type of Project involved 52
4.4 Frequency and Percentage of ISO 9001 Certified Company 53
4.5 Risk Analysis Matrix Table 55
4.6 Level of Risk 55
4.7 Mean, Risk Score and Level of Risk for Construction Project Risks 58
4.8 Overall Risk Score and Level of Risk Importance 62
4.9 Asymptotic Significance value of Construction Project Risks 65
4.10 Total Mean and Asymptotic Significance for Level of frequency of
Construction Project Risks 68
4.11 Total Mean and Asymptotic Significance for Level of Impact of
Construction Project Risks 72
4.12 Percentage of Contractors‟ Perception towards Risk Allocation 75
xii
4.13 Percentage of Developers‟ Perception towards Risk Allocation 78
4.14 Comparison of Contractors‟ and Developers‟ Perception towards Risk
Allocation 81
4.15 Contribution of Risk to Increase Project Cost 83
5.1 Summary of Risk Allocation 88
xiii
LIST OF FIGURES
FIGURE NO. TITLE PAGE
1.1 Research Methodology Flow Chart 8
2.1 Risk Management Process 11
2.2 Classification of Construction Project Risks 19
4.1 Type of Firms 50
4.2 Year of Experience in Construction Project 51
4.3 ISO 9001 Certified Company 53
4.4 Level of Frequency of Construction Project Risks 69
4.5 Level of Impact of Construction Project Risks 73
xiv
LIST OF ABBREVIATION
ABBREVIATION FULL NAME
CIDB - Construction Industrial Development Board
GDP - Gross Domestic Product
PSZ - Perpustakaan Sultanah Zanariah
REHDA - Real Estate & Housing Developers‟Association
SPSS - Statistical Package for Social Science
UAE - United Arab Emirates
US - United States
xv
LIST OF APPENDICES
APPENDIX TITLE
A FORM OF QUESTIONNAIRE
CHAPTER 1
INTRODUCTION
1.1 Introduction
Construction is a complex and dynamic industry. Construction includes all
types of activities related to construct, erect, repair or demolish immobile structure
and related facilities. According to Abdullah (2004), construction industry is the
sector of national economy which engaged in erecting, altering, repairing and
demolishing buildings, structures, and civil engineering works. Moreover, it also
involve the assembly and installation on site of pre-fabricated components and
building engineering services.
Besides, construction industry is also a vehicle through which a country‟s
physical developments are activated by starting projects from the blue print stage to
the implementation. The implementation and materialization of such projects
inevitably can bring a lot of benefits to the people and the country. Hence, this can
satisfy the aspiration of national progress and growth, which also will be uplifting the
status of the country economically (Adnan, 2008).
2
In recent years, there is rapid growth in Malaysia‟s construction industry after
economic recovery. The positive growth of construction has made it being
recognized as a major economic force and also generates Malaysia‟s development
(Norliana, 2006). Thus, the construction industry has played a major role in
contributing to Malaysia‟s Gross Domestic Product (GDP).
However, there also exist the negative consequences as there has positive
effect in construction industry. According to Norliana (2006), if there are no
prevention policies, the negative consequences normally arise from the incremental
of project, activity and the usage of various machinery and equipment in construction
site which causes the arising in risk of accident, delay, cost overrun, occupational
safety and health and so on.
This represent that construction is a very competitive, high-risk business. In
many circumstances, the competitiveness and the perception of risks can make the
relationship between participants adversarial as the limitations of traditional project
delivery systems. There are many studies agreed that the adversarial situations
significantly influence the productivity and efficiency of the construction industry
(Kadefors, 2004).
1.2 Background of Study
Risk is a complex phenomenon that has physical, monetary, cultural and
social dimension. The consequences of risk events go well beyond the direct physical
harm to financial or physical assets, people or ecosystems to effect the way a society
operates and people think (Loosemore, Raftery, Reilly, & Higgon, 2006). In
construction management field, risk defined as an exposure to economic gain or loss
arising from taking part in the construction process (Barrie & Paulson, 1992).
3
Risks naturally always exist in every industry such as factory industry,
agriculture industry, construction industry and others. Among the risks, some can be
eliminated but some risks are hardly to be eliminated. Thus, it must find a solution to
solve or prevent the risks to be occurred. As according to Andi (2006), the risks can
only be shared or transferred from one party to other party through contract clauses.
The construction industry, like any other industry or business, is risky. This is
because of the unique features of construction activities, for instance complicated
processes, long period, financial intensity, abominable environment and dynamic
organization structures (Patrick, Zhang, & Wang, 2009). Due to the nature of
construction organization structure, management, process and business activities, the
construction industry are usually associated with a high level of risks. The risks that
exist in this industry are normally negatively affect contracting parties‟ beneficial
and also affect executed project which cause schedule delay or cost overrun (El-
Adaway & Kandil, 2010).
For construction projects, they normally carried out under an environment
characterized by varying degree of uncertainties and risks, which can categorized in
„known‟, „known-unknown‟, and „unknown-unknown‟ conditions (Andi, 2006).
However, construction projects are apparent to have more inherent risk as there are
many contracting parties involved in a project such as owner, contractor,
subcontractor, designer, supplier and others. Each project has its own unique and
built only once. In addition, the increasing of size and complexity of construction
project would also add to the risks (El-Sayegh, 2008). Although risks can be
predicted of most projects, it is difficult to handling them.
Hence, effectively identifying and managing risks is very essential in a
construction project as to deal with the risks related with variable construction
activities. It has been becomes an important issue in project management as to
achieve the successful delivery of a project and the objectives in terms of cost, time,
quality, safety and environmental sustainability (Patrick, Zhang, & Wang, 2009).
4
1.3 Problem Statements
The cost overrun and schedule delay in the most construction project were
mainly caused by risks. Thus, the effectiveness of risk identification and
management are needed in order to solve this problem. As a result, the risk
management has become increasingly important in today‟s environment as it be able
to reduce or prevent risks happened and dire consequences.
As stated by Uher and Davenport (2002), risk management can be defined as
“a systematic method of looking at areas of risk and consciously to determine how
each should be treated. It can also defined as a management tool that aims at
identifying sources of risk, determining their impact, and developing appropriate
management responses” (Patrick, Zhang, & Wang, 2009). Furthermore, risk
management in construction projects has been widely discussed.
To manage well of the risks, it must identify potential risks that might be
existing in construction project and analyse the probability of risk events first.
Additionally, all parties involved in project must understand risk preference, risk
responsibilities, risk management capabilities and risk event conditions in order to
make the risk management to be more effective and efficient (Wang, ASCE, & Chou,
2003).
Understanding the concept of risk allocation and responsibilities of each
contracting parties on the risks in contract clauses is an important step in managing
risks. The owner and contractor often have disagreements over risk management
responsibility as they usually have different understandings of contract clauses
(Hartman & Snelgrove, 1996).
5
Thus, the efficiency and effectiveness of contract clauses can merely be
comprehended when owner and contractor have the same perception or
understanding of risk management and risk allocation responsibility. Without the
clear and understandable contractual provisions, the contracting parties normally
might have disagreement toward risk responsibility. Subsequently, this can cause
mismanage a risk whereby the contracting parties assuming that the risk or its
consequences are not under their responsibility (Hartman & Snelgrove, 1996).
The mismanaged risks may possibly make contract relationships adversarial
and cause project inefficiencies. The result of this condition, it directly causes the
increasing on the project cost. For instance, if the contractor has different perceptions
of risk allocation with the owner or a lack of clear understanding to risk management,
the contractor will inappropriately manage the risks in construction projects as he or
she assumes that the risk events or consequences are not under his or her
responsibilities (Wang, ASCE, & Chou, 2003).
Moreover, the construction project risks may be categorized into several
types which are physical risks, economic risks, capability-related risks, time-related
risks, safety and construction risks (EJCDC, 1990). As according to Klemetti, the
construction risks can be categorized in several ways based on the source of risk, by
impact type, or by project phase (El-Adaway & Kandil, 2010). Thus, it is important
to identify and categorize the risks into groups as can make the contracting parties
clear in type of risks and it can help them easily allocate the risks.
In conclusion, ineffective risk allocation or misunderstanding of risk
allocation between contracting parties will leads a dispute after the occurrence of a
risk event. It is important for contracting parties to understand clearly about the risk
allocation and type of risks that are under their responsibilities as assisting them to
manage the risks. However, the method of risk management is always influenced by
the uniqueness of the construction industry in different country. As well, there is a
little known about risk allocation and risk management in Malaysia construction
6
industry. Therefore, this study will assess this issue and focus on traditional
procurement project as traditional procurement is the most common and popular
method used in construction industry.
1.4 Aims and Objectives of the Study
After in view of the related issues and problems, the aim of this study is to
evaluate the perception of contractors and developers on the importance and
allocation of construction risks in construction project. In order to achieve it, the
following objectives have been identified:
1. To identify the importance of construction risks in construction project.
2. To compare the perceptions of contractors and developers on the importance
of construction project risks.
3. To evaluate the perception of contractors and developers on allocation of
construction project risks.
4. To determine the contribution of risks to increase project cost.
1.5 Scope of the Study
This study was carried out by using questionnaire survey. The scope of study
will focuses on contractors and developers in Johor. The respondents will only focus
on contractors Grade 7 that registered with Construction Industrial Development
Board (CIDB) and developers that registered with Real Estate and Housing
Developers‟ Association Malaysia (REHDA).
7
1.6 Significance of the Study
The significance of this study is to ascertain the level of impact and frequency
of construction risks in construction project and then figure out the importance of
risks. The outcome can be used to help contractual parties to take action to manage
the risks by adding contingencies on them. This can protect their interests in the
event of a risk occurrence.
Besides, this study is also to identify construction risks allocation between
contracting parties. The outcome of this study can also be a reference for contractual
parties such as owners or developers and contractors to understand their
responsibilities in certain risk events. Besides, this will also be a simple guideline for
contractors when pricing the risks.
1.7 Research Methodology
The research methodologies are used so as to collect data, analysis data and
report on results and findings. The methods used in data collection are literature
reviews, and distributing questionnaire to the contractors and developers.
For data analysis, methods used in this study are frequency analysis, mean
index analysis, Mann-Whitney Test and risk analysis matrix. After analysis, the data
will be reported, elaborated, and discussed. SPSS software will be used in this study.
Figures 1.1 shows the research methodology flow chart as used for this study.
Figure 1.1 Research Methodology Flow Chart
1st
Stage
Objectives
Problem Statement
Research Objective
Literature
Review
Instrument
- Questionnaire
Respondents
- Contractors G7 and
Developers in Johor
Data
Collection Data
Analysis
Importance of
construction risks
in construction
project
The allocation of
construction project
risks
Title Selection
Conclusion and
Recommendation
2nd
Stage 3rd
Stage 4th
Stage 5th
Stage
The contribution of
each risk to increase
project cost
8