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