It has been suggested that projects in the construction industry are subject to risks more than other industries. However, there is often little parity in allocation of risks in the construction industry. Usually, project participants allocate risks by aversion where owners tend to shift risks to the primary contractor, who in turn transfers them to the subcontractors. As a result of this, risks are not necessarily allocated/ re-allocated to the party that is best able to manage them efficiently and effectively. Risk allocation can significantly influence the behavior of the project participants and hence affects project schedule, cost and performance. Inappropriate risk allocation has led to adversarial relationships between contracting participants and has consequently increased project cost.
The objective of this dissertation is to shed light on the current practices of risk allocation in the construction industry. The dissertation consists of three sections. The first section investigates and evaluates the problems of the current practice of risks allocation and their impacts on project
performance. The second section investigates, identifies, and classifies barriers to optimal risk allocation. The third section looks into allocating construction risk from a more cooperative and rational perspective. The goal is to provide the construction industry with a rational decision-making mechanism that will provide an alternative to the current practice of typically allocating risks by aversion. To meet the objectives, structured survey questionnaires for Sections One and Two were used.
The first survey found that the current practice of risk allocation has four major problems. These problems include:
1. Dispute, claims and tension leads to adversarial relationships.
2. Competitive relationship leads to aggressive relationships.
3. Subjective pricing of risk leading to higher contingency.
4. Allocation by aversion that leads to misallocation of risks.
The second survey found thirteen barriers to optimal risk allocation, which were classified into three main categories: behavioral, technical, and organizational barriers. Lack of an efficient risk allocation mechanism ranks at the top of the identified barriers. These findings were linked, in causal-effects relationships, to formulate an analytic model for the current practice of risk allocation.
This dissertation uses the research findings and the rational decision-making process to develop a practical mechanism for optimizing risk allocation. The developed mechanism was then fine-tuned and validated by a Delphi expert panel technique.
The developed mechanism should aid construction industry professionals and construction project participants in making rational and economical risk allocation decisions to alleviate the identified above-mentioned problems, overcome the identified barriers, and improve project efficiency by minimizing the negative impacts of the current practice of risk allocation on project cost, schedule and overall project performance.