The Construction Contractors In Nigeria Construction Essay

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CHAPTER 2

LITERATURE REVIEW

2.0 Introduction

Risk is simply the measure of the likelihood that you will suffer harm from the hazard (G. Tyler Miller, Jr 2006) and every human endeavor involves risk (Dey and Ogunlana, 2004; Poh and Tah, 2006). Take for instance, the life time of developing cancer of the lung from smoking a pack of cigarettes per day is 1 in 250, which means that 1 of every 250 people who smoke a pack of cigarettes per day will develop lung cancer over a typical lifetime. It is important to distinguish between possibility and probability because when I say that it is possible that a smoker can get lung cancer, I simply mean that the event could happen and the probability gives an estimate of the likelihood of such an event. So the same thing also happens to the construction field because the construction industry is more prone to risk and uncertainty than most other industries (Flanagan and Norman, 1993; Kim and Bajaj, 2000; Tah and Car, 2000).

It is important that the risk is assessed and managed to avoid further occurrence. The figure 2.1 below summarizes how risk are assessed and managed in construction industry

Figure 2.1: Risk assessment and risk management

Risk Management

Comparative risk analysis

How does it compare with other risks?

Risk reduction

How much should it be reduced?

Risk reduction strategy

How will the risk be reduced?

Financial commitment

How much money should be spent?

Risk Assessment

Hazard Identification

What is the hazard?

Probability of risk

How likely is the event?

Consequences of risk

What is the likely damage?

2.1 Construction Contractors in Nigeria

Construction contractors are usually categorised by several criteria. In Nigeria, the scope of operation is a common criterion. Researchers use this criterion to categorise contractors into either indigenous or expatriate (Edmonds, 1979, Ogunpola, 1984, Olateju, 1991, Samuel, 1999; Mayaki, 2003). Idoro (2007) described indigenous contractors as those contractors that are fully owned and managed by Nigerians. He further described multinational contractors as expatriate contractors who are mainly private firms that are jointly owned by Nigerians and foreigners but solely managed by expatriates. From this description, the major differences between indigenous and expatriate contractors are concerned with company ownership and management which are either mostly or fully controlled by expatriates. The differences are in other features such as labour, materials and equipment, are not as pronounced as in these two features. Idoro (2004) traced the participation of expatriate contractors in construction in Nigeria to the colonial days and opined that construction practice and technology in Nigeria had witnessed significant foreign participation from the colonial days to the present day. Edmonds (1979) opined that expatriate contractors were the large construction companies and were few in number but they carried out 90% of the total construction works in Nigeria. Ogunpola (1984) supported this assertion by maintaining that although, the numerical strength of expatriate contractors was about 7% of the total number of contractors however, and they accounted for a substantial proportion of construction works. Olateju (1991) also confirmed this assertion in a study which discovered that indigenous contractors got only 7% of the total value of contracts awarded by the Federal Government and Oyo State Government from 1974 to 1984. Idoro (2004) maintained that the construction industry in Nigeria was indeed dominated by expatriate contractors and that the problem in Nigeria was not that of attracting foreign participation but rather that of promoting indigenous participation

2.2 Risk and risk management in construction

Project risk in the literature are defined in several ways ( e.g, PMI, 2000, IEC, 2001, Baloi). The concept of risk is discussed in greater detail and suggestion using the more general concept of uncertainty (Ward and Chapman, 2003). A formal definition is given in the international standard IEC 62198 as a combination of the probability of an event occurring and its consequences for project objectives. Akintoye and MacLeod (1997) conducted a questionnaire survey which shows that the majority of project actors perceive risk as a negative event. Osipova and Apleberger (2007) presented more detailed literature review on risks in construction. Project risk management is the identification, assessment, and prioritization of risks (defined in ISO 31000 as the effect of uncertainty on objectives, whether positive or negative) followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities.

However, all definitions agree that the aim of project risk management is to maximise opportunities and minimise the consequences of a risk event in the construction project. The process is defined differently in research literature (e.g. Flanagan and Norman and Chapman and Ward, 2003). The Guide to the Project Management Body of Knowledge (PMI, 2000) identifies four main steps in the risk management process: risk identification, risk assessment, development of risk response and management of risk response.

According to the standard ISO 31000, the process of risk management consists of several steps as follows:

Identification of risk in a selected domain of interest.

Planning, the remainder of the process.

Mapping out the following:

the social scope of risk management

the identity and objectives of stakeholders

the basis upon which risks will be evaluated, constraints.

Defining a framework for the activity and an agenda for identification.

Developing an analysis of risks involved in the process.

Mitigation or Solution of risks using available technological, human and organizational resources.

SHAMPU (Shape, Harness, and Manage Project Uncertainty) model is introduced by Chapman and Ward (2003), which consists of nine phases. Generic project risk management process of eleven phases, which can be used in large and complex projects are presented by Del Cano and de la Cruz (2002). For the purpose of this research I use a simplified risk management process of three main steps: risk identification, risk assessment and risk response. The reason for the simplification is that this model is well-known for the project actors and frequently used in practice. The goal of the risk identification process is to decide on potential risks that may affect the project. In classifying project risks and risk sources several approaches can be used (Leung et al., 1998; Tah and Carr, 2000; Baloi and Price, 2003; Li et al., 2005). The main categories are financial, economic, managerial, legal, construction, design and environmental risks. During the risk assessment the identified risks are evaluated and ranked. The goal is to prioritise risks for management. Baccarini and Archer (2001) describe a methodology for the risk ranking of projects, which allows for an effective and efficient allocation of the resources for management of project risks. The JRAP model proposed by Ã-ztas and Ã-kmen (2005) is a pessimistic risk analysis methodology, which is effective in uncertain conditions in construction projects. The risk response process is directed to identifying a way of dealing with the project risks. Several surveys conducted among the construction industry actors (Akintoye and MacLeod, 1997; Uher and Toakley, 1999; Lyons and Skitmore, 2004) show that checklists and brainstorming are the most usable techniques in risk identification; subjective judgment, intuition and experience are used mostly in risk assessment; and transfer, reduction and avoidance are the most applied methods for risk response.

2.3 The roles of the project's different phases in risk management

Traditionally, a construction process is divided into four main phases: programme, planning, procurement and production. In the programme phase the client has an idea about the project and analyses conditions for its execution. During the planning phase the architects produce construction drawings according to the client's requirements. In the procurement phase the parties sign the contract. Finally, the contractor executes the job in the production phase. Since it is impossible to foresee all project risks in the programme phase and due to the tendency of the identified risks to change during project implementation, joint and consistent risk management is required throughout all project's phases (Rahman and Kumaraswamy, 2004). Motawa et al. (2006) propose a model, which helps in determining potential changes in the project based on available information in the early stages of the project. Baccarini and Archer (2001) introduce a methodology for a risk rating process in the procurement phase, which allows the effective and efficient allocation of resources for project risk management. Several authors highlighted the importance of the early phases in project risk management since the decisions taken in these phases often have a significant impact on the final result (Kähkönen, 2001). However, according to Uher and Toakley (1999), the actual usage of risk management techniques in the early phase is very low. Lyons and Skitmore (2004) conducted a survey where one of the aspects was the use of risk management in each of the project phases. The results showed that risk management in the planning and production phases was higher than in the programme phase. Risk identification and risk assessment were more often performed in the risk management processes than risk response.

2.4 Construction projects

According to Turner (1992), a project is an endeavour in which human, material and financial resources are organised in a novel way; to undertake a unique scope of work of given specification, within constraints of cost and time, so as to achieve unitary, beneficial change, through the delivery of quantified and qualitative objectives. The definition suggests three key targets of the project, i.e. time, cost and quality, which are to be in focus when undertaking the project. It also highlights the importance of efficient organisation of available resources in order to achieve a good final result. Flanagan and Norman (1993) emphasize two aspects of any construction project: the process, i.e. project phases, and the organisation, i.e. project actors. From the process perspective, any construction project comprises a number of sequential phases. Different authors suggest a different number of project phases (Chapman and Ward 2003, Flanagan and Norman 1993, Harris et al. 2006, PMI 2000, Smith et al. 2006). The simplest approach identifies two main phases - project development and project implementation. These two can be further detailed and developed into a larger number of phases, e.g. feasibility, design, procurement, construction, commissioning, and operation. The model adopted in this research comprises four phases - programme, design, procurement and production. The maintenance phase was excluded from the study because no risk management activities are to be found in this phase. In the programme phase the client has an idea about the project and analyses conditions for its execution. During the design phase the architects and engineers produce construction drawings according to the client's requirements. In the procurement phase the client appoints the contractor to carry out the project. Finally, the contractor executes the job in the production phase. Figure 2.2 below overviews the different models presented in the literature and the model used in the thesis.

Figure 2.2: Construction project phases. Source: A (PMI 2000), B (Harris et al. 2006), C (Flanagan and Norman 1993), D (Chapman and Ward 2003). Model E is used in this thesis.

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2.5 Risks in projectw4.jpg

Several of these definitions have a common feature: they define risk in terms of uncertain events and their impact on a project's objectives. The international standard "Project risk management - Application guidelines" uses the terms probability and consequence and defines risk as a combination of the probability of an event occurring and its consequences for project objectives (IEC 2001). As this research discusses risks in the project context, a formal definition from "A Guide to the Project Management Body of Knowledge" is used (PMI 2000) defines risk as "an uncertain event or condition that, if it occurs, has a positive or negative effect on a project's objectives". Ward and Chapman (2003) discuss the concept of risk in greater detail and suggest using a more general concept of uncertainty. It's argued that the term 'risk' is often associated with adversity and focus on threats, not opportunities. The questionnaire survey conducted by Akintoye and MacLeod (1997) strengthens the argument, showing that the majority of respondents perceive risk as a negative event. According to Smith et al. (2006) all project risks can be divided into three main categories: known risks, known unknowns and unknown unknowns. The difference between the categories is the decreasing ability to predict or foresee the risks. Taking into account the probability of the occurrence and the consequence for project objectives, those events that have high probability and high impact are subject to risk management in Figure 2.3 below.

Figure 2.3: Classification of risk events (Smith et al. 2006).

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2.6 Processes in risk management

Risk management is a systematic process of identifying, assessing and responding to project risk (PMI 2000). The overall goal of the risk management process is to maximise the opportunities and minimize the consequences of a risk event. A variety of risk management models with different numbers of stages can be found in the literature. Project risk management offers a model with five steps: risk planning, risk identification, risk assessment, risk response plan, and risk review and keep tabs on risk.. PMBOK's model (PMI 2000) is similar but divides risk assessment into two processes of qualitative risk analysis and quantitative risk analysis. SHAMPU framework which involves nine stages: define the project, focus the project, identify the issues, structure the issues, clarify ownership, estimate variability, evaluate implication, harness the plans, and manage implementation was presented by Chapman and Ward (2003). Integrated methodology for project risk management in large and complex construction projects was proposed by Del Cano and de la Cruz (2002). The SHAMPU model is divided into four process phases: initiation, balancing, maintenance and learning. Each phase consists of several stages, which, in turn, are divided into different activities. Despite the variety of models, risk identification, assessment and response form the core of project risk management. Therefore, a model consisting of these three stages is used in this study in Figure 2.4 below.

Figure 2.4: Risk management process adopted in the study.

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Sources: theconstructor.org, 2009.

Risk management process involves some steps and risk identification is the first step and it focuses on determining those risks that may affect the project. It is suggested that as many project stakeholders as possible should participate in the risk identification process (PMBOK, PMI 2000). Tools and techniques for identifying the project risks are numerous (IEC 2001) which includes brainstorming, expert opinion, structured interviews, questionnaires, checklists, historical data, previous experience, testing and modeling, evaluation of other projects. Risk management practice studies empirically show that checklists and brainstorming are the most usable techniques in risk identification (Akintoye and MacLeod 1997, Lyons and Skitmore 2004). Risk identification sometimes depends on individual judgments of the project participants mentioned a recent study in this context that suggests that the role of experience in risk identification is less significant than is commonly assumed. During the risk identification process the potential risks fall in the different groups. In general, the sources of risk in construction projects may be divided into three groups:

Internal or controllable risks (e.g. design, construction, management and relationships);

External or uncontrollable risks (e.g. financial, economic, political, legal and environmental);

Force majeure risks.

Several studies contributed to knowledge by identifying unique, specific and country-related risks (Andi 2006, Ling and Hoi 2006, Zou et al. 2007). In risk assessment, risks identified are evaluated and ranked. The goal is to prioritise risks for management. The JRAP (Judgemental risk analysis process) model proposed by Ã-ztas and Ã-kmen (2005) is a pessimistic risk analysis methodology, which is effective in uncertain conditions within construction projects. Zeng et al. (2007) propose a risk assessment methodology based on fuzzy reasoning techniques and aimed at dealing with risks in complex projects.

The risk response is an appropriate steps taken or procedures implemented upon discovery of an unacceptably high degree of exposure to one or more risks. Also called risk treatment and it consist of four risk strategies: risk avoidance, risk reduction, risk transfer and risk retention. Risk avoidance deals with the risks by changing the project plan or finding methods to eliminate the risks. Risk reduction aims at reducing the probability and/or consequences of a risk event. Those risks that remain in the project after risk avoidance and reduction may be transferred to another party either inside or outside the project. Risk retention or acceptance indicates that the risk remains present in the project.

2.7 Risk allocation through construction contracts

In construction project, it is impossible to completely remove all risk. Therefore, an appropriate allocation of risks among project actors is very important. Risk allocation influences the behaviour of project actors and, therefore, has a significant impact on the project performance in terms of the total cost. A project risk that is unclearly allocated leads to disputes between the client and the contractor. One of the problems identified in the literature is the actors' different perceptions of to whom a specific risk or group of risks should be allocated. Usually, contractors indicate that they have to bear the majority of project risks and price these risks through adding a contingency to the bid price (Andi 2006). Using contingency funds has been identified by the researchers and practitioners as a significant source of the project's cost increase (Zaghloul and Hartman 2003). Evaluation and conscious allocation of risks to the appropriate actor under the contract allows reducing the bid price by decreasing contingency funds and, therefore, leads to lower total cost (Zack 1996). A number of models providing a framework for risk allocation decisions can be found in the literature (Lam et al. 2007, Li et al. 2005, Olsen and Osmundsen 2005). Smith et al. (2006) highlight the importance of considering the following issues when making risk allocation decision:

who has the best ability to control risk events;

who has the best conditions to manage risks;

who should carry the risks that cannot be controlled;

how much does it cost to transfer the risks.

Risk allocation strategy in construction projects is defined through the contractual arrangements. The contract is a written agreement between a client and a contractor where the liabilities and responsibilities of each party are assigned. The contract can also be defined as a trade-off between the contractor's price for executing the project and his willingness to take the risks (Flanagan and Norman 1993). There are different contract strategies available in figure 6 below. The objective of clients is to choose the strategy that ensures achievement of the project objectives in the most efficient way. Two contract strategies that are mostly used in Nigeria are separated (design-bid-build) contracts and integrated design-build contracts. The collaborative form of partnering has become popular in Nigeria during the last decade. In contrast with the UK, partnering does not have the status of a contractual form in Nigeria. As a form of project implementation, partnering is intended to create effective collaboration between the project's actors.

Figure 2.5: Categories of construction contract (derived from Harris et al. 2006).

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2.7.1 Design-bid-build

Separated contracts are characterised by a traditional separate appointment of a design team and a construction firm. First, the client appoints an architect or engineer to produce design documents (Design) and then procures (Bid) the contractor to execute (Build) the project. Thus the client is responsible for the planning, design and function of a construction and the contractor is responsible for the job execution. The DBB procurement is the most widely used strategy in many countries, e.g. the UK, USA and Singapore (Ling et al. 2004). Within this contract strategy, two main organisation alternatives are possible: divided contracts and general contracts. Schematically their organisation structures are shown in Figure 2.6 below.

Figure 2.6: Organisation structure in design-bid-build contracts.

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2.8 Collaborative relationships in construction projects

Adversarial and opportunistic behaviour is common in the construction industry (Cox and Thompson 1997, Zaghloul and Hartman 2003). It means that the actors are focused on the short- term relationship and economic results rather than on long-term cooperation. In response to this behaviour, many researchers try to find the concepts for more collaborative relationship between the project actors. Two concepts are of special interest in this research: relational contracting and joint risk management. Both focus on improvement of contractual relationships, better risk allocation, and, therefore, on more effective risk management.

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