CH AP TER O NE

1. INTRO DUCT IO N

1.1 Research background

Risk is commonly defined as the possibility of loss, injury, disadvantages or destruction. Risk
arises when uncertainty has the potential to affect objectives. Risk defined is as “Any uncertain
event or set of circumstances that, should it occur, would have an effect on one or more
objectives”. (The Association of Project Management (2004). According to the literatures
reviewed, risk has significant impact on a performance of any construction project i.e. it is an
uncertainty that significantly affects project objectives. Some of the risks involved in construction
projects are differing site conditions, delays and extension of time, liquidated and consequential
damages, occupational health and safety of workers and unexpected termination or suspension of
work. If the construction contract does not contain some provisions to deal with these risks, they will
lead to claims and disputes which would cause further delay and cost.

administration: Capacity and willingness of parties to administer the contract such as slow
decision making, irresponsibility of the contract administration parties and changed circumstances
like inadequate site investigations, uncontrollable external events and unclear risk allocation.(Liu
Yi 2009). unclear and unfair risk management as one of the root causes of claims and disputes in
construction (Abdissa Dessa 2003).

According to the parties involved in building construction projects, most projects are not
completed in conformity to the original plan i.e. they face various problems and changes that lead
to delay, cost overrun or lower quality. The risks involved throughout the life of a building project
might be causes for variations in project objectives if they are not managed well. risk management
in the contractual stage can especially be very important in preventing the effect of risk on project
objectives.

There are different risk management techniques used in different stages of the construction in the
outside world; Risk management in the contractual stage, i.e. before signing the contract is used
very frequently.

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If risks are identified and allocated to the contracting parties in the contract document, it makes
dealing with the risks if and when they arise very easy. A construction contract risk management
approach that uses a team of experienced construction professionals or experts will lead to better
achievement of project objectives. (Francis K. Adams, 2008).

This research presumes lack of preparation for the different situations that might arise during the
construction process and lack of awareness of the parties about the significance of risk
management are some of the major causes for most building projects failing to meet their
objectives. This thesis tries to study the effect of lack of risk management on the Diriba Defersha
building construction projects and aims to identify the level of use of risk management especially
in the contractual stage and its significant role in meeting project objectives.

1.2 STATEMENT OF THE PROBLEM

According to the literatures reviewed, risk has significant impact on a performance of any
construction project i.e. it is an uncertainty that significantly affects project objectives. Some of the
risks involved in construction projects are force majeure, differing site conditions, delays and
extension of time, liquidated and consequential damages, occupational health and safety of
workers and unexpected termination or suspension of work. If the construction contract does not
contain some provisions to deal with these risks, they will lead to claims and disputes which would
cause further delay and cost. We are doing our research on the construction contract risk
management in adama town ( case study Diriba Defersha construction site).

1.3 Objectives of the research

1.3.1 The general objective

this research is to study the practice of using construction contract risk management techniques in
Diriba defersha building construction Adama sites and to emphasize the importance of such
practice in achieving project objectives.

1.3.2 The specific objectives are:

1. To identify the level of use of construction contract risk management techniques indiriba
defersha building construction projects of adama sites.

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2. To test the level of awareness of different contractual parties involved in building construction
projects about construction contract risk management principles

3. To study the effect of applying contractual risk management techniques in meeting project
objectives The last objective was modified since it was not believed to be fully achieved by the
research. Hence the new specific objective is:

1.4 Significance of the research

The research findings may help parties involved in construction to improve their risk management
strategies. Some of the claims and disputes that arise during and after construction can be avoided
by improving risk management, e.g. if the contractor contains specific provisions for evaluating
change order costs, it will be easy to negotiate payment for change orders and claim settlement
later.

This research is significant in helping alleviate some of the problems facing the construction
industry by enlightening the parties involved in the construction industry about risk management
starting from the contractual stage and in turn making the projects achieve their objectives
effectively and efficiently

1.5 Scope of study

The scope of the research is limited to the study of risk management in Diriba Defersha building
projects of adama site. Hence, the research involved contractors and consultants only that
undertakes building construction projects.

There are only a few researches done on risk management in Ethiopia, hence the researchers only
reviewed these few theses done on the subject. It took a very long time to collect all the data
necessary for the research since most of the managers working in building construction companies
were not willing to return the questionnaire on the set date claiming they were very busy.

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1.6 limitation of the research

This work has many problems, especially in the case of data collection there are some respondents
are not interesting to give true information that is needed for the study. The reason might be due to
the confident of the information or it might be lack of awareness. In addition to this, the study has
financial and time constraint, experience on the study of the research.

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 CHAPTER TWO

2 LITERATURE REVIEW

2.1 INTRODUCTION

This chapter presents the findings from different reviewed literatures on the subjects of
construction, project delivery systems, contract, risk and risk management. The risk facing any
project depends on the type and methods of construction, the stage of construction, the type of
contract and delivery system and project type and complexity etc. similarly the risk management
technique that should be applied also depends on the above factors. Hence, the literature review
tried to highlight these issues in relation to risk with the main focus being on management of
construction risk starting from the contractual stage.

2.2 Building construction projects

A construction in simple words is a process of constructing something by human for one purpose or
another. It may be a road, bridge, a dam, a private residence, an airport, a commercial building, etc.
construction contributes to the economic development of any country by satisfying some of the basic
objectives of development including output generation, employment creation and income generation and
re distribution; it also plays a major role in satisfying basic physical and social needs, including the
production of shelter, infrastructure and consumer goods. (Moavenzdadeh F. 1976).

All projects are risky and there are three separate reasons for that. The first reason is that all projects
share common characteristics which inevitably introduce uncertainty. Some of this common
characteristics are projects are unique, complex, involve assumptions and constraints, performed by
people and involve change from a known present to an unknown future. The second reason is that all
projects are undertaken to achieve some specific objectives. The final reason is that all projects are
affected by the external environment they exist in. (Hillson D., 2009).

A building construction project, like any other project, also faces different risks throughout the life of
the project. This is due to the uniqueness of every project, the uncertainties introduced by the project

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stakeholders, statutory or regulatory protocols and other intrinsic and extrinsic constraints. He further
discusses that risk can constrain the achievement of key project objectives, time, cost and quality.
Inability to achieve the project objectives has great consequence on all project stakeholders involved in
the construction.

For the client it could mean extra cost and less return on investment, for the consultants it could result
in loss of confidence placed in them by the clients, for the contractor it could mean loss of profit and bad
reputation etc. (Nafishah B., 2006).

The construction industry is a very important part of any country. It highly contributes to the growth and
development of the economy in developing countries like Ethiopia.

the construction industry plays a major role in developing countries since it constitutes a significant
portion of Gross national product and employment; at least three-quarters of the world’s construction
workers are in the less developed countries. (JillWells. 2001; Moavenzdadeh F. 1976).

The studies also state that construction workers in the less developed countries are more exposed to
accidents and endure much poorer terms and conditions of work than workers in the developed
countries., the construction industry has a poor report image due to poor construction and inadequate
inspection. The report says this poor image is directly a result of the nature of the work which is difficult
and dangerous. ( the general labor office meeting report, Geneva, JillWells, 2001).

Construction is a major component of investment; hence expansion in construction activity is closely

related to economic growth. Numerous studies have shown that construction output grows particularly
fast, often exceeding the rate of growth of the economy as a whole, as countries put their basic
infrastructure in place during the early stages of development. This implies that construction plays a
major role in improving the economic growth of a country.

Despite improvements in the project risk management practices across the developed countries
construction industry, in the developing countries construction projects are still suffering from ill
defined scope, design and mismanagement. And as a result, the projects are accompanied by clear time,
cost and quality gaps (Monvenzadeh F., et al, 1976; Jill Wells, 2001).

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Risk is unavoidable in almost all construction projects. Because of exposure to the outdoors,
construction is affected by both daily and seasonal weather variations. It is also often influenced
significantly by the availability of local construction financing, labor, materials, and equipment etc.
These and all the above mentioned factors make construction a very risky undertaking. Construction is
especially important in developing countries since it can greatly contribute to the economic growth but
as mentioned above the industry is faced with a lot of problems.

Hence, to make the construction effective and efficient there should be some way tomanage and control
the risks and minimize the problemssince all projects are exposed to risk, successful projects are the
ones where that risk is properly managed. ( Hillson D.2009),

2.3 Construction in Ethiopia

the construction industry is the most important enabler for the overall development specifically for least
developing countries like Ethiopia. They also state that the construction industry is among the leading
industries in producing employment and it contributes to the national development of any country.
(Abraham A., 2007 and Kassim S., 2008,)

The above discussion is trying to show that construction is very important for countries like Ethiopia.
the most important thing that can be done in projects is make sure that the inevitable risk associated with
every project is at a level which is acceptable by the organization and is effectively managed. This
statement implies that different organizations have different risk acceptance levels and Ethiopia as a
country or the organizations involved in construction can only afford to accept small levels of risk due to
their low capital. ( Hillson D. 2009).

2.4 Project delivery systems

Project delivery system is the way project owners along with project regulators and financers determine
the assignment of responsibilities to project stakeholders along the construction process. It is often
determined during the basic planning phase of the construction project Project delivery systems describe
how the project participants are organized to interact, transforming the owner’s goals and objectives to
finished facilities. Generally, there are six types of Procurement and Contract Delivery systems. The
party has to select the right type of delivery system which incurs the smallest risk for his/her project. .
(Cristian P. et al, 2009; Zewdu T.),

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2.4.1 Design-Bid-Build (D-B-B)

After the project owner prepares the basic plan that identifies construction project program, they call
upon the participation of design/ supervision consultants. These consultants will carry out the design and
the necessary tender documents which will be the basis for selecting contractors. Here the design and the
construction are performed by two separate parties. (Cristian P., et al, (2007),

this is the most practiced type of delivery system in the Construction Industry of Ethiopia. In this type of
delivery system, projects are divided into different packages following each other. The design and
supervision consultant will be the prime professional on behalf of the owner and plays the part of
administrator of the construction contract but the employer might take the responsibility of coordinating
the various project packages if found necessary. ( Abreham A. (2007),

the advantage of DBB is that the owner, contractor and consultant are clearly assigned their
responsibilities and tasks. The disadvantage is, since the procedure is linear the lifetime is too long;
Project owner would be responsible for risks associated with both the design and contract administration
and usually there exists severe adversarial relations between the consultant and the contractor. Zewdu T,
(2009) also agrees with this saying in DBB contract delivery system, the employer carries a lot of risk.
The employer signs different contracts with the consultant and the contractor, hence is exposed to risks
associated with both contracts. ( Cristian P., et al, (2007),

2.4.2 Design-Build (D-B)

Design build delivery system is also known as ‘‘turnkey’’. The term turnkey indicates that the system is
delivered to the client ready for operations. The project is largely contractor managed and the cost and
control of risk are weighed towards the contractor and away from the owner. in this type of contract
delivery system, both the design and construction liability rests with the contractor. On the other side the
owner’s ability to control the project is low. (Cristian P., et al, 2007),

Design Build or Turnkey in principle reduces numbers of procurement processes engaged in the
fragmented process and employ only one procurement process and a single contractor to provide the
entire Construction Implementation Process (Design and Construction Implementations). He further
states that contractors’ tender cost is higher for DB than in the case for DBB delivery system in order to

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provide reasonable offer. The project is largely contractor managed and the cost of risk and control are
weighted towards the contractor and away from the client. The increase in risk transferred onto the
contractor will be counterbalanced by the increase in contract prices which can be taken to include these
costs of risks. ( Abraham A. (2007),

some of the disadvantages of this turnkey delivery system are; the owner’s ability to control the project
is low and the contract price is relatively high. The contractor carries a lot of risk in this type of delivery
system and if these risks are not properly managed they can lead to bankruptcy of the company in
addition to not achieving the project objectives. (Cristian P., et al, 2007)

2.4.3 Construction management

Under this type of delivery system, the owner contracts separately but concurrently with a design
consultant and with a firm whose primary expertise is construction (construction management
consultancy firm). One disadvantage of this system is the owner chooses a management contractor
which means the owner has one more department to manage, which leads to an increase in overhead
expenses. ( Cristian P., et al, 2007,).

2.4.4 Finance / Build Operate Transfer (BOT)

BOT is a form of contract delivery system that promotes public private partnership in which a private
company is contracted to finance, design, construct and operate for a certain period (usually 10 years)
and transfer the facility for to the project owner (Cristian P, et al, 2007).

2.4.5 Engineering Procurement Construction (EPC)

In this type of contract delivery system, the engineering and construction contractor will carry out the
detailed engineering design of the project, procure all equipment and materials necessary, and then
construct to deliver a functioning facility or asset to their clients (www.epcengineer.com). According to
Cristian P. et al, this kind of delivery system is also known as turnkey project service to indicate the
system is delivered to client ready for operation. The project is largely contractor managed,

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2.5ConstructionContract
2.5.1 Introduction

A construction contract is a contract specifically negotiated for the construction of an asset or a

combination of assets that are closely interrelated or interdependent in terms of their design,

technology and function or their ultimate purpose or use. Construction contracts are formulated in a
number of ways for rendering services from consultants or contractors.

Since most of the time the owner cannot perform the actual construction of his project, he hires a
contractor that will undertake the task.

A contractual agreement is signed between the owner and the contractor stating all the responsibilities
of both parties. the contractor in addition to completing the project, should share some of the risks that
might arise during construction. various contract types might be utilized in construction projects
depending on the type of delivery system. The forms of contract should suit to the selected project
delivery system. Accordingly there are different types of contracts for the execution of civil engineering
works. ( Abraham A. 2007 and Zewdu T. 2009).

2.5.2 Cost plus Percentage of Cost Contract

In this type of contract, the contractor’s fee is given by certain percentage of the actual cost of
construction. The actual cost construction is reported by the contractor and the payment is made to him
by the owner together with a certain percentage as agreed earlier. In this type of contract, the contractor
has a tendency to increase the cost of wok in order to earn more profit. This is the major disadvantage of
this contract type.

Cost plus contract types are not mostly practiced in the Ethiopian building construction projects.

three types of contracts are identified based on the method of pricing and payment. These are lump Sum
contract, cost reimbursement contract and measurement contract.In lump sum type of contract, some
fixed amount of money is paid to the contractor to complete the project. The work of the consultant is
minimized as he only supervises quality of work. It saves time because of less measurement activity and
it is good for smaller projects. ( Zewdu T. 2009)

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In measurement type of contract, the contractor is paid based on how much work he executes. It is
possible to vary the amount of work and pay the contractor for extra work.In cost reimbursement type of
contract, the contractor works with his money and when he is done, his money will be returned to him. It
is suitable for rich contractors. The contractor agrees to carry out certain activities and gets paid for how
much of it he performs

2.5.3 Contracts and risk

The construction contracts can help in allocating risks to the different parties involved in the project.
The owner has the power to decide the type of contract to be used for a specific project; hence it is very
important that he understands the terms of the contractual agreement and also identify the risks
associated with the different types of contracts

In lump sum contracts the owner assigns almost all of the risk to the contractor. The contractor in return
can ask a higher price in order to take care of unforeseen contingencies. If the actual cost of the project
is under estimated, the contractors profit will decrease by the underestimated amount. An over estimate
has an opposite effect but may reduce the chance of being the low bidder and winning the project.

large numbers of contracts are completed under the lump sum/turnkey regime. This is mostly because
the owner wants to know the budget and schedule at the start of the project and they don’t want to have
any role during construction. But as mentioned above this arrangement faces many problems if it is not
well defined at the beginning. All the risks associated with the contract should be identified and different
managing techniques incorporated before signing the contract to make the project successful.
(Partnership Victoria guide, 2001 and Francis K. A., 2008,)

Most owners want quality construction with reasonable cost but not all are willing to share risks or
provide incentives to enhance the quality of construction. As a result there are only a few responsible
contractors responding to their invitation to submit bids or the bid prices submitted exceed their
engineers estimate. And even if the initial bid prices are close to the engineer’s estimate, claims and
disputes on the contracts become frequent. This claims and disputes can easily be avoided by improving
the contract provisions and incorporating clauses that deal with management of risk. one of the most
controversial issues in contract provisions concerns the payment for change orders. If the contract does
not contain specific provisions on cost disclosures for evaluating change order costs, it will be difficult

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to negotiate payments and claim settlement later. Delay can have cost consequences in most building
contracts which can in turn disrupt the agreed cost estimates of the project. Considering time as a
standalone risk, there are some circumstances in which an employer must achieve a particular end date.
In such circumstances the contractor is taking an absolute time risk and can require additional cost
provisions in the contract for taking the time risk. ( building research advisory board, 1978),

When we come to the situation in the Ethiopian building construction projects, most projects are
completed past their due completion date, i.e. they face delay; and as stated above, this almost always
leads to cost overrun. ( Lui Y., 2009),

The guidance notes should give extra substance and intent as to how a clause should be understood and
interpreted. The flowcharts then map out each of the main processes within each contract and
demonstrate how it should operate and what to do next if a party has or has not carried out the next
contractual action.

When selecting a contract document one should consider the allocation of risk each form of contract
uses and should have an understanding of the commercial balance of a contract and the likely effect of
its provisions on the end result and to match this to the parties’ needs. Careful contract review is one of
the most crucial steps in the risk management process. There is no substitute for reading each contract
very carefully before signing it. Beyond the obvious problems of errors and inaccurate information that
creep into negotiated contracts, careful review may reveal additional risks, improperly allocated risks,
and other issues that might need clearing up before the signing of the contract.

2.5.4 Project contract lifecycle

Every project, not just those in the construction industry, goes through a series of identifiable phases,
wherein it is ‘born’, it matures, it carries through to old age and it ‘expires’. In the construction project
life cycle we identify different phases each with different purposes and characteristics. It usually takes a
long period of time from the contract formation till the construction end since it usually involves many
processes. contract management must be carried out throughout the entire project life in different stages
to achieve the intended project objectives. ( Hillson D., (2009),

Hillson D. 2009, argues that there is no universally accepted definition of a project lifecycle and
different books and standards use different terminologies to divide the life of a project into different

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phases. He used three simple stages to structure the way in which risk management is used across the
project lifecycle; these are before the project starts, when the project starts and after the project has
started. The first stage includes conception, viability and initiation of the project. The second stage is the
elapsed time between the decisions to initiate the project to the actual launch of theproject. The final
stage is the project execution phase which is the application area of the project.

the construction contract goes through two main phases which are the establishment of the contract and
the implementation of the contract. The establishment of the contract includes bidding and contract
negotiation and the implementation phase is from signing of the contract till the end of the contract. The
bid period, which is the initial period of the construction contract, is from the preparation of the bid
document to the bid opening. Contract negotiation starts when the tender is made and ends when the
contract is signed. In this stage the owner and the contractor discuss the future of the contract and how
they plan to complete it and finally sign the contract after reviewing all the provisions carefully. During
the contract implementation phase, the contractors complete the construction work according to the
contract agreement. ( Cristian P. et al, 2009,)

As an alternative to the above classifications, an applicable classification for stages of the construction
lifecycle which is believed to contain all the stages is used for this research which include inception and
feasibility stage; planning and design stage; tendering stage; construction stage; commissioning and
acceptance stage and maintenance stage (Abraham A, 2007; Zewdu T, 2009 and Kasiem S., 2008 and
Eskesen S. D., 2009).

2.6.1 Project lifecycle and risk

Although a project can be divided into a number of separate phases and the risks assessed and managed
as such, there is a need to manage risks as a continuum over the project life cycle. Maximizing the
process of assessing and managing project risks requires initial recognition combined with a systemic
method of monitoring changes and impacts over time.

Some risks remain constant while other arise and diminish as projects progress. Improvements in project
performance can be achieved by recognizing which risks

occur across the entire project life cycle and giving them due consideration. Within the project life cycle,
optimal risk identification and assessment procedures and timing, as well as the identification of the

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most favorable decision points need to be outlined. Unfortunately, according to different researches
done earlier, most project owners and contractors don’t estimate the effects of risks throughout the entire
projects lifecycle (CDM regulations, 2007).

For most projects, different participants or parties are responsible for and control the various phases of a
projects’ lifecycle. ( Walewski G., et al, (2003),

structuring distinct phases and responsibilities can increase the risk by isolating the project participants
in such a manner that minimal attention is given to the overall project i.e. individual project participants
become concerned with only their own project risks and either willingly or unwillingly try to transfer
these risks to other project participants.

2.7 Risk

Before discussing about risk management it would be better to understand what the terminology ‘risk’
means. Risk is associated with every aspect of our daily life, i.e. risk is involved in every step we take.
risk is a situation involving exposure to danger or the possibility that something unpleasant will
happen.Different literatures, professionals and standards define risk in their own way. But most of them
confirm that the view towards risk is most of the time negative. Risk is defined as a factor, thing,
element, or course involving uncertain danger or a hazard. ( the Oxford English Dictionary (2009).

Risk is also defined by other scholars as the probability that unfavorable outcome will occur., risk is "the
probability of occurrence of some uncertain, unpredictable and even undesirable event(s) that would
change the prospects for the profitability on a given investment". (Nasir et al., 2003)

Risk is a chance of an event occurring which would cause actual project circumstances to differ from
those assumed when forecasting project benefits and costs (Partnership Victoria guidance
material,2001).

Regardless of the continuing debate among risk management practitioners about the definition of risk;
there exist several attempts from different professional bodies and standard institutions to propose a
definition of risk that capture broad acceptance. However there is no one official definition for risk. But
it was discovered most standards use the word risk in its negative sense to mean, chance of bad
consequences, or exposure to mischance and some standards like the UK define risk as an uncertain
event or set of circumstances which, should it occur, will have an effect on achievement of objectives.

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Since the effect is not specified it could mean either negative or positive and taking this into
consideration risk has been defined as an uncertain event or condition that, if it occurs, has a positive or
negative effect on one or more of the project’s objectives. Risk events are expected to take place in the
future; hence they are events that have not yet happened. Risk has long been recognized in the
construction industry. Contractors are required to accept a certain level of risk due to unforeseen costs
that they incur during construction. Risk is also an issue for clients. This risk can be minimized by
including contingency sum in the contract document. ( PMBo 2008),

This contingency sum is used when and if the unexpected occurs. the contingency amount allowed is
only some percentage of the overall cost. (Stephen M. et. al 2000),

One of the major problems in evaluating the risk of a project is the identification of the full range of
risks to which the project could be subjected to. The identification process is especially difficult because
what is considered risk is influenced by the person’s perception. Therefore in order to reduce the effect
of these individual perceptions, multiple experts on risk management should be involved in the contract
design stage. A better result of managing risk can be obtained if a risk management is involved starting
from the contractual stage and work throughout the life of the project (Hillson D., 2009).

Risk should be fully understood by all the contracting parties; otherwise it might cause many problems
to all involved. there are three categories of risk. (CDM guideline, 2007),These are

1. Not likely to be obvious to the contractor: The contractor, at the pricing stage, may not appreciate
some of the less obvious risks, such as: interim stability; sequencing major plant installation with
construction/demolition; structural issues associated with working around existing foundations; use of
sealants or other materials with a health risk; departures from standard details or practice; fragile roofs
etc…

2. Unusual: These may be ‘common’ risks but occurring in unusual circumstan ces or because of the
nature of the construction or site, including: structural stability attained through diaphragm action or
dependence on existing structures; contamination; industrial effluent; use of building; unstable ground
etc…

3. Difficult to manage: These may be common risks but be in awkward situations, such as: working
at height; ‘health’ and ‘safety’ issues in existing/old buildings; confined spaces; lack of space for
erection of standard scaffolding; proximity of gas mains or they may relate to the nature of the risk, for

15
example injury to the public. describes risk in an equation form: Risk = (Probability of Event)
(Consequences of Event). This implies that risk is measured in terms of the probability of the risk
occurrence and the level of impact of its occurrence. The research identified various sources of risk in
construction projects, the most significant risk source being the vagueness of contract conditions about
risk allocation. (Cristian P., et al, 2009)

4. Vagueness of contract conditions about risk allocation

5. Contract conditions represent the legal reference showing the relation between the contract parties.
6. Risk associated with construction projects should clearly be allocated to the responsible party
through the contract conditions. The absence of understanding of risk accountability between the parties
will result in negligence of risk events which leads to parties assuming the risk event and its
consequence may be out of their responsibility coverage. When the contract conditions related to risk
allocation are vague and not clearly defined several problems might be encountered. If any conflict is
faced and the contract conditions does not address how to resolve the conflict then it may lead to endless
disputes.
7. Contract conditions should not be subject to interpretation and they should be understood by all
parties and they should clearly state how risk should be managed.
8. Undefined quality requirements
9. Quality is an important issue in building construction projects. The objective of any construction
project is to finish the construction within the estimated budget, time and according to the quality
requirements. Poor quality of work leads to loss of money and time. The owner has the right to ask for
rework when the executed job is not complying with the agreed quality standards. But if the required
quality standards are not clearly defined in the contract, the client might overstate the quality
requirement which will create problems with the contractor.

10. Low percentage of the advance payment

The advance payment which is the payment provided by the owner to help out the contractor manage his
obligations towards the contracts is very important to the contractor as it will provide a cash to start the
project with. Typically on a construction project, an advance payment will be provided by the client if
the contractor requests it to meet significant start up costs incurred before construction begins. Usually
the advance payment represents a percentage from the total amount of the contract, usually 15 to 20%

16
 depending on the nature of the work. An advance payment provides the contractor with working capital
at the start of the contract in order to commence the work. In order to protect the client/ employer
against the risk of the contractor failing to repay the amount, advance payment should only be made
against an approved advance payment guarantee provided by the contractor. employer to make an
advance payment as an interest free loan for mobilization, should the contractor provide a valid and
enforceable guarantee until the advance payment has been repaid in full. If the percentage agreed on the
contract is low or if the client fails to provide the payment on time the risk of delay will be encountered
caused by shortage of cash to continue the work.

Some parties can accept more risks than others depending on their skill, personnel, equipment, time,
desire etc, as well as their risk acceptance profile. all parties need to understand the risks which they are
accepting and know how the contract is dealing with them. Nearly all the risks involved in construction
have the capacity of eroding profit margin and transforming the project from profit making into a loss
making venture. Generally if risk is poorly understood by the contractual parties and incorrectly
allocated, it is likely to be incorrectly managed resulting in poor project delivery. ( IMCA, 2006),

The parties involved in construction contracts can’t predict the future, but accurately estimating the
degree of risks inherent in their projects can help them quickly adapt to it. In the construction project
sense, risk can be defined as the economic lose arising from the involvement in construction. Any
project decision-making without regard to risks will lead to unexpected outcome. The IMCA risk
guideline (2006) identifies five classifications of risk according to where control lies. This classification
is believed to be helpful for this research and is presented as follows:

1 External: Unpredictable

These are risks beyond the control of the individual or operator and are totally unpredictable. They arise
from external influences such as third parties, acts of god, etc.

2 External: Predictable but Uncertain

These risks are also beyond the control of individuals or companies.

3 Internal: Technical

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 These are risks arising directly from the technology of the project work, of the design, construction or
operation of the facility.

4 Internal: Non-Technical

These are within the control of individuals or the operator and usually arise from a failure of a project
team to achieve its expected performance. They may result in schedule delays, cost over-runs or an
interruption to cash flow.

5 Legal: Civil and Criminal

Risks under civil law can arise from contractual arrangements, patent rights etc. Risks under criminal law
can arise under statute, e.g. Health & Safety requirements.

categorizes project risks into five, which are Management risks, Engineering risks, Procurement risks,
Construction risks, and Commissioning risks based on the stages of the project they occur in. (Cristian
P. et al, 2009)

says risk is an important part of any project. If risk is properly managed it will lead to better
achievement of project objectives. It further states that a critical element for controlling the cost, schedule
and scope of a project is gaining and maintaining the control of the design process. Failure to control and
manage this process will result in delay and increased construction costs. Care should be taken to avoid
incorrect understanding and appointment of risk. (Angelo W. et al. (2001),

Areas of risk: IMCA risk guideline groups risks into the following main areas of risk in construction
contracts which are briefly discussed below;

· Contractual risk: is risk which result from not clearly defining the responsibilities and duties of the
contracting parties. The contract clauses should be clear and easily understood by everyone involved

· Performance risk: is a risk due to clearly undefined scope and nature of work. The contractor is expected to
perform the work with some standard including safety. Different situations that could hinder
performance should be included in the contract. Incomplete information at the time of bid can negatively
affect the performance of the contractor.

· Financial/Economical risk: are risks that are a result of not understanding the terms of payment,

18
 performance bond, bank guarantee etc. The payment terms should reflect the progress of the work and
the parties should have the required financial backing from a reliable source.

· Political risk: are risks that are especially significant when the construction is on a host government’s
site/country. The host country might interfere in the bidding and construction process by changing laws
and standards. The contractor needs a secure environment for performing the construction and should be
clearly stated in the bid as well as the contract document.

· Technical risk: this risk arises from lack of understanding of the system and the technology that would be
utilized at the time of bid and during construction.

 Geographical risk: arise as a result of the location of the site. The location of the site is very important
and should be selected very carefully because it can lead to additional risks like political risk.
 Operator risk: are due to the operators influence on the bid, contract, supervision, and approval
etc…the operator should have the required insurance coverage which should be clearly stated in the
contract document, for example, so that claims would lead to payment instead of dispute.
Underperformance of the operator should not affect the work of the contractor; therefore there should be
clear statements in the contract specifying the operator’s obligations and the consequences to the
contractor.

2.8 Risk versus uncertainty

Often risk is confused with uncertainty and it is common to hear the two terms being used
interchangeably. Both risks and uncertainties are future outcomes which are products of performance
and their likelihoods. But various researchers believe that in risk management the two terms have
distinct meanings and they tried to clarify a distinction between the terms them. ( Deviprasadh A.(2007)

uncertainty is the unpredictability of environmental and organizational variables that might impact the
performance of the organization or the party. Risk is the consequences of uncertainty and it is the chance
of something happening that will have an impact upon project objectives which includes the possibility
of loss or gain, a variation from a planned or desired outcome as a consequence of the uncertainty
associated with following a particular course of action. Uncertainity is defined as an absence of

19
 information, knowledge or understanding regarding the outcome of an action, decision or event and risk
as the measure of the uncertainty that exists. (Gary R. Heerkens, 2002).

2.9 Risk management systems

Management is a means of integrating resources in order to achieve organizational objectives efficiently

and effectively. Project management is the application of knowledge, skills, tools and techniques to
project activities to meet project objectives.

There will always be some uncertainty associated with any project which representsrisk. If risk exists
then the way to manage it has to be found. formal risk management in the construction industry became
an integral process only within the past 20 years. The rise in the need to manage risk was caused by the
rapid development in technology. The incorporation of risk management in construction will lead to
more precise estimates of cost and more profit. Since there is a great concern about project risks
affecting the outcome of the project, different methods of managing risks are attempted. Management of
risks holds the key to project success or failure. Managing risk is an integral part of good management
(risk management guideline, 2004).

risk management is used to identify, prevent, contain and mitigate risks in order to achieve project
objectives. It further explains risk management as ongoing process throughout the project containing the
following five steps. ( Partnership Victoria guidance material (2001),

(i)Risk identification- The process of identifying all the risks relevant to the project; (Dr. Francis K.
(2008),

iiRisk assessment- Determining the likelihood of identified risks materializing and the magnitude of
their consequences if they do materialize; (Francis K., (2008),

(i) Risk allocation- Allocating responsibility for dealing with the consequences of each risk to one of
the parties to the contract, or agreeing to deal with the risk through a specified mechanism which may
involve sharing the risk; (James P. Bobotek, 201 1),

(ii) Risk mitigation- Attempting to reduce the likelihood of the risk occurring and the degree of its
consequences for the risk-taker; and

20
(iii) Monitoring and review- Monitoring and reviewing identified risks and assessing, allocating,
mitigating and monitoring new risks as the project develops and its environment changes. This process
continues during the life of the contract.

2.10 Unit Price or Bill of Quantity

In this type of contract, the contractor undertakes the execution of work on an item rate basis. The
amount to be received by the contactor depends upon the quantities of various items of work actually

executed. The payment to the contractor is made on the basis of detailed measurements of different
items of work actually done by him.

Unit-price contracts are used for work where it is not possible to calculate the exact quantity of materials
that will be required. Unit-price contracts are commonly used for heavy/highway work. Contractors
submit a price for each item on a unit-price.contract. Unit prices are multiplied by the engineer’s
estimated quantities and totaled. The winner would be the firm with the lowest responsive total. This type
of contract involves small risk to the parties since the payment is according to the amount of work
required.

2.11 Lump sum and scheduled contract

This is similar to the lump sum contract but schedule of rates is also included in the contract agreement.
In this type of contact, the contractor offers to do a particular work at a fixed sum within a specified time
as per plans and detailed specifications. The rate for various items is also provided which regulates the
extra amount to be paid or deduced for any additions or deletions made during the progress of work. Any
extra items of work are required to be measured for payment. The original work shall however be
checked and compared with the drawings and specifications.

2.12 Cost plus

Cost plus, also known as cost reimbursable, contracts are used in situations that make it difficult or
impossible for either the owner or the contractor to predict their costs during the negotiation, bid, and
award process.

21
Cost plus contracts take many forms, the most common being cost plus fixed fee and cost plus a
percentage. Most owners prefer cost plus fixed fee because then the amount of profit the contractor will
earn cannot increase, thereby removing any incentive for the contractor to increase the cost of the
project in hopes of increasing his profit.

2.13 Summary of the literature review

It has been learnt from the literature review that the construction industry in developing countries is
more exposed to different risks and it lacks proper management.

It has been also learnt from the literatures that the construction industry contributes greatly towards the
growth and development of these countries. Therefore to make the construction in developing countries
effective and efficient there must be some way to manage and control the risk and minimize the
problems. The literature review indicated that all projects are exposed to risk, and the impact it causes
can be very critical to developing countries like Ethiopia; the only way to make projects successful is by
using different risk management techniques. This research therefore aims in identifying the level of use
of different risk management techniques in the Ethiopian building construction industry.

The reviewed literature indicated that there are different types of delivery systems that can be adapted
for a project and choosing the right type of delivery system for a particular project can help achieve the
project objectives by decreasing the risk involved. The reviewed literature also indicated that the
contract plays a very important role in managing risk and it is vital to understand the terms of the
contractual agreement and identify the different risks associated with the type of contract selected before
signing it. It has been learnt from the literature that risk should can be improved by recognizing at what
stage of the project the risk materializes and giving it due consideration. This research therefore aims in
testing the level of awareness of the parties involved in the Ethiopian building construction industry
about the principles and use of risk management.

It has been learnt from the literature review that if a project is to fulfill its objectives in an efficient
manner, there is a need to involve the risk management processes starting from the contractual stage.
Risk is an uncertainty that has an effect on achieving project objectives and risk management should be
performed to identify, prevent, contain and mitigate risk in order to achieve project objectives.

22
 CHAPTER THREE

3 RESEARCH DESIGN AND METHODOLOGY

3.1 Introduction

The previous chapter discussed about the influence construction contract delivery systems, stage of
construction, type of risk and type of contract have on managing risk effectively to achieve project
objectives. It tried to give an in depth understanding of construction contract risk management by
discussing the findings of other researches. This research presents the findings of the research
conducted to assess the practice of using different contract risk management techniques in Dirirba
defersha building construction projects adama site.

3.2 Research design

Data for the research was collected using both primary and secondary sources. The primary data
was obtained through questionnaire directed to contractors and consultants that are involved in
projects. The secondary data was obtained from the internet, thesis, journals, books and different
articles in published documents. The secondary data was used to get an insight of the problem and
was used as criteria for developing and analyzing the primary data. The questionnaire also
contained an introduction part which briefly defined the different terms that were used in the
research. This part was included to be used as an optional reading for any interested respondents
who might find it hard to remember the technical terms used in the research.

The research was both qualitative and quantitative in nature. Some of the data collected was in
descriptive form while some of the data was in numeric form. The research is an observational
descriptive research i.e. it involves observing the situation as it is without getting involved and
changing things. A total of 20 questionnaires were sent to contractor and consultants in diriba
defersha building construction site adama town.

The following tables (3.1 and 3.2) show the informants general profile. A total of 20 respondents
were used for the research, out of which 1 were building and general contractors and 4 were
consultants and 15were internal workers that are worked in the project site.

23
Since the contractor is Grade one. The respondents had different years of experience in the building
construction industry and as shown in table 3.2

Category Number of respondents

Contractor 1

Consultant 4

Other workers 15
Total 20

Table 3.1 General profile of respondents (category)

Description Number of respondents

0-5 years 6

6 to 15 years 10

More than 15 years 4

Tabl total 20 e 3.2 General profile
of respondents (year of experience)

3.3 Questionnaire

The questionnaire had four sections. The first section consisted of questions about the general
profile of the respondent. The second section was compromised of questions to test the level of
awareness of the parties about risk management. In the third section questions that were believed
to test the level of use of construction contract risk management techniques were asked. The fourth
and final section of the questionnaire investigated the causes and effect of different areas of risk on
building project objectives.

Both close and open ended questions were asked in the questionnaire. The close ended questions
had a number of choices of possible answers and the respondents selected whatever they feel was

24
most appropriate. The closed ended questions were selected because they are easier to assess and
answer considering how busy the respondents were. Open ended questions were used only in few
places where the response options were relatively wide and not known but unfortunately none of
the respondent used these parts to specify their answers

3.4 Data analysis

Descriptive statistics method was used to analyze the responses in actual numbers. Counts or
frequencies were used to figure out how many times something occurred or how many responses fit
into a particular category and the findings were presented in a table. Percentages are easier to
interpret and in this analysis, they were implemented to express the findings as a proportion of the
whole. The findings were presented in the form of pie charts to help understand easily. Measures
of central tendency, mean, was also used to characterize what is typical for the group. The mean
scores were presented in forms of tables and when necessary bar diagrams were used.

25
 CHAPTER FOUR

4 RESULTS AND DISCUSSION

4.1 Introduction

The results and discussion below is devised in three parts in line with the objectives of this
research and also the sections of the questionnaire. These divisions can help tackle one objective at
a time. The first part tries to present the findings of the questions asked to test the level of
awareness of different parties involved in building construction projects and discuss about what
this findings mean. The second part of the results and discussion contains the findings of the
questions directed towards identifying the level of use of different construction contract risk
management techniques and the results are discussed. The third part is focused on the effect of
different areas and causes of risk on project objectives and presents the results of the questions
directed towards this. The effect of incorporating or not incorporating different contract risk
management techniques on Diriba Defershha building project in adama site that is selected are
discussed in this part.

4.2 Awareness of the concept of risk management

Risk is defined in different ways by various researchers as shown in the literature review. Most
standards used risk in its negative sense and for the purpose of this research this negative term was
adapted. Hence risk is an uncertain event or set of circumstances if they occur would have a
negative effect on one or more of the project objectives. Risk management is a very important part
of any project which tries to identify, analyze and evaluate risk to minimize the effect it has on
projects. From the questionnaire survey of this research, it was discovered most of the respondents
were aware of the concept of risk management. Table 4.1, shows the responses of the respondents
when they were asked if they were aware of the concept of risk management. Among the 20
respondents 16 were aware of the concept of risk management. This shows that most of the parties
involved in adama building construction projects, 97%, know about the concept of risk
management, the next question tried to assess how they became aware and if they are confident
enough to implement their knowledge into action.

26
 Response of awareness of Frequency Percentage
risk management Table 4.1
Awareness Yes 16 95% of the concept of
risk management
No 4 5%

Most of the respondents who

answered yes to the above
question became aware of the principle of risk management through study and training. Figure 4.1
shows 70.8% of the parties became aware of the principles of risk management through study and
24.2 % became aware through training.

Figure 4.1 Ways of the respondents’ awareness of risk management principles

The above results show that study and training in the field of risk management is a good way of
creating awareness and making the parties competent in the principles of contract risk management.
But when the respondents were asked to evaluate their knowledge of risk management principles,
most of them answered as medium or fair. Table 4.2 and figure 4.2 show only ten of the
respondents, i.e. 15.4%, rated their knowledge of risk management principles as high. This result
shows out of those who claim to have knowledge of risk management, most of them are not fully
confident enough to rate their knowledge as high.

This implies that a lot needs to be done in increasing awareness and making the parties involved in
the Ethiopian building construction projects confident enough to implement their knowledge of
risk management to increase the efficiency and effectiveness of their projects.

27
 Responses Frequency Percentage

Low 3 13.8

Medium 10 70.8

High 7 15.4

Table 4.2 Rate of knowledge of risk management of the respondents

4.3 The level of use of construction contract risk management techniques

The risk management function heavily depends on the type of risk inherent in the construction
project and the contractual agreement. For the purpose of this research, the definition of risk is
limited to the one that has a negative impact on a project; and hence the risk management is
limited to the process of dealing with negative risks, as these pose inconveniences in achieving
project objectives.

According to the literature review handling of risk is very important in construction industries.
Risk management helps improve the awareness of handling risks in the contractual stage and in
turn improve the relation among parties and increase efficiency. It depends on the nature and
location of the work, the parties involved and the contracting climate and the type of risk inherent
in the project.There are different areas of risk discussed in the literature review; these are
contractual risk, performance risk, financial/economical risk, political risk, technical risk,
geographical risk and operator risk.

Risk management was defined as a process by which the likelihood of the risk occurring or its
impact/consequence on projects is reduced.

If a risk is very unlikely to occur and if its consequence is minor then it’s of less importance to the
parties involved. On the other hand if the risk is likely to occur and cause major consequences,
then the risk is of major concern to everyone involved. In this section, the respondents were asked
to rate the probability of occurrence of the different areas of risk and the level of consequence they
lead to if they occur. Table 4.3 presents the number of responses for each risk area and the mean
values for each item. Low, moderate and high were assigned values of ‘1”, ‘2’ and ‘3’ respectively

28
as shown in the table. The mean values for each item were calculated by multiplying the number of
answers in a category by its rating value, obtaining a sum and dividing by the total number of
answers for that item.

Figure 4.3 is a bar diagram that shows the different areas of risk with their probability of occurrence
and level of consequence on project objectives with value ‘1’ representing low, ‘2’ representing
medium and ‘3’ representing high probability of occurrence and level of consequence.

Risk Areas Number of responses

Probability of occurrence mean Level of consequence/significance mean
1(L) 2(M) 3(H) total 1(L) 2(M) 3(H) total

i. Contractual 5 20 10 35 2.2 10 22 30 62 2.3

ii. Financial 6 9 16 31 2.5 6 8 47 61 2.7
iii. Performance 12 24 26 62 2.2 10 22 24 56 2.3
iv Technical 18 34 10 62 1.9 10 28 25 63 2.2
v. Geographical 32 16 12 60 1.7 20 20 15 55 1.9
vi. Operator 16 22 18 56 2.0 6 34 16 56 2.2
vii. Other 16 6 4 26 1.5 2 2 1 5 1.8

Table 4.3 Mean scores of the probability of occurrence of different risk areas and their level of
consequence

These results show that the risk area with the highest probability of occurrence and the highest
level of consequence is financial risk. This tells us that financial problems almost always occur in
Ethiopian building construction projects and their effect on objectives is very high. Because of
financial shortage and delay on payment certificates, projects are most of the time finished with
delay, beyond budget and without meeting quality requirements. Hence, to improve the situation,
financial sources should be available on time starting from the beginning of the project till the end
and all payment certificates should be issued, approved and paid on time.

29
As shown in the above bar chart contractual risk is among the top risk areas which have a high
probability of occurrence and high level of impact or consequence on project objectives. These
risks are caused by poor contract formulation and bad or no contract administration or generally
lack of contract management.

The contract can be a very useful tool to minimize risks and their consequences if utilized well. If
the contract agreement is not clear, it might lead to different problems which in turn will have
great consequence on project objectives. On the other hand if the contract is unambiguous and if it
contains different provisions which deal with identified risks and their management techniques it
might serve as a very important tool in achieving project objectives.

Importance of risk management

Project stage
1 2 3 4 5 total mean
i. Inception and feasibility 1 0 7 3 9 20 4.0
ii. Planning and design 1 1 2 6 10 20 4.2
iii. Tendering stage 0 1 8 2 8 20 3.9
iv. Construction stage 0 3 0 6 11 20 4.5
v. Commissioning and acceptance 1 3 10 1 5 20 3.2

Table 4.4 Importance of risk management at different stages of construction

30
 4.2 Importance of risk management at different stage of project lifecycle

As can be observed from table 4.4 and figure 4 . 4 , risk management is believed to be important
at all stages of the project lifecycle, i.e. above moderate. But it was discovered that it is
especially very important during the construction stage and during the planning and design stage.
This implies that the different risks should be identified and managed starting from the planning
and design stage. The identified risks should be considered in the contract formulation and
discussed before signing the contractual agreement. And as can be seen from the f i n d i n g s , risk
management is mostly needed during the construction stage; this implies contract administration is
essential to make sure the risks include in the contractual documents are managed according to the
agreement. Risks which were not anticipated during the contractual stage should also be dealt with if
they ever manifest. A risk management team should work closely with the contract administrators to
decrease the effect of all risks on project objectives.

It had been learnt from the literature review that there are various types of project delivery systems
which describe how the project team is organized to achieve project objectives. The most common
types of delivery systems are Force account,

31
Design bid build (DBB), design build (DB) or Engineering procurement construction (EPC) for large
projects, Construction management (CM) and Build operate transfer (BOT).

The right type of delivery system which is believed to involve the least level of risk should be
selected and used for any project. Therefore, the respondents were asked to rate the level of risk that
the different delivery systems incur. Table 4.5 shows the number of responses for each category
(1=very low, 2=low, 3=moderate, 4= high, 5= very high) and for each delivery system. The mean
values were taken to get an overall average of all the responses. Figure 4.5 is a bar diagram that
presents this results, i.e. the different delivery systems with their level of risk.

Delivery system Level of risk

1 2 3 4 5 total mean

i. Force account 7 4 22 11 16 60 3.4

ii. Design bid build, (DBB) 6 12 19 15 10 62 3.2
iii. Design build, (DB) 0 6 18 30 9 63 3.7
iv. Construction management 2 20 20 12 6 60 3.0
v. Build operate transfer (BOT) 4 14 20 16 8 62 3.2
Table 4.5 different contract delivery system and their of risk

32
Figure 4.3 Levels of risk of different contract delivery systems

Majority of the respondents state design build (DB) type of contract delivery system involves the
highest level of risk. This is because DB type of contract delivery system makes one party
responsible for both design and construction risks.

The next delivery system that was believed to involve high risk is force account. It can be observed
from this result that when one party takes full responsibility of delivering the project the risk
involved increases but when the responsibility is divided among different parties the risk is
relatively lowered since it is shared by all the parties. According to most of the respondents when
a construction management consultancy firm is involved in a project it decreases the risk involved.
It had been learnt from the literature that in many countries construction management is a common
and effective type of delivery system. If the responsibility of managing and controlling construction
of projects is given to professionals who specialize in managing projects,

33
the risk involved and the effect could be greatly minimized. The construction management
consultancy is relatively not common in Adama town of the four construction sites. It was seen
from the literature review that the first three types of delivery systems; force account, DBB and
DB are mostly utilized in different sites of the four construction sites that is selected in Adama
town. In some researches, DB and EPC are used interchangeably but they have a basic difference
in that EPC delivery system is mostly used for large scale projects According to different
researches, in the developed world construction risk management is a relatively known concept
and it is utilized widely. There is different risk management technique used in different stages of
the construction. Risk management in the contractual stage, i.e. before signing the contract is used
very frequently. Risks are identified and allocated to the contracting parties in the contract
document, making dealing with the risks if and when they arise very easy. In the previous section
it was stated that most of the parties involved in sites of the four construction that is selected in
Adama town. have heard of risk management but only a few are confident enough to say they have
high knowledge about the risk management techniques. This section tries to assess the level of use
of the different risk management techniques in the four construction sites that is selected in Adama
town. The next question tried to assess the utilization of risk management techniques in the four
construction sites that is selected in Adama town.. Majority of the respondents, 62.7% said they
use risk management techniques while the remaining 37.3% stated they don’t use any risk
management techniques. Among the group which don’t use risk management techniques around
half (53%) put down lack of awareness as their main reason. From the other half (3 0%) put fear of
the need to hire additional staff as an excuse for not using risk management techniques. A small
portion (6.7%) doesn’t use this techniques fearing they are time consuming.

As mentioned above, even if most of the parties involved in the building construction projects have
awareness about the general concept of risk management, only a few have high knowledge about
the principles and techniques involved in managing risk. This is why the majority of the
respondents that don’t use risk management techniques put down lack of awareness as an excuse
for not using it. Therefore, regular trainings on the subject need to be given to the parties involved
the four construction sites that is selected in Adama town to create better awareness.

34
Most respondents, 79%, say their company uses risk management techniques at all stages of
construction i.e. different risk management techniques are applied starting from the contractual
stage up to the end of construction. 16.3 % of the respondents only apply risk management
techniques during the construction stage; this is not recommended since the risks involved in any
project should be identified first in the contractual stage and management techniques put in place
so that the parties can be better prepared to deal with them if they arise during the construction
stage. The literature shows that it is very important to identify all the risk involved in any project
as early as possible to come up with a strategy to avoid or decrease its effect. Some of the methods
that can be used to identify risks in a project are expert opinion, checklist, risk records and risk
analysis. Among the respondents that use risk management techniques, majority of them said they
use checklists and risk records to identify important risks for the building project, this can be
observed from figure 4.6. Only 24% use risk analysis which investigates all potential sources of
project risks and the interrelation among them. Checklists and risk records might be enough to
identify risks for small building projects but for important and complex projects risk analysis is
recommended since it investigates all potential sources of risks related to the particular building
construction project As discussed in the literature, the next step is risk assessment to determine the
likelihood of the risk occurrence and the size of its consequence if it occurs. As presented in figure
4.7, the research findings show that most of the respondents, 61.4%, said they rank the importance
of risks based on past experience to assess the likelihood or probability of the risk occurrence for
the identified risks. According to this research, most parties involved in the four construction sites
that is selected in Adama town attempt to estimate the probability of risk occurrence by using past
experience and expert judgment. This tends to make the process subjective and the result obtained
might not be reliable and maybe variable based on the individual performing the assessment.
Probability analysis is found to be the most common method used for estimating the size of the
risk severity or its consequence on project objectives. This is presented in figure 4.8. The
respondents also agree that Scenario analysis is widely used as well to determine the consequence
of the risk on project objectives. It can be observed from this result that most of the respondents
don’t use decision tree analysis and sensitivity analysis which were found to be very effective for
determining risk severity by different studies and researches.

35
 As seen in the literature review, the likelihood of risk occurrence usually both affects and is
affected by how it is allocated. Allocating a risk to the party best able to control its occurrence and
consequences, reduces the likelihood of the risk eventuating by giving the party best able to
control it an incentive to prevent its occurrence. The party with the greater knowledge of the
project's technical characteristics and/or structure and financing arrangements is also generally in
the best position to manage the consequences if the risk materializes. According to 47% of the
respondents risk is allocated to different parties involved in a project mostly by considering the
party which is in the best position to control them through the contract clauses. This method
minimizes the effect of risk since the risk is transferred to the party that has power to control its
occurrence or decrease its effect when it becomes evident. Around 42% of the respondents deal with
the risk by negotiation when and if the risk occurs. This means the risk, instead of being allocated
before it occurs, is dealt with after it occurs after the parties negotiate on which party is in the best
position to deal with it.

A few respondents (11%) said they pay risk premiums for the party willing to take the risk; this
method follows similar procedures as insurance. Risk mitigation is an important risk management
process which tries to reduce the likelihood of the risk materializing or reduce its effect if it does
materialize. According to the literature review there are four common risk mitigation options, i.e.
avoidance, retention, control and transfer. The most common risk mitigation method identified by
majority of the respondents was control or reduction of the risk as can be seen in figure 4.10. This
means majority of the respondents try to decrease the effect of risk or manage it to decrease its
consequence after the risk has been identified.

36
Figure 4.4 Common risk mitigation methods used in Ethiopian building construction projects.

Figure4.5 Types of contract mostly used in Ethiopian building construction

projects.

As can be observed from figure 4.12, lump sum is identified as the second popular contract
document by the respondents (8%) but the other forms of contracts are seen as non important by
the respondents for their building construction projects (figure 4.12). Hence, according to the
respondents, the four construction sites that is selected in Adama town projects are executed using
either unit rate or lump sum contract. And sometimes a combination of the two contracts is used.

Then the respondents were asked to rate contract documents with their level of risk and identify
the contract document which offers less risk. Figure 4.13 shows the contract documents with their
level of risk ; ‘1’ representing ‘very low’, ‘2’ representing ‘low’, ‘3’ representing ‘moderate’ and
‘4’ representing ‘high” levels of risk. The unit rate contract was identified to offer the least level of
risk by the respondents.

37
parties. This research, therefore, confirms that most parties involved in the four construction sites
that is selected in Adama town. projects believe that if the contract is prepared well and if it
contains clauses that deal with different risks, many of the problems caused by them and their
effect on project objectives can be minimized.

The respondents were also asked to rank the impact different risk areas have on project objectives.
Table 4.6 below shows the no of responses under each category of risk and the level of impact the
risk areas have on project objectives.

The impact each risk area has on different objectives, i.e. time, cost, and quality were calculated
separately and the average of these values was taken to get the total effect of these risk areas on the
overall project objective.

No of responses and mean values

Risk Areas Impact
Time Mean Cost Mean Quality Mean
Average
low moderate high low moderate high low moderate high

i. Contractual 4 19 44 2.6 4 28 28 2.4 12 23 28 2.3 2.43

ii. Financial 2 18 47 2.7 4 15 48 2.7 8 16 35 2.5 2.63
iii. Political 16 19 8 1.8 35 20 8 1.6 36 20 6 1.5 1.63
iv. Performance 4 12 51 2.7 4 28 35 2.5 8 16 36 2.5 2.57
v. Technical 4 39 24 2.3 6 35 24 2.3 6 23 38 2.5 2.37
vi. Geographical 19 24 20 2.0 10 32 19 2.1 12 36 15 2.0 2.03
vii. Operator 15 24 24 2.1 10 24 27 2.3 6 31 23 2.3 2.23
Table 4.6 Impact of different risk areas on project objectives

38
 CHAPTER FIVE

5 CONCLUSIONS AND RECOMMENDATIONS

This research had three major objectives which were to identify the level of use of construction
contract risk management techniques in Diriba defersha building construction projects in Adama
site, to test the level of awareness about construction contract risk management of different
contractual parties involved in these projects and to study the effect of contractual risk
management in meeting project objective. The reviewed literature showed that construction
contract risk management is vital in any construction and that different risk management
techniques should be used starting from the contractual stage to make projects successful. The
questionnaire survey was believed to contain all the important research questions which were
helpful in fulfilling the research questions.

The results of the questionnaire survey and discussion of the findings in line with the literature
review were presented in the previous section. In this section the conclusions derived from the
research findings and the recommendations are presented.

5.1 Conclusions

1. Most of the participants involved in Diriba defersha building construction projects in adama site
are aware of the concept of risk management but only a relatively smaller number of this group
believe they have an adequate knowledge needed for applying these risk management techniques
to make their projects successful.

2. Most participants involved Diriba defersha building construction projects in adama site don’t use
risk management techniques in their projects because of lack of awareness about their
significance and some don’t use them fearing they need to hire additional staff and acquire more
resources.

3. The type of contract selected for the construction has a great influence on the level of risk
encountered. The most widely used type of contract in Diriba defersha building construction
projects in Adama site is believed to be the unit rate contract and it is found to involve least level

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 of risk. The type of delivery system selected for the project has influence on the level of risk
encountered. The parties involved in Ethiopian Diriba defersha building construction projects in
adama site believe that Design build (DB) and Force account delivery systems involve high risk
while comparatively construction management delivery system is believed to involve the least
level of risk.

4. Financial difficulty and poor contract management were identified to be the most important causes
of risk with a very high level of occurrence and a high level of impact on project objectives in
Diriba defersha building construction projects in adama site. The methods and techniques mostly
used in the building projects to identify, assess, allocate and mitigate the risks are highly
dependent on an individual’s judgment and past experience. In most projects, there is no
specialized risk management team to deal with different risks that might arise during the life of
the project.

5.2 Recommendations

1. Since lack of awareness was identified as a major cause for not having enough confidence for
using risk management techniques, regular trainings and workshops on the subject need to be
provided for the parties involved in building construction site. All participants should be
encouraged to take part and participate in trainings and workshops and try to increase their
knowledge of risk management.

2. A special attention should be given to managing Financial and Contractual areas of risk since
they were identified as most important risks in Diriba defersha building construction projects in
Adama site.

3. We recommend further research be conducted on the subject;

 By using case study on few selected construction companies and their projects.
 Involving other sectors of the construction industry.
In order for good researchers to come up with very useful findings, we recommend the parties
involved in the construction industry be more cooperative by willingly participating and giving
any support needed for the research

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