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CHAPTER 1
INTRODUCTION
1.1 General
Project risk management is an essential part of the process which aims at identifying the
potential risks associated with a project and responding to those risks. It includes activities
which aim to maximize the consequences associated with positive events and to minimize the
impact of negative events. Risk is present in all the activities in a project; it is only the amount
which varies from one activity to another.
Construction projects are always unique and risks raise from different sources. Construction
projects are naturally complex and dynamic, and involving multiple feedback processes. A lot
of participants individuals and organizations are involved in the construction project, and their
interests may be positively or negatively affected as a result of the project execution or project
completion. Different participants with different experience and skills usually have different
expectations and benefit. This naturally creates problems and confusion for even the most
experienced project managers and contractors.
The construction industry is subjected to more risk and uncertainty than many other industries.
The process of taking a project from initial investment appraisal to completion and into use is
complex, generally bespoke, and entails time-consuming design and production processes. It
requires a multitude of people with different skills and interests and the co-ordination of a wide
range of disparate, yet interrelated, activities. Such complexity is further compounded by many
uncontrollable external factors (Flanagan and Norman, 1983). The construction industry has a
poor reputation in coping with risks, many projects failing to meet deadlines and cost targets.
Clients, contractors, the public and others have suffered as a result (Edwards 1995).
Construction projects can be extremely complex and filled with uncertainty. Risk and
uncertainty can potentially have damaging consequences for the construction projects.
Therefore nowadays, the risk analysis and management continue to be a major feature of the
project management of construction projects in an attempt to deal effectively with uncertainty
and unpredicted events and to achieve project success.
Construction risk is generally perceived as events that influence project objectives of cost, time
and quality. Some of the risks associated with the construction process are fairly predictable or
readily identifiable; others may be totally unforeseen. Construction risk can be classified in six
categories as follows: i) Acts of God, e.g. floods, hurricanes; ii) Physical risks, e.g. labor

injuries, fire, damage to equipment; iii) Financial and economical risks, e.g. inflation,
unavailability of funds; iv) Political and environmental risks, e.g. changes in rules and
regulations, political uncertainty; v) Design-related risks, e.g. defective design, and vi)
Construction-related risks, e.g. change orders, labor productivity, etc. (Al-Bahar, 1990)
Risk management may be defined as a process to control the level of risk and to mitigate its
effects. It is a systematic approach for identifying, evaluating and responding to risks
encountered in a project (Nummedal et al., 1996).
1.2 Problem Statement
In todays world where changes take place and risks are overhanging, the prerequisite for
survival and success is knowing the environment and being capable of decision-making in a
correct and prompt manner. In case of not recognizing both internal and external risk factors of
the project, the managerial decision-making mistakes take place. Moreover, time and cost
assessment estimates also go wrong. Risk management can identify the risk-generating factors.
Furthermore, risk management can control or remove such risk factors through analyzing and
choosing suitable strategies.
Risk analysis and management are important part of decision making process in the
construction company. The construction industry and its clients are widely associated with
the high degree of risk duo to the nature of the construction business activities, process,
environment, and organization (Kartam and Kartam, 2001)
Previous research suggests that Construction activity is particularly subject to more risks
than other business activities because of its complexity; a construction project usually
requires a multitude of people with different skills and interests and the coordination of a
wide range of disparate, yet interrelated, activities. The unique features of a project and many
other external uncertainties further compound such complexity. It is not uncommon to find
construction projects with cost overrun, time delay and poor quality caused by various risks
(Shen, 1997).
The individual in the construction industries that undertake various activities are heterogeneous
since client, consultant and contractors have different roles and objectives (flanagan, 1995).

1.3 Research Questions

The questions raised in this research are as follows:
a. What kinds of risks threaten the construction projects and what are their effects?
b. Can application of risk management at studies and contract stages determine the type of
risks and conditions of risk management in the best possible manner?
c. How can risk management be institutionalized in the construction sector in order to bear
positive results similar to those of time management and cost management in projects?
1.4 Objectives
The objective of the study is to evaluate the effectiveness of different risk management
practices in Pakistan Construction Industry and to find out the most suitable way of managing
the construction risks by recommending the appropriate risk management techniques, which
reduce conflicts and improve profitability.
Sub-objectives associated with main objective can be identified as follows:
a) To evaluate the contractors and clients level of awareness and acceptance on Risk
Management practice.
b) To identify the current practice of risk management amongst contractors and clients.
c) To examine the challenges and difficulties to the implementation of risk management
in construction project from the contractors and clients point of view.
1.5 Scope of Study
This research study focuses on risk management practices adopted by contractors and clients
in public and private sector projects of Pakistan. The study is to investigate the perception of
Contractors and Clients organizations regarding the difficulties in implementing risk
management strategies and benefits relevant to risk management in their organization.