ASSIGNMENT

Risk Management in Chinese Construction Industry

Group members: Abhishek Gupta- 11030241195 Adil Ali 11030241194 Suraj Rai- 11030241193 Saily Kalbhor-11030241196

Research paper

Solution: 1 Contents: (I) Proposed Title (II) Introduction (III) Brief introduction of Chinese construction industry (IV) The recent trends of risk management in Chinese construction industry (V) Brief Literature Review Sources of risk Classification of risk Perceptions of Risk management process (VI) Methodology Secondary Analysis Questionnaire Individual Interviews Case Study (VII) Proposed Research Time-Table (VIII) References

Proposed Title: Risk and its Management in construction industry in China

Introduction: The increasing pace of change, customer demands and market globalization all put risk management high on the agenda for forward thinking companies. Risks cause cost overrun and schedule delay in many projects. The effectiveness of risk management becomes an important issue in project management. To make risk management more efficient and effective, all parties must understand risk responsibilities, risk event conditions, risk preference, and risk management capabilities. Different parties involved in a construction project face a variety of uncertain factors. These factors can be compiled under the category of risk. Making decisions on the basis of assumptions, expectations, estimates and forecasts of future events involves taking risks. Risk and uncertainty characterize situations where the actual outcome for a particular event or activity is likely to deviate from the estimate or forecast value. The definition of risk management varies; risk management is generally defined as, 'A formal orderly process for systematically identifying, analysing, and responding to risk events throughout the life of a project to obtain the optimum or acceptable degree of risk elimination or control'. The objective of my research is to present the perception of typical Chinese contractor towards construction risk. The result of surveys should further clarify the current perception of contractors regarding current construction circumstance in the industry. The data and information will be collected from published statistics, individual interviews and questionnaires, and the data will be used to compare with previous published surveys. The purpose of this comparison is to identify perception and trends in construction risk management. A basic understanding of current attitudes and trends therefore will be indicated. Then I will adopt some appropriate case to enhance my understanding of my view point. The following proposal presents the 'What' and 'How' of my study, using an integrated approach...

Brief introduction of Chinese construction industry: China's economy has shown remarkable growth over the past several years and many foreign economists predict a healthy growth in the near future. According to the Chinese Statistical Yearbook 2002, China's construction industry achieved 646.2 billion yuan in total output value in 2001, accounting for 6.7 percent of the nation's gross domestic product (GDP). China's construction industry realized 704.7 billion yuan in total output value in 2002 -- an increase of 10.54 percent from the previous year's 637.5 billion yuan -- accounting for 6.9 percent of the national GDP. Construction enterprises reached 45,893 by the end of 2001, employing 21,106,600 people and generating 1,536.156 billion yuan in output value and 402.357 billion yuan in adde d value. Areas under construction totaled 1,883,286,800 square meters; completed areas covered 976.99 million square meters. Profits totaled 29.439 billion yuan in the year, with taxes at 49.903 billion yuan. Of the enterprises, 44,997 were Chinese with 20,986,800 staff members. The companies reaped 1,518.595 billion yuan in output value in 2001 and 398.022 billion yuan in added value. Areas under construction numbered 1,874,480,800 square meters and completed areas

completed covered 972.532,300 square meters. Profits reached 28.83 billion yuan, with taxes at 49.392 billion yuan. (China Statistical Yearbook, 2002)

Recent trends of risk management in Chinese construction industry: For years, the Chinese construction industry has had a very poor reputation for coping with risk, with many projects failing to meet deadlines and cost targets. This can be traced to many causes as Lu mentioned, including: Technical, quality or performance reasons, such as employment of inexperienced designers, changes to the technology used or to industry standards during the project. Organizational problems, such as cost, time and scope objectives that are internally inconsistent, lack of prioritization of projects, inadequacy or interruption of funding, and resource conflicts with other projects in the organization. External problems, such as shifting legal or regulatory environment, poor geological conditions and weather, force majeure. Project management, such as poor allocation of time and resources, inadequate quality of project plan, and poor use of project management disciplines. (Lu 2003) Risk management is still new to China; it was introduced and applied in construction industry for a relative short period. Survey showed that Chinese contractors are often responsible for most risk factors, meanwhile, the use of risk analysis techniques for managing and controlling risk are generally low among the Chinese construction industry. Basically, most contractors still resort to the subjective judgment and practice experience for perceiving and managing risks. However, according to Chinese Statistical Yearbook 2004, situation was improving. During the Tenth Five-Year Plan, China's construction industry has so far enjoyed a good opportunity for development, more and more parties involved in the construction projects raised their perception of risk and the attitude towards risk management improved. (China Statistical Yearbook, 2004) Literature Review: The literature review in this part is mainly about the identification of risk resources, classification of risk, perception of risk and basic theory of risk management as well. Sources of risk There are many resources of risk that an organization must take into account before a decision is made. It is therefore important that these sources of risk are identified allowing the necessary analysis and response to take place. According to Merna and Smith, sources of risk to business from projects including as follows: political, environmental, planning, market, economic, financial, natural, project, technical, regulatory, human, criminal, safety, legal. (Merna and Smith 1996). A source of risk is any factor that can affect project or business performance, and risk arises when this is both uncertain and significance in its impact on project or business performance. Classification of risk: It is helpful to try to categorize risk associated with projects both as a guide to identification and to facilitate the selection of the most appropriate risk management strategy. Merna and smith proposed one method to separate the more general risks which might influence a

project but may be outside the control of elements; these are referred to as global and elemental risks. Global risks originate from sources external to the project environment. They are often predictable but not always controllable. Global risks can be subdivided into four sections: political, legal, commercial and environmental risk. Elemental risks are those risks associated with elements of the project, namely implementation risks and operation risks, and for some projects there will be financial risks and revenue risks. These risks are more likely to be controllable or manageable by project parties. (Smith 2003) Perceptions of risk Different people will respond to seemingly similar risky situation in very different ways. Risk perception has a crucial influence on risk taking behavior. The perceived importance attached to decisions influences team behavior and the consequent implementation methods. Subjectivity, according to Merna, is a key factor in assessing risk. Whether a problem is perceived in terms of potential gains or losses will not be assessed as a simple mathematical calculation of the problem, but as a subjective fear, often linked to consequences of outcomes. Furthermore, he stated that risks are perceived by different stakeholders at different business level. Risk management process In construction projects each of the three primary targets of cost, time and quality is likely to be subject to risks. In terms of project implementation, managers need to be able to undertake or propose action which reduce or eliminate the effects of risks. To achieve this aim, a suggested systematic approach to the management of risk is followed: *Risk Identification: To identify the risk resource; *Risk Analysis: To quantify the effects; *Risk Response: To develop management response to risk

Methodology: In order to collect data and information for the research and examine the main questions raised, the following methodology will be possibly employed: Secondary Analysis Since direct observation is not very accessible in construction industry in China, secondary analysis is more preferable. Secondary analysis is the reanalysis of data that was originally compiled by another researcher for other purposes than the one the present researcher intends to use it for. The sources that I would use include archives, newspaper, and magazine articles. I will try to choose the sources which are more objective. I will adopt appropriate methods to find the useful data and information for my research on risk management. Questionnaire Questionnaires are an inexpensive way to gather data from a potentially large number of respondents. Often they are the only feasible way to reach a number of reviewers large enough to allow statistically analysis of the results. For my study, the questionnaire is designed to collect data. The data will be compared with data collected from a similar survey conducted in 1979 by the American Society of Civil Engineers (ASCE). The purpose of this

comparison is to identify ant trends in construction risk that will facilitate risk management. The reasons for me to choose questionnaire as research method as follows: Firstly, a Questionnaire can save resources and money. Although preparation may be costly, any data collection scheme will have similar preparation expenses. The administration cost per person of a questionnaire can be as low as postage and a few photocopies. Time is also an important resource that questionnaires can maximize. Secondly, Questionnaires are easy to administer confidentially. Thirdly, in studies that have resources to pursue other data collection strategies, questionnaires can be a useful confirmation tools. Thus, questionnaires are versatile, allowing the collection of both subjective and objective data through the use of open or closed format questions. Modern computers have only made the task of collecting and extracting valuable material more efficient. Individual Interviews Interviews will enable me to do most of the qualitative part of my research, and the information gained here is usually more realistic. I plan to interview some engineers, some project management team and some experienced project managers as well. In addition, Individual interviews by a way of structured questionnaire will also be used to collect information about the risk management perception. The interview is especially important for some proposed examining questions. I will also attempt to interview some professional journal editors relating to construction industry. Case Study Case study research is the most common qualitative method used in risk management. As Yin (2002) defined, the scope of a case study as follows: A case study is an empirical inquiry that: *investigates a contemporary phenomenon within its real-life context, *especially when the boundaries between phenomenon and context are not clearly evident. For my research on risk management, I will choose some recent cases which relating to risk management as a way of identifying the perception and trends of risk management in construction industry in China. I will select both success and failing cases in Chinese construction industry. References: Al-Bahar, J. F., and Crandall, K. C. (1990) Systematic risk management approach for construction projects. Journal of Construction Engineering Management, 116~3, 533-546. China Statistical Yearbook, 2002, China Statistics Press. China Statistical Yearbook 2004, China Statistics Press. Lu, Y. J. (2003) Risk Management for Large-scale Infrastructure Projects in China, 11 Merna, A. and Smith, N. J. (1996) Projects procured by privately financial concession contracts, vol.1. Asia Law and Practice, Hong Kong. Raftery, J. (1994) Risk Analysis in Project Management. E & FN Spon, London. Smith, N. J. (2003) Appraisal, Risk and Uncertainty. 6, 42-43

Wehrung, D. A., Lee, K., Tse, D. K., and Vertinsky, I. B. (1988). Adjusting risky situations: A theoretical framework and empirical test. Journal of Risk Uncertainty, 2, 189-212. Yin, R. K. (2002) Case Study Research, Design and Methods, 3rd ed. Newbury Park, Sage Publications. Sol: 3 References Akincl and Filscher (1998) have talked about the concerns related to the contractors.

Solution 2:
RESEARCH METHODOLOGY TECHNIQUES

Questionnaire:Questionnaires are an inexpensive way to gather data from a potentially large number of respondents. Often they are the only feasible way to reach a number of reviewers large enough to allow statistically analysis of the results. For my study, the questionnaire is designed to collect data. The data will be compared with data collected from a similar survey conducted in 1979 by the American Society of Civil Engineers (ASCE). The purpose of this comparison is to identify ant trends in construction risk that will facilitate risk management. The reasons for me to choose questionnaire as research method as follows: Firstly, a Questionnaire can save resources and money. Although preparation may be costly, any data collection scheme will have similar preparation expenses. The administration cost per person of a questionnaire can be as low as postage and a few photocopies. Time is also an important resource that questionnaires can maximize. Secondly, Questionnaires are easy to administer confidentially. Thirdly, in studies that have resources to pursue other data collection

strategies, questionnaires can be a useful confirmation tools. Thus, questionnaires are versatile, allowing the collection of both subjective and objective data through the use of open or closed format questions. Modern computers have only made the task of collecting and extracting valuable material more efficient. Individual Interviews:Interviews will enable me to do most of the qualitative part of my research, and the information gained here is usually more realistic. I plan to interview some engineers, some project management team and some experienced project managers as well. In addition, Individual interviews by a way of structured questionnaire will also be used to collect information about the risk management perception. The interview is especially important for some proposed examining questions. I will also attempt to interview some professional journal editors relating to construction industry. Secondary Analysis:Since direct observation is not very accessible in construction industry in China, secondary analysis is more preferable. Secondary analysis is the reanalysis of data that was originally compiled by another researcher for other purposes than the one the present researcher intends to use it for. The sources that I would use include archives, newspaper, and magazine articles. I will try to choose the sources which are more objective. I will adopt appropriate methods to find the useful data and information for my research on risk management.

SAMPLING

The sampling technique used in this paper is: Stratified Sampling. Stratified Sampling:Groups or classes inside a population that share a common characteristic are called strata. For example, in the population of all undergraduate college students, some strata might be freshmen, sophomores, juniors, or seniors. Other strata might be men or women, in-state students or out-of-state students, and so on. In the method of stratified sampling, the population is divided into at least two distinct strata. Then a (simple) random sample of a certain size is drawn from each stratum, and the information obtained is carefully adjusted or weighted in all resulting calculations. For data collection questionnaires were used.  Respondents to the questionnaires were chosen among the different roles in the construction industry, mainly including management organizations, client, contractor, designer, and superintendent.  The total number of respondents is 115, and the distribution of samples is as follows: 18 -Hubei, 38 -Beijing, 10-Shanghai, 19-Jiangsu, 10-Heilongjiang and 20-Guangxi.  The distribution of samples according to groups is as follows: 19 clients, 30 contractors, 21 designers, 20 superintendents, 10 management , 8 planning organizations and 7 others.  Ninety percent of the respondents held senior positions in their organizations, such as director, general manager, or project manager, and the others also had been involved in the industry for many years.

DATA ANALYSIS

The data collected from the questionnaire were analysed. The selected techniques that are appropriate to this study include the following: Estimation of the sample population mean Rank cases One-way analysis of variance -ANOVA Spearman rank correlation. Of these statistical techniques the ANOVA and Spearman rank correlation have been adopted for inferential analysis

Solution: 3 Among the many references given, The Lu, Y. -2005. Construction management practice on the Three Gorges Project. Proc., 1st Greater China Project Management Summit, Beijing, 1326. Is most relevant to the study because, this paper talks about the Chinese construction industry specifically and covers the construction & related risks involved around the world also. About the Three Gorges Project the paper discusses in detail, regarding incentives, frequency of incentives, delivery of project etc. Incentives have been increasingly applied to align the objectives of participants in the delivery of construction projects. However, little research has been undertaken to systematically study the use of such incentives. This paper reports the findings of an empirical survey of the Chinese construction industry on: the need to apply incentives; frequency of the usage of incentives; how the incentive schemes are decided; and their effectiveness in application. The incentive schemes of the Three Gorges Project is also studied, from which an incentive matrix is presented that has measures tied not only to the final results but also extended to the whole construction process to facilitate providing early warnings, obtain continuous improvement, and ultimately achieve satisfactory project results

for participants. It is recommended that future studies be encouraged to develop incentives according to project features such as project type, delivery system, project risk, and participants needs and their experience, enabling incentives to be applied broadly by participants to improve the efficiency of project delivery. The strategies adopted in the TGP can largely remove the barriers to risk management as the survey revealed such as lack of joint risk management mechanisms by parties, different recognition of risk control strategies, ineffective implementation of risk control strategies, no incentive for better risk management, inappropriate risk allocation, and insufficient on going project information for decision making. The satisfactory performance of the TGP shows that the TGP risk management strategies are effective in managing the identified key project risks. The specified project quality was achieved in a systematic and orderly manner, and the completed works have met the required standards; the total cost of the project was forecasted under $21.8 billion _United States_, which is 11% less than budget; the construction progress strictly met the schedule requirements of the project _Lu 2005_; the safety incidents decreased continuously; and the industrial relationships among participants were good with communication among them being effective. The major finding of the report tallys with the project of Chinese construction industry that can be directly related with the findings of our study. It states certain issues like The intent of this study has been achieved through a systematic Chinese industry survey on the use of incentives. The major ndings of this study include the following: 1. The delivery systems currently being applied in China retain features of the traditional systems. However, the limitations of these systems are being recognized, and it is agreed by all parties that the current contract has specied the risks and obligations of the parties, but lacks incentives to promote better performance. All the parties also support the idea that incentives make the project risk allocation fairer, because incentives can be seen as the sharing of rewards from good performance. 2. Generally, the quality objective was found to be the most important, ahead of the schedule/time objective and the cost objective, with contractors having ranked cost objective ahead of schedule/time objective. The frequencies of using incentives are consistent with the priority of objectives, and the quality incentive is the most frequently used, with schedule, earlier completion, safety, and cost incentives following. 3. It is found that the incentive provisions are mainly decided at the construction and bidding stages, following the planning and design stage. 4. The majority of incentives are decided by clients and their consultants with considerable incentives being decided through negotiation among parities. Most of the incentives are decided depending on the necessity of clients, followed by incentives depending on the risk allocation on each party and according to traditional trends. These show that clients have a stronger inuence on deciding incentive schemes than contractors; 5. Among a variety types of surveyed projects, nearly half of the projects spend very limited resources on incentives, with incentive amounts of other projects ranging over 0.5% of the total project cost;

6. There is a consensus among all parties that use of incentives is effective in providing motivation for participants to perform better. 7. The general combined schemes in TGP typically included ve incentives: quality, occupational health and safety and environment, schedule, information management, The paper states that overall ratings on the application of risk management techniques is not high, which is consistent with the risk management systems being used by the participants, and are quite informal and inadequate to deal with project risks. This suggests that there is much room to systematically improve the risk management in the industry by using different approaches to increase both the organizations and individuals knowledge/skills on. The TGP risk management approach can largely remove the barriers to risk management in the industry. This indicates that the future open communication risk management process should not be only combined with partnering principles that provide joint problem resolution procedures, but also with the need to build effective communication infrastructures, which support the information contributed by all participants being able to promptly enter the risk management process to facilitate organizations as well as individuals optimum decision making dealing with project risks;

Solution: 4 Shortcomings of this paper : Decision making is an important part of DSS i.e. decision making system or process .Here the focus was entirely on the Chinese construction industry and not on a global basis .More ever the decision pertaining to the Chinese construction country has not been compared to the process followed in other countries .Had It been then we would have got a better understanding of the process on a global basis. Within china the sample that was taken for study was not exhaustive as it included only six areas-Hubei,Beiging,Shanghai,Jiangsu,Heilongjiang and Guangxi. A more exhaustive sample would have given better results. Data collection was done by Triangulated Approach, but a single method cannot reveal all the aspects .Also there was complexity in the method used and the process was cumbersome.

Questionnaire and Interview was chosen as the principal survey method .But it was argued that the postal surveys can be biased if the return rate is lower than 30-40%.Another problem is to obtain adequate level of response. The data tables were very difficult to comprehend .Diagrams explains things very swiftly and quickly but they were missing in the case study.

Improvements : To improve this paper, emphasis could have been on the pictorial representation of the models in a precise manner and have communication channels along with the pictorial models. The models should have been there as this when used and the type of communication used definitely help in providing a better understanding as to when to use which communication model; but channels also play an important and significant role in deciding the communication model. The case study should be more precise and redundancy should be avoided. More ever light should be thrown on the process followed in other countries as well and a comparative analysis should be done.