Risk assessment and allocation in the UAE construction industry

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Abstract

This study identifies and assesses the significant risks in the UAE construction industry and addresses their proper allocation. Data were collected through a questionnaire distributed to construction experts. The study reveals that economic risks such as inflation and sudden changes in prices, shortage in material and labor supply are significant. Other significant risks include owner risks such as unrealistic construction schedule, improper intervention and changes in design. Political, social and cultural risks are found to be insignificant. Local and international experts are in agreement as to the ranking of construction risks in the UAE. More risks are allocated to contractors or shared between contractors and owners with only two risks allocated directly to the owners.

Introduction

The construction business, like any other business, is risky. However, construction projects are perceived to have more inherent risks due to the involvement of many contracting parties such as owners, designers, contractors, subcontractors, suppliers, etc. Construction projects are unique and built only once. They also involve a temporary project team that is assembled from different companies, countries, cultures, etc. Moreover, the size and complexity of construction projects are increasing which adds to the risks. This is in addition to the economic, political, social and cultural conditions where the project is to be undertaken. Project risk can be defined as an uncertain event or condition that, if it occurs, has a positive or negative effect on at least one project objective, such as time, cost, scope, or quality [1]. Risks are related to rewards. Some risks should be accepted as long as they are in line with the rewards. Risks are threats to project success [2]. Failure to adequately deal with risks has been shown to cause cost and time overruns in construction projects [3], [4]. Trying to eliminate all risks in construction projects is impossible. Thus, there is a need for a formal risk management process to manage all types of risks. Risk management is a formal and orderly process of systematically identifying, analyzing and responding to risks throughout the lifecycle of a project to obtain the optimum degree of risk elimination, mitigation and/or control [5]. To be successful, the organization should be committed to addressing the management of risk proactively and consistently throughout the project [1].

One of the major steps in project risk management is to identify and assess the potential risks in the project. Every project contains some degree of risk; and yet, most project managers are ill prepared when it comes to identifying or adequately addressing potential risks [6]. Trying to identify all the risks is time-consuming and counter productive. Attempts to consider every risk are doomed to failure [3]. The trick is to identify the most critical risks and control them [7]. Thus it is important to determine the most significant risks in the construction industry. There are a number of researches on construction risks in several countries such as Indonesia [3], USA [8], Kuwait [9], Hong Kong [10], China [11], India [12], and Taiwan [13]. However, no such study had been performed in the United Arab Emirates (UAE). Construction risks differ among different countries as the economic, political, social and cultural conditions are different. The management of risk is greatly influenced by the uniqueness of the construction industry in a specific country [3].

The UAE construction industry is unique. The UAE is witnessing an unprecedented boom in construction activity at all levels with the government’s goal of diversifying its income away from oil dependence to tourism, commercial and industrial activities. There are a lot of new mega projects that are underway and others in the pipeline. The number, size and complexity of new construction projects has created an extra burden on construction participants and resulted in lots of risks. Therefore, it is important to identify and assess the significant risks in the UAE construction industry in order to help local companies and international companies who do or plan to work in the UAE to pay attention to these significant risks. Risk identification and allocation are influential factors in risk handling decisions [13].

The main objective of this paper is to identify and assess the significant risks in the UAE construction industry based on their risk rating (impact and probability). The paper also compares the perspectives of local and international companies working in the UAE. Moreover, this research addresses the proper allocation of risks to the appropriate contracting party.

Section snippets

Research methodology

The first step was to identify risks in construction projects. This was done primarily through literature review. A comprehensive list of 42 risks was developed based on previous studies in Indonesia [3], USA [8], Kuwait [9], Hong Kong [10], and China [11]. A questionnaire was then structured to get the perceptions of construction experts in the UAE. The questionnaire consisted of two sections. The first section was intended to gather information about the respondents’ profile. The second

Risk identification

Various risks were identified in the first stage. This was accomplished mainly through literature review. The Risk Breakdown Structure (RBS) is then developed to organize the different categories of risks (Fig. 1). To improve the risk identification process, risks can be categorized according to the source of risks. The Risk Breakdown Structure (RBS) shows the risk groups, risk categories and risk events at the lowest level. Project risks are divided into two groups, according to their source,

Risk significance

Based on the survey results, the relative importance index (RII) was calculated for each risk based on probability, impact and rating. These risks were then ranked according to their RII. The results are presented in Table 2. Table 3 presents the top 10 risks in the UAE construction industry based on risk rating. According to risk rating values, the most significant risk is inflation and sudden changes in prices. The RII is 15.48 (scales 1–25). Inflation is a key risk in the UAE. The latest

Comparison of local and international companies

The UAE construction market is open to local and international companies. Many of the mega size projects are handled by international companies with local partners. The perceptions of experts working in international companies are compared to that of local companies. Table 4 presents the top ten risks according to experts working in international companies in the UAE. Table 5 presents the top ten risks according to experts working in local companies in the UAE.

Inflation is ranked 1st in both

Risk allocation

Risk allocation is an important issue. It refers to the proper allocation of risks to the contracting party, mainly the owner or the contractor. Sometimes, risks cannot be handled by one party alone so the two share that risk. Generally, risks should be allocated to the party that can best handle it. However, due to an asymmetry in commercial power, there are no rules regarding risk allocation in construction contracts as owners can place any risks to the contractor. Contractors usually respond

Summary and conclusions

The UAE construction industry is very active. Every day, there is an announcement of a new mega construction project. The number, size and complexity of new construction projects are increasing resulting in extra risks. The top ten risks can be attributed directly to this phenomenon. The results of this study show clearly that inflation and sudden changes in prices is the highest risk in the UAE construction industry. Fifty five percent of the respondents indicated that this risk should be

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