THE PRICE OF RISK IN CONSTRUCTION PROJECTS: CONTINGENCY APPROXIMATION MODEL

Here is the abstract of a paper I presented at the 5th International Conference on Construction Project Management (ICCPM) / 2nd International Conference on Construction Engineering and Management (ICCEM) at Singapore in March 2007.

The price of risk in construction projects: contingency approximation model

Samuel Laryea, Edward Badu
Department of Building Technology, Kwame Nkrumah University of Science and Technology, PMB, Kumasi, Ghana

Isaac K. Dontwi
Department of Mathematics, Kwame Nkrumah University of Science and Technology, PMB, Kumasi, Ghana

Little attention has been focussed on a precise definition and evaluation mechanism for project management risk specifically related to contractors. When bidding, contractors traditionally price risks using unsystematic approaches. The high business failure rate our industry records may indicate that the current unsystematic mechanisms contractors use for building up contingencies may be inadequate. The reluctance of some contractors to include a price for risk in their tenders when bidding for work competitively may also not be a useful approach. Here, instead, we first define the meaning of contractor contingency, and then we develop a facile quantitative technique that contractors can use to estimate a price for project risk. This model will help contractors analyse their exposure to project risks; and help them express the risk in monetary terms for management action. When bidding for work, they can decide how to allocate contingencies strategically in a way that balances risk and reward.


Keywords: contingency, contractors, risk exposure, risk pricing, uncertainty.

ACKNOWLEDGEMENT:
Professor Denis Cioffi, Project Management Program, George Washington University, USA.
Professor Will Hughes, School of Construction Management and Engineering, University of Reading, UK

REFERENCE:
Laryea, S., Badu, E. and Dontwi, I. K. (2007) The price of risk in construction projects: contingency approximation model (CAM). In: 5th International Conference on Construction Project Management (ICCPM) / 2nd International Conference on Construction Engineering and Management (ICCEM), 1-2 March 2007, Nanyang Technological University, Singapore.