Risks of International Projects: Reward or Folly? By: G. Edward Gibson, Jr, Ph. D, P.E. and John walewski Abstract Assessing and managing risk is a complex and critical task for international construction projects that support new business ventures. Indeed, it could be argued that the word risk and the term international projects could be used interchangeably. Driven by such factors as new markets, domestic competition, and trade liberalization, U.S. owners and contractors have in recent years aggressively pursued international business opportunities and projects. International work requires owners to assess a diverse set of political, geographic, economic,environmental, regulatory, and cultural risk factors when contemplating an international capital project. In addition, contractors must consider a similar set of risk factors in determining whether to undertake uch projects, and how to price and schedule the work if they do. A limited amount of research has been undertaken to address these issues. and current efforts to assess and evaluate the risks associated international construction are fragmented and fail to provide adequate assistance to project managers. Can be systematically addressed and mitigated on these types of projects or is it folly to attempt this process? This paper will report the results of our research project focused on international projects sponsored by the Center for Construction Industry Studies(CCIS), the Construction Industry Institute( CIl) and the Project Management Institute(PMi). This research included input from over 100 industry experts representing 58 organizations. Data from 65 international projects, with a total cost of approximately $27 billion(U.S )were analyzed. We will present key risk issues and a management approach to help mitigate risks. Included in that discussion will be the International Project Risk Assessment(PRA) tool developed in collaboration with dustry. This management tool provides a systematic method to identify, assess, and determine the relative importance of international-specific risks across the projects life cycle. The reward of risk management on international ventures will be explored. How industries other than construction can gain from this research will be outlined ntroduction Construction is a major worldwide industry accounting for approximately $3. 4 trillion USD, or almost ten percent of global Gross Domestic Product(ENR 2000, Batchelor 2000; Bon 2001). Proportionally, the majority of international construction activity is conducted by local, regional, or national entities, yet an increasing percentage of industry participants operate on an international level (Bon 2001 ). Although the United States is the largest construction market--estimated at over $800 billion USD--projects completed outside of the domestic market, have become an even greater part of the capital investment portfolio of U.S owners. Historically, U.S. companies have been significant participants in most global markets and U.S.-based contractors have a long tradition of overseas work. The growth and activities of multinational corporations has been a major contributor to the creation of an international construction market (United Nations 2001) Facility construction involves a wide variety of risks. International projects- defined as those in which the investor, owner and/or contractor are from a country different than where the project is physically located- typically involve a wider range of risks than"domestic" projects. In effect, moving outside of ones al business jurisdiction interjects many unknowns. Political interference, social unrest, and currency exchange are some of the concerns that add to the complexity of international ventures. Assessing and managing risk is therefore a complex and critical task for international construction projects and has proven to ustin Industries Endowed Teaching Fellow and Professor of Civil Engineering, University of Texas at Austin, I University Station, Austin, Texas 78712, phone 512-471-4522, fax 512-471-3191, email gibson @mail. utexas. edu 2 Ph.D. Candidate and Graduate Research Assistant, University of Texas at Austin, I University Station, Austin, Texas 78712
1 Risks of International Projects: Reward or Folly? By: G. Edward Gibson, Jr.1 , Ph.D., P.E. and John Walewski2 Abstract Assessing and managing risk is a complex and critical task for international construction projects that support new business ventures. Indeed, it could be argued that the word “risk” and the term “international projects” could be used interchangeably. Driven by such factors as new markets, domestic competition, and trade liberalization, U.S. owners and contractors have in recent years aggressively pursued international business opportunities and projects. International work requires owners to assess a diverse set of political, geographic, economic, environmental, regulatory, and cultural risk factors when contemplating an international capital project. In addition, contractors must consider a similar set of risk factors in determining whether to undertake such projects, and how to price and schedule the work if they do. A limited amount of research has been undertaken to address these issues, and current efforts to assess and evaluate the risks associated with international construction are fragmented and fail to provide adequate assistance to project managers. Can risks be systematically addressed and mitigated on these types of projects or is it folly to attempt this process? This paper will report the results of our research project focused on international projects sponsored by the Center for Construction Industry Studies (CCIS), the Construction Industry Institute (CII) and the Project Management Institute (PMI). This research included input from over 100 industry experts representing 58 organizations. Data from 65 international projects, with a total cost of approximately $27 billion (U.S.) were analyzed. We will present key risk issues and a management approach to help mitigate risks. Included in that discussion will be the International Project Risk Assessment (IPRA) tool developed in collaboration with industry. This management tool provides a systematic method to identify, assess, and determine the relative importance of international-specific risks across the project’s life cycle. The reward of risk management on international ventures will be explored. How industries other than construction can gain from this research will be outlined. Introduction Construction is a major worldwide industry accounting for approximately $3.4 trillion USD, or almost ten percent of global Gross Domestic Product (ENR 2000; Batchelor 2000; Bon 2001). Proportionally, the majority of international construction activity is conducted by local, regional, or national entities, yet an increasing percentage of industry participants operate on an international level (Bon 2001). Although the United States is the largest construction market—estimated at over $800 billion USD—projects completed outside of the domestic market, have become an even greater part of the capital investment portfolio of U.S. owners. Historically, U.S. companies have been significant participants in most global markets and U.S.-based contractors have a long tradition of overseas work. The growth and activities of multinational corporations has been a major contributor to the creation of an international construction market (United Nations 2001). Facility construction involves a wide variety of risks. International projects — defined as those in which the investor, owner and/or contractor are from a country different than where the project is physically located — typically involve a wider range of risks than “domestic” projects. In effect, moving outside of one’s usual business jurisdiction interjects many unknowns. Political interference, social unrest, and currency exchange are some of the concerns that add to the complexity of international ventures. Assessing and managing risk is therefore a complex and critical task for international construction projects and has proven to 1 Austin Industries Endowed Teaching Fellow and Professor of Civil Engineering, University of Texas at Austin, 1 University Station, Austin, Texas 78712, phone 512-471-4522, fax 512-471-3191, email egibson@mail.utexas.edu 2 Ph.D. Candidate and Graduate Research Assistant, University of Texas at Austin, 1 University Station, Austin, Texas 78712
be difficult for owners, contractors, and to the growing number of other participants that include investors and Insurance interests Driven by such factors as new markets, domestic competition, and trade liberalization,U.S.owners and contractors have aggressively pursued international business opportunities and projects. International work quires owners to assess a diverse set of political, geographic, economic, environmental, regulatory, security, and cultural risk factors when contemplating an international capital project. In addition, contractors must consider a similar set of risk factors in determining whether to undertake such projects, and how to price and schedule the work if they do. Organizations are more likely to successfully plan and deliver international ventures when they have a more comprehensive understanding of the commercial, political, construction and operations uncertainties and risks with such project. A limited amount of research has been undertaken to address these issues. Current efforts to assess and evaluate the risks associated with international construction re fragmented and often fail to provide adequate assistance to project managers because few management tools or techniques exist to identify, assess, and help manage the risks Most industry analysts agree that international business opportunities will continue to attract U.S foreign investment and the international construction market will attract U.S. contractors. U.S. Owners aggressively pursue international opportunities to seek out new markets or improve cost effectiveness in manufacturing operations. The globalization of international construction markets provides tremendous opportunities for contractors to expand into new foreign markets(Hann and Diekmann 2002). Respondents to a survey on the future of international construction markets for the next 25 years agreed that American firms in specialized construction services possess a competitive advantage, and will continue to export construction services(Bon 2001) The Center for Construction Industry Studies(CCIS), the Construction Industry Institute(CID), and the Design, Procurement and Construction Specific Interest Group of the Project Management Institute(DPC-SIG) funded our research study in 2000 to improve risk assessment procedures for international construction. CCiS is a multi-disciplinary research program studying the construction industry located at the University of Texas at Austin and is part of the Sloan Foundations Industry Centers program. CCIS was created with a grant from the Alfred P. Sloan Foundation and the Construction Industry Institute(Cil) to perform multi-disciplinary, long range studies addressing construction industry challenges in order to complement the traditionally short-term research process employed by Cll and others. This study was sponsored by CCis to focus on it research thrust areas in project execution processes and economics, finance, and dispute resolution. CIl is a research organization whose mission is to improve the competitiveness of the construction industry. It is a consortium of approximately 90 leading owners and contractors who have joined together to find better ways of planning and executing capital construction programs. PMI participation with this research effort was promoted by the interdisciplinary scope of the research, and the desire to continue its efforts to evaluate the changing nature of the project execution process and the implication of these changes on the industry The goal of our collaborative research effort was to develop a risk management process to increase the success of international capital facilities for owners and contractors, with project success defined as budget and schedule achievement, and meeting technical and operational objectives. Principal beneficiaries of the results are project managers in the industrial, building, and infrastructure construction sectors, including both private and public organizations that conduct international operations and activities. The tools and techniques that were developed are relevant to organizations outside of construction given that many project risk issues and factors are generic and systemic Completed in December 2003, our investigation produced the International Project Risk Assessment (PRA) tool(CIl Implementation Resource 181-2 and Cll Research Report 181-11). The tool and supporting documentation provides a systematic method to identify, assess, and determine the relative importance of international-specific risks across the projects life cycle and spectrum of participants to allow for subsequent mitigation. The associated research report describes in detail the research performed including the methodology, data analysis, and value of the research to industry. The IPRa is the first management tool of its kind that allows for the identification and assessment of the life cycle risk issues specific to international construction fo both owners and contractors. Furthermore, the tool is unique because the created Baseline Relative Impact values are based upon empirical data using industry expert inputs reporting on actual projects, and the Ipra identifies the risk factors of highest importance to the project team
2 be difficult for owners, contractors, and to the growing number of other participants that include investors and insurance interests. Driven by such factors as new markets, domestic competition, and trade liberalization, U.S. owners and contractors have aggressively pursued international business opportunities and projects. International work requires owners to assess a diverse set of political, geographic, economic, environmental, regulatory, security, and cultural risk factors when contemplating an international capital project. In addition, contractors must consider a similar set of risk factors in determining whether to undertake such projects, and how to price and schedule the work if they do. Organizations are more likely to successfully plan and deliver international ventures when they have a more comprehensive understanding of the commercial, political, construction and operations uncertainties and risks with such project. A limited amount of research has been undertaken to address these issues. Current efforts to assess and evaluate the risks associated with international construction are fragmented and often fail to provide adequate assistance to project managers because few management tools or techniques exist to identify, assess, and help manage the risks. Most industry analysts agree that international business opportunities will continue to attract U.S. foreign investment and the international construction market will attract U.S. contractors. U.S. Owners aggressively pursue international opportunities to seek out new markets or improve cost effectiveness in manufacturing operations. The globalization of international construction markets provides tremendous opportunities for contractors to expand into new foreign markets (Hann and Diekmann 2002). Respondents to a survey on the future of international construction markets for the next 25 years agreed that American firms in specialized construction services possess a competitive advantage, and will continue to export construction services (Bon 2001). The Center for Construction Industry Studies (CCIS), the Construction Industry Institute (CII), and the Design, Procurement and Construction Specific Interest Group of the Project Management Institute (DPC-SIG) funded our research study in 2000 to improve risk assessment procedures for international construction. CCIS is a multi-disciplinary research program studying the construction industry located at the University of Texas at Austin and is part of the Sloan Foundation’s Industry Centers program.. CCIS was created with a grant from the Alfred P. Sloan Foundation and the Construction Industry Institute (CII) to perform multi-disciplinary, longrange studies addressing construction industry challenges in order to complement the traditionally short-term research process employed by CII and others. This study was sponsored by CCIS to focus on it research thrust areas in project execution processes and economics, finance, and dispute resolution. CII is a research organization whose mission is to improve the competitiveness of the construction industry. It is a consortium of approximately 90 leading owners and contractors who have joined together to find better ways of planning and executing capital construction programs. PMI participation with this research effort was promoted by the interdisciplinary scope of the research, and the desire to continue its efforts to evaluate the changing nature of the project execution process and the implication of these changes on the industry. The goal of our collaborative research effort was to develop a risk management process to increase the success of international capital facilities for owners and contractors, with project success defined as budget and schedule achievement, and meeting technical and operational objectives. Principal beneficiaries of the results are project managers in the industrial, building, and infrastructure construction sectors, including both private and public organizations that conduct international operations and activities. The tools and techniques that were developed are relevant to organizations outside of construction given that many project risk issues and factors are generic and systemic. Completed in December 2003, our investigation produced the International Project Risk Assessment (IPRA) tool (CII Implementation Resource 181-2 and CII Research Report 181-11). The tool and supporting documentation provides a systematic method to identify, assess, and determine the relative importance of international-specific risks across the project’s life cycle and spectrum of participants to allow for subsequent mitigation. The associated research report describes in detail the research performed including the methodology, data analysis, and value of the research to industry. The IPRA is the first management tool of its kind that allows for the identification and assessment of the life cycle risk issues specific to international construction for both owners and contractors. Furthermore, the tool is unique because the created Baseline Relative Impact values are based upon empirical data using industry expert inputs reporting on actual projects, and the IPRA identifies the risk factors of highest importance to the project team
This paper provides an overview of risk management, IPRA tool development and research findings and a brief explanation on how the tool is used. Also included are recommendations to practitioners who are pursuing international projects as well as areas for future research. Our research investigation has shown that the tools and techniques developed can assist in improving the overall success of international capital projects oject teams performing risk management activities are rewarded. Those that" go it blindly "do so at their own Risk management A myriad of risk and risk-related definitions are applied to construction projects, and no standard definitions or procedures exist for what constitutes a risk assessment. In the construction industry, risk is often referred to as the presence of potential or actual treats or opportunities that influence the objectives of a project during construction, commissioning, or at time of use(RAMP 1998). Risk is also defined as the exposure to the chance of occurrences of events adversely or favorably affecting project objectives as a consequence of uncertainty(Al-Bahar 1990). Dias and loannou(1995) concluded that there are two types of risk: 1)pure risk when there is the possibility of financial loss but no possibility of financial gain, and 2)speculative risk that involves the possibility of both gains and losses. CIls definitive work on construction risks(Cll 1988)uses lassic operations research literature to distinguish the concepts of risk, certainty, and uncertainty, and is consistent with the literature(ASCE 1979: CIRA 1994; Kangari 1995: Hastak and Shaked 2000; PMI 2000; Smith 2001)on what is considered as the sequential procedures for construction risk management: 1) identification, 2)assessment, 3)analysis of impact, and 4 )management response Increased concerns about project risk have given rise to various attempts to develop risk mana methodologies. An example of such is the Risk Analysis and Management of Projects (RAMP) produced by the Institute of Civil Engineers and the Institute of Actuaries in the United Kingdom(RAMP This method uses a project framework to identify and mitigate risk through the accepted framework of risk identification and project controls by focusing on risks as they occur during the project life cycle. It requires users to follow a rational series of procedures and to undertake this analysis at scheduled intervals during the life cycle of a project. RAMP applies to all types of project but does not focus on international issues Traditional risk assessment for construction has been synonymous with probabilistic analysis(Liftson 1982, Al-Bahar 1990). Such approaches require events to be mutually exclusive, exhaustive, and conditional ndependent. However, construction involves many variables, and it is often difficult to determine causality, dependence and correlations. As a result, subjective analytical methods that rely on historical information and the experiences of individuals and companies have been used to assess the impact of construction risk and uncertainty(Bajaj, Oluwoye, and Lenard 1997) Although contracts are the mechanism to allocate liabilities and responsibilities of project participants in construction, contract language alone is insufficient to specify and appoint all the risks(ACEC/AGC, 1992 Rahman and Kumaraswamy 2002). An ideal process would address the individual needs of each organization and each project( Chapman and Ward 1997) The distribution of risk between the client and contractor tends to overshadow effective management strategies and investigations show that contactors and owners give minimal consideration to risks outside the realm of their own concerns(Kim and Bajaj 2000, ENR 2002). Although the owners project team must identify ith the business mission of the company, there are often disconnects. Cll research has shown the failure to align business goals and specific project goals due to poor pre-project planning is a major industry challenge (CII1997) Determination of risk responsibilities and ownership is critical yet can be difficult to allocate for international projects. The Federation Internationale des Ingenieurs Conseils(the International Federation of Consulting Engineers, FIDIC)and the International European Construction Federation(FIEC) publish two well known and widely-accepted forms of conditions of contract for international construction projects(the Red and Yellow Books) that include provisions on the fair and equitable risk sharing between the owner and the contractor as well as risk responsibilities, liabilities, indemnity, and insurance. a discussion on risk sharing is included in an analysis of the FIDIC Red Book(Bunni 1997) that includes a series of flow diagrams of the risks in construction, and their ensuing responsibilities, liabilities and how these are dealt with by the red Book Conditions of Contract for work of Civil Engineering Construction)
3 This paper provides an overview of risk management, IPRA tool development and research findings, and a brief explanation on how the tool is used. Also included are recommendations to practitioners who are pursuing international projects as well as areas for future research. Our research investigation has shown that the tools and techniques developed can assist in improving the overall success of international capital projects. Project teams performing risk management activities are rewarded. Those that “go it blindly” do so at their own folly. Risk Management A myriad of risk and risk-related definitions are applied to construction projects, and no standard definitions or procedures exist for what constitutes a risk assessment. In the construction industry, risk is often referred to as the presence of potential or actual treats or opportunities that influence the objectives of a project during construction, commissioning, or at time of use (RAMP 1998). Risk is also defined as the exposure to the chance of occurrences of events adversely or favorably affecting project objectives as a consequence of uncertainty (Al-Bahar 1990). Dias and Ioannou (1995) concluded that there are two types of risk: 1) pure risk when there is the possibility of financial loss but no possibility of financial gain, and 2) speculative risk that involves the possibility of both gains and losses. CII’s definitive work on construction risks (CII 1988) uses classic operations research literature to distinguish the concepts of risk, certainty, and uncertainty, and is consistent with the literature (ASCE 1979; CIRA 1994; Kangari 1995; Hastak and Shaked 2000; PMI 2000; Smith 2001) on what is considered as the sequential procedures for construction risk management: 1) identification, 2) assessment, 3) analysis of impact, and 4) management response. Increased concerns about project risk have given rise to various attempts to develop risk management methodologies. An example of such is the Risk Analysis and Management of Projects (RAMP) method produced by the Institute of Civil Engineers and the Institute of Actuaries in the United Kingdom (RAMP 1998). This method uses a project framework to identify and mitigate risk through the accepted framework of risk identification and project controls by focusing on risks as they occur during the project life cycle. It requires users to follow a rational series of procedures and to undertake this analysis at scheduled intervals during the life cycle of a project. RAMP applies to all types of project but does not focus on international issues. Traditional risk assessment for construction has been synonymous with probabilistic analysis (Liftson 1982, Al-Bahar 1990). Such approaches require events to be mutually exclusive, exhaustive, and conditionally independent. However, construction involves many variables, and it is often difficult to determine causality, dependence and correlations. As a result, subjective analytical methods that rely on historical information and the experiences of individuals and companies have been used to assess the impact of construction risk and uncertainty (Bajaj, Oluwoye, and Lenard 1997). Although contracts are the mechanism to allocate liabilities and responsibilities of project participants in construction, contract language alone is insufficient to specify and appoint all the risks (ACEC/AGC, 1992, Rahman and Kumaraswamy 2002). An ideal process would address the individual needs of each organization and each project (Chapman and Ward 1997). The distribution of risk between the client and contractor tends to overshadow effective management strategies and investigations show that contactors and owners give minimal consideration to risks outside the realm of their own concerns (Kim and Bajaj 2000, ENR 2002). Although the owners project team must identify with the business mission of the company, there are often disconnects. CII research has shown the failure to align business goals and specific project goals due to poor pre-project planning is a major industry challenge (CII 1997). Determination of risk responsibilities and ownership is critical yet can be difficult to allocate for international projects. The Fédération Internationale des Ingénieurs Conseils (the International Federation of Consulting Engineers, FIDIC) and the International European Construction Federation (FIEC) publish two wellknown and widely-accepted forms of conditions of contract for international construction projects (the Red and Yellow Books) that include provisions on the fair and equitable risk sharing between the owner and the contractor as well as risk responsibilities, liabilities, indemnity, and insurance. A discussion on risk sharing is included in an analysis of the FIDIC Red Book (Bunni 1997) that includes a series of flow diagrams of the risks in construction, and their ensuing responsibilities, liabilities and how these are dealt with by the Red Book (Conditions of Contract for work of Civil Engineering Construction)
Understanding the relationship between risk management and project phases for capital projects can be a difficult task. International projects are often first- or one-time efforts where project progress and phasing decisions can be isolated from risk management. For most international projects, different participants are responsible for and control the various phases of a projects life cycle. In most cases, the project owner is largely responsible for program analysis, a third-party is often hired to manage and control design and who turns the results over to the owner for operations or production contractor is hired to construct the project, Structuring projects with distinct phases and responsibilities can increase risk by isolating the project articipants in such a manner that minimal attention is given to overarching project concerns. 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(Kim and Bajaj 2000) Mitigating risk by lessening their impact is a critical component of risk management. Implemented correctly, a successful risk mitigation strategy should reduce adverse impacts. In essence a well planned and properly administered risk mitigation strategy is a replacement of uncertain and volatile events with a more predictable or controlled response( Chapman and Ward 2002) he uncertainty of a risk event as well as the probability of occurrence or potential impact should decrease by selecting the appropriate risk mitigation strategy. Four mitigation strategy categories commonly used are Avoidance- when a risk is not accepted and other lower risk choices are available from several alternatives Retention/Acceptance- when a conscious decision is made to accept the consequences should the vent occur Control/ Reduction- when a process of continually monitoring and correcting the condition on the project is used. This process involves the development of a risk reduction plan and then tracking the plan. This mitigation strategy is the most common risk management and handling technique ransfer/Deflect- when the risk is shared with others Forms of sharing the risk with others include contractual shifting, performance incentives, insurance, warranties, bonds, etc Successful project management requires the identification of the factors impacting project scope definition, cost, schedule, contracting strategy and work execution plan. However, much of the research related to risk identification, assessment and management for constructed facilities is focused on specific issues such as location, categories of risks aspects, or types of projects, For example, lists of relevant construction project risks ave been developed(Kangari 1995, RAMP 1998, Smith 1999, Hastak and Shaked 2000, Han and Diekmann 2001)as well as political risk are available(ashley and Bonner 1987, Howell 2001) The value of systematic risk management of project activity is not fully recognized by the construction dustry (Walewski, Gibson, and Vines 2002). Since no common view of risk exists, owners, investors, designers, and constructors have differing objectives and adverse relationships between the parties are common Attempts at coordinating risk analysis management between all of the project participants have not been traditionally formalized and this is especially true between contractors and owners International project risks are sometimes overlooked or assessed haphazardly. Such risks include war civil war, terrorism, expropriation, inability to transfer currency across borders, and trade credit defaults by foreign or domestic customers(Wells and Gleason 1995, Hastings 1999). Although risks such as civil unrest and economic stability are typically outside the scope of normal business, understanding and dealing with these risks are critical for companies working internationally. A 2001 study by Aon Trade Credit discovered that, in the Fortune 1000, only about 26 percent of companies had in place systematic and consistent methodologies to assess political risks(Aon 2003). Working in an international setting often requires a much wider view of the projects context than with domestic projects(Miller and Lessard, 2000; Mawhinney 2001 In summary, the purpose of risk management is to mitigate risks by planning for factors that can be detrimental to project objectives and deliverables. Although risk management is a relatively known and practiced process, few organizations have conquered its successful implementation. Much of what is practiced is based on intuition or personal judgment. The need to manage risks is important to all project stakeholders and critical for project success, especially in the international project arena
4 Understanding the relationship between risk management and project phases for capital projects can be a difficult task. International projects are often first- or one-time efforts where project progress and phasing decisions can be isolated from risk management. For most international projects, different participants are responsible for and control the various phases of a project’s life cycle. In most cases, the project owner is largely responsible for program analysis, a third-party is often hired to manage and control design and engineering to meet the initial constraints set by the owner, and a contractor is hired to construct the project, who turns the results over to the owner for operations or production. Structuring projects with distinct phases and responsibilities can increase risk by isolating the project participants in such a manner that minimal attention is given to overarching project concerns. 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 (Kim and Bajaj 2000). Mitigating risk by lessening their impact is a critical component of risk management. Implemented correctly, a successful risk mitigation strategy should reduce adverse impacts. In essence a well planned and properly administered risk mitigation strategy is a replacement of uncertain and volatile events with a more predictable or controlled response (Chapman and Ward 2002). The uncertainty of a risk event as well as the probability of occurrence or potential impact should decrease by selecting the appropriate risk mitigation strategy. Four mitigation strategy categories commonly used are: • Avoidance – when a risk is not accepted and other lower risk choices are available from several alternatives • Retention/Acceptance – when a conscious decision is made to accept the consequences should the event occur. • Control/Reduction – when a process of continually monitoring and correcting the condition on the project is used. This process involves the development of a risk reduction plan and then tracking the plan. This mitigation strategy is the most common risk management and handling technique. • Transfer/Deflect – when the risk is shared with others. Forms of sharing the risk with others include contractual shifting, performance incentives, insurance, warranties, bonds, etc. Successful project management requires the identification of the factors impacting project scope definition, cost, schedule, contracting strategy and work execution plan. However, much of the research related to risk identification, assessment and management for constructed facilities is focused on specific issues such as location, categories of risks aspects, or types of projects. For example, lists of relevant construction project risks have been developed (Kangari 1995, RAMP 1998, Smith 1999, Hastak and Shaked 2000, Han and Diekmann 2001) as well as political risk are available (Ashley and Bonner 1987, Howell 2001). The value of systematic risk management of project activity is not fully recognized by the construction industry (Walewski, Gibson, and Vines 2002). Since no common view of risk exists, owners, investors, designers, and constructors have differing objectives and adverse relationships between the parties are common. Attempts at coordinating risk analysis management between all of the project participants have not been traditionally formalized and this is especially true between contractors and owners. International project risks are sometimes overlooked or assessed haphazardly. Such risks include war, civil war, terrorism, expropriation, inability to transfer currency across borders, and trade credit defaults by foreign or domestic customers (Wells and Gleason 1995, Hastings 1999). Although risks such as civil unrest and economic stability are typically outside the scope of normal business, understanding and dealing with these risks are critical for companies working internationally. A 2001 study by Aon Trade Credit discovered that, in the Fortune 1000, only about 26 percent of companies had in place systematic and consistent methodologies to assess political risks (Aon 2003). Working in an international setting often requires a much wider view of the project’s context than with domestic projects (Miller and Lessard, 2000; Mawhinney 2001). In summary, the purpose of risk management is to mitigate risks by planning for factors that can be detrimental to project objectives and deliverables. Although risk management is a relatively known and practiced process, few organizations have conquered its successful implementation. Much of what is practiced is based on intuition or personal judgment. The need to manage risks is important to all project stakeholders and critical for project success, especially in the international project arena
The International Project Risk Assessment (IPRA)Tool Background Investigation Our research project was guided by an industry research team composed of twelve individuals. This team met periodically to guide our efforts and to provide input into our development activities. Our nvestigation began with an extensive literature review on the topics of risk identification, assessment, and management, as well as issues related to international construction. Information was also gleaned from industry practices for assessing international project risks and CIls periodic globalization forums to gain additional insight on these issues To further evaluate the approaches that organizations use to manage the risks incurred on international projects, we conducted 26 structured interviews with mid-to upper-level management personnel, including eight each from contractor and owner organizations, and the remainder distributed among legal, professional service financial, and insurance experts. Construction industry experience of interviewees ranged from 20 to over 50 years, and all participants had at least 10 years of working experience with international projects of various types and sizes(Walewski and Gibson 2003) Both the literature review and these interviews showed that a variety of techniques and practices exist to identify and assess risks that occur on international projects, but there was no standard technique or practice specifically targeted for such projects(Cll 1989, Walewski et al. 2002). We found that decisions on country specific risks are often made by top management and separated from other business, technical and operational risks of the project. Few project participants have a complete understanding of the portfolio of risks that happen on such projects, and a life cycle view of the risks is uncommon. As such, compartmentalization of the risk occurs, and international projects are often organized and managed in ways that create information and communication disconnects Development of the Tool To address a structured management approach, we developed a detailed list of the risk elements that impact the projects life cycle(planning, design, construction, and operations) of international facilities- effectively this is the"risk identification"portion of the risk management process. We used help from five primary sources for this list: the expertise of the research team, literature review the structured interviews, input from 10 Cll Globalization Committee members, and further w by industry representatives. Initial topic categories were gathered from previous research and the str interviews and screened using the research team's expertise. The final list of international risks was further refined and an agreement reached regarding exact terms and nomenclature of element definitions. Once this completed, separate reviews were performed by Globalization Committee members and vetted participants during a series of workshops The final list consists of 82 Elements grouped into 14 Categories and further grouped into four main Sections that reflect the projects life cycle. This list, which forms the basis of the IPRa tool, is presented in Figure 1. This list can be considered very comprehensive for pursuing capital projects outside of one's home jurisdiction. Each Section, Category, and Element of the IPRa has a corresponding detailed description to assist project participants in gaining an understanding of the issues related to that component of the risk being considered. An example element description is given in Appendix A. The IPRA Assessment Sheets and Element Descriptions are used in concert by a project manager and project team members to identify and assess specific risk factors, including the likelihood of occurrence and relative impact for each element We hypothesized that all elements are not equally important with respect to their relative impact on overall project success. These issues are different depending on the project type and location as well.Our dustry sponsors believed there would be significant benefit if a standard baseline(impact)risk value could be determined for each element. This guidance value of a risk's effect on the project would be of assistance when the risk is unknown by project participants, and could also provide a framework to rank order risk elements project for subsequent mitigation
5 The International Project Risk Assessment (IPRA) Tool Background Investigation Our research project was guided by an industry research team composed of twelve individuals. This team met periodically to guide our efforts and to provide input into our development activities. Our investigation began with an extensive literature review on the topics of risk identification, assessment, and management, as well as issues related to international construction. Information was also gleaned from industry practices for assessing international project risks and CII’s periodic globalization forums to gain additional insight on these issues. To further evaluate the approaches that organizations use to manage the risks incurred on international projects, we conducted 26 structured interviews with mid- to upper-level management personnel, including eight each from contractor and owner organizations, and the remainder distributed among legal, professional service, financial, and insurance experts. Construction industry experience of interviewees ranged from 20 to over 50 years, and all participants had at least 10 years of working experience with international projects of various types and sizes (Walewski and Gibson 2003). Both the literature review and these interviews showed that a variety of techniques and practices exist to identify and assess risks that occur on international projects, but there was no standard technique or practice specifically targeted for such projects (CII 1989, Walewski et al. 2002). We found that decisions on countryspecific risks are often made by top management and separated from other business, technical and operational risks of the project. Few project participants have a complete understanding of the portfolio of risks that happen on such projects, and a life cycle view of the risks is uncommon. As such, compartmentalization of the risks occurs, and international projects are often organized and managed in ways that create information and communication disconnects. Development of the Tool To address a structured management approach, we developed a detailed list of the risk elements that impact the project’s life cycle (planning, design, construction, and operations) of international facilities— effectively this is the “risk identification” portion of the risk management process. We used help from five primary sources for this list: the expertise of the research team, literature review results, the structured interviews, input from 10 CII Globalization Committee members, and further review by industry representatives. Initial topic categories were gathered from previous research and the structured interviews and screened using the research team’s expertise. The final list of international risks was further refined and an agreement reached regarding exact terms and nomenclature of element definitions. Once this effort was completed, separate reviews were performed by Globalization Committee members and vetted again by participants during a series of workshops. The final list consists of 82 Elements grouped into 14 Categories and further grouped into four main Sections that reflect the project’s life cycle. This list, which forms the basis of the IPRA tool, is presented in Figure 1. This list can be considered very comprehensive for pursuing capital projects outside of one’s home jurisdiction. Each Section, Category, and Element of the IPRA has a corresponding detailed description to assist project participants in gaining an understanding of the issues related to that component of the risk being considered. An example element description is given in Appendix A. The IPRA Assessment Sheets and Element Descriptions are used in concert by a project manager and project team members to identify and assess specific risk factors, including the likelihood of occurrence and relative impact for each element. We hypothesized that all elements are not equally important with respect to their relative impact on overall project success. These issues are different depending on the project type and location as well. Our industry sponsors believed there would be significant benefit if a standard baseline (impact) risk value could be determined for each element. This guidance value of a risk’s effect on the project would be of assistance when the risk is unknown by project participants, and could also provide a framework to rank order risk elements on the project for subsequent mitigation