Proper Risk Allocation Research Articles

How does contractual governance affect construction project performance? The mediating role of the contractor’s behavior

ABSTRACT The contractor’s performance behavior is fundamental in improving project performance. However, few studies have investigated the impact of contractual mechanisms on contractor’s performance behavior and how this impacts project performance. Therefore, this study developed and tested a theoretical model to examine the mediating role of contractor’s performance behavior between risk allocation(contractual governance) and project performance. A total of 208 valid questionnaires collected from project managers in the Chinese construction industry were analyzed by partial least squares structural equation modeling (PLS-SEM) to test the theoretical hypotheses. The empirical results show that proper risk allocation can induce both contractors’ perfunctory and consummate behavior and restrict opportunistic behavior, thus achieving basic project performance. Although the mediating effect of perfunctory behavior is insignificant, consummate and opportunistic behavior can mediate between proper risk allocation and value-added project performance, where the mediating role of consummate behavior is more critical. The findings contribute to the impact of contractual mechanisms on the construction project performance and guide the owner’s contract design strategy and the contractor’s choice of performance strategy.

Exploring Modalities Best Suited for Public Private Partnership Concession Agreements in the Education Sector of Zambia

The Zambian public sector has been known to face several challenges in the provision of infrastructure among others education infrastructure. Thus, the introduction of Public Private Partnerships (PPPs). In as much as the education sector of Zambia can benefit tremendously from the PPP initiative, poorly designed PPP concession agreements risk worsening existing educational sector challenges. The objectives of the paper were to establish the extent of application of PPPs in the Zambian education sector, identify the challenges surrounding concession agreements in PPPs in Zambia, and suggest the right modalities that could be applied to PPP concession agreements in the Zambian education sector. Both secondary and primary data was collected to establish that no private sector entity has had or is currently engaged in an ongoing concession with the Government in the procurement of infrastructure for schools. Challenges surrounding concession agreements in PPPs included contract misspecifications, lack of contractual flexibility, opportunistic behaviour by either party, and shielded concession agreement creation and process. In view of the foregoing, right modalities that could be applied to PPP concession agreements in the Zambian education sector include proper risk allocation, adequate concession period, clear allocation of roles and responsibilities, and inclusion of stabilization clauses.

Addressing Challenges and Enhancing Sustainability in Public Private Partnerships (PPPs) in China

This conceptual paper examines the challenges faced by Public Private Partnerships (PPPs) in China and proposes strategies to enhance their sustainability. Through an analysis of the background, factors, and aspects influencing PPPs, valuable insights are gained to contribute to the existing literature. The regulatory framework, risk allocation, and financial viability are identified as key challenges. Lessons from the literature emphasize the importance of a consistent regulatory framework, proper risk allocation, and realistic financial evaluations. Transparency, stakeholder engagement, and capacity building are crucial aspects for sustainable PPPs. The findings have implications for policymakers and practitioners, providing guidance for improving PPP practices. Future directions focus on strengthening transparency, stakeholder engagement, and capacity building to foster sustainable PPP implementation and management.

Multi Agent System Based Risk Allocation Model for Public-Private-Partnership Type Projects (RAMP3)

The performance of the Public Private Partnership (PPP) projects depends on the efficiency of the risk allocation strategies between the public and private parties. Therefore, a multi agent system-based Risk Allocation Model for PPP projects (RAMP3) was developed to determine the proper risk allocation decisions between the public and private parties within the study. The methodology of RAMP3 involves i) identification of risks by agents, ii) assessment of each risk’s importance and impact, iii) communication of agents to negotiate on risk allocation decision and iv) determination of strategies and utility functions to be used in negotiation process. Focus of the study is presenting the steps of negotiation process of agents using economic theory and Zeuthen bargaining strategy. RAMP3 was validated on two real PPP projects and results show that the higher risk value of an agent gets, agent’s utility due to counter agent in that concession round lowers. Preliminary findings also show that risk is allocated to the party that has a higher risk acceptability in negotiation process. The RAMP3 will enable project parties to determine the appropriate risk allocation strategies by considering the effects of emerging risks in terms of time delay, cost overrun and conflict and provide contract success. The model can also be used as a decision support system by public partner for performing an efficient and accurate risk allocation.

Risk analysis and allocation in public-private partnership power transmission line projects

The aim of this paper is risk analysis for the delivery of public-private partnership (PPP) power transmission line projects in India and to address risk analysis and their proper risk allocation between the different stakeholders involved. An empirical questionnaire survey was designed. A total of 45 valid responses were obtained for data analysis. The expected monetary value method (EVM) is employed for risk analysis and allocation. It was found that one risk was high risk, 65 were moderate, 35 were major, nine were minor risks and two were low risk. Risk allocation was done both phase and stakeholder wise. A key finding from this research is the execution phase of the power transmission line project involves huge risk, i.e., 64% and the project company takes a maximum of 53%. Hence, project company should focus more on critical risk factors of execution phase.

The Right of a Payor Who Discharged Another's Debt Under a False Assumption for Restitution from the Creditor - Following the Supreme Court Ruling in the Matter of Baizman Investments Inc. V. Haliva

The recent judgment of the Supreme Court in the matter of Baizman Investments Inc. v. Haliva concerns one of the most complicated problems in the law of mistake: Is a creditor, who received a contractual payment from a third party in of a debt, under a duty of restitution in the event that the contract under which he received the payment was based on a false assumption and cancelled thereafter? The article revisits the ruling in Baizman, according to which the creditor has a prima facie duty of restitution in these circumstances. The ruling was based upon the interpretation of the relationship between the payor and the creditor as contractual. Rejecting the reasoning behind this ruling, the article suggests that Israeli law should adopt the doctrine of discharge for value, as well as its embedded normative judgment regarding the proper risk allocation between payor and creditor. The doctrine is evaluated in light of the principle of maximizing social welfare. Furthermore, the article suggests that the doctrine should include, as an additional requirement, a rule that ascribes importance to the differential financial capabilities of the parties, especially in cases involving a financial institution on the one hand and a private party on the other.Note: Downloadable document is in Hebrew.

Using Bargaining Game Theory for Risk Allocation of Public-Private Partnership Projects: Insights from Different Alternating Offer Sequences of Participants

AbstractThe global expansion of public-private partnerships (PPPs) has generated interest in risk allocation for PPP projects. Many previous researchers have shown that without proper risk allocation, PPP projects cannot be successful. Current research is limited to equilibrium allocation of risk. The objective of this study is to improve this situation by constructing an alternating offer bargaining game model of risk allocation between two players involved in PPP projects, i.e., the public and private sector. Risk allocation can be analyzed as a game to more fully reflect the bargaining process among the parties. Equilibrium risk allocation outcomes were analyzed for the two cases in which the bargaining process was initiated in the first round by the public or private sector, and shows that risk allocation ratio is associated with the sequence of alternating offer, discount factor, and asymmetric degree of information. The probability, severity, and impact of risk factors were considered to prioritize ...

Proper Risk Allocation: NDFD Clause

AbstractDelay is an ever-present risk on any construction project that causes run up costs. Owners (sellers) and contractors (buyers) who enter into a contract are keen to mitigate the economic ris...

Factors critical for the success of public‒private partnerships in UAE infrastructure projects: experts' perception

During the last decade, the United Arab Emirates (UAE) has been the biggest market for public–private partnerships (PPPs) in Gulf Cooperation Council (GCC) countries. Currently, PPPs are increasingly being used in the rapid development of UAE infrastructure projects. Despite this fact, little is known about the success factors for adopting such an approach for the infrastructure projects in the UAE. Twenty-one in-depth interviews were held with PPP experts and key personnel who have experience in the development life cycle of PPP infrastructure projects in the UAE in order to investigate their perception of the key success factors of PPP in UAE infrastructure projects and examine the relative importance of these factors. The results show that the five most important critical success factors (CSFs) for all respondents were: availability and effectiveness of proper regulatory and legal framework for PPPs; proper risk allocation and sharing among project stakeholders; clear project brief and client outcomes; comprehensive and business viability of project feasibility study; and finally, proper project value management systems during different project phases. These findings should be taken into consideration by public and private partners when developing new PPP projects in the UAE in order to increase the success rates of these projects.

Proper Risk Allocation during Construction: Differing Site Conditions

AbstractDiffering site conditions are encountered on site when the actual conditions are materially different from those included in the contract documents (Type I) or from those reasonably expected by the project team given the type of work performed on site (Type II). In both cases, the damages associated with differing site conditions can cause the failure of the entire project if this risk is not properly allocated in the contract documents. Regardless of this allocation, the construction contract requires the contractor to give notice to the owner in the case of differing site conditions. Also, the contractor is required to keep track of the effects that differing site conditions have on his schedule and performance. The main objective of this paper is to describe the risks associated with differing site conditions and to demonstrate how these risks are usually allocated during the different scenarios that may occur if differing site conditions are encountered. This was done by looking at several leg...

Risk Allocation & Subsequent Legal Issues in Construction Contracts

The paper aims to shade intensive lights over risks allocation and its related aspects embedded with a construction contract. For this purpose, an in-depth study of different types of risks which generally arisen in large sized construction projects is presented within the paper. For making the context clear, the paper elaborates some significant information about construction contract and different parties which are generally involved within a construction contract. In this section, the nature of different construction contracts is also discussed, which becomes a prime reason behind different types of risk in the contract. Further, the paper discusses different types of risks availed by different parties so that raw data for proper risk allocation can be collected. Further section of the paper is related with the risk allocation in a construction contract. The section explores disclaimer method for transferring risk from one party to other. Furthermore different roles played by different parties in the mitigation of risks in a contraction contract are also explained in the paper.The contractor under a construction contract is invariably required to carry out and complete the project by a specified date. This requirement is often accompanied by an obligation to produce a construction programme and to keep it up to date. There may be a contract administrator with powers to approve the programme. This paper identifies matters in relation to these obligations over which the parties can be in dispute and examines the legal principles governing their resolution. The matters include the contractor’s choice of type of programming method, consequences of the contractor’s failure to comply with its programming obligations, the contractor’s right to complete earlier than required and delay from concurrent causes.Contracts for the construction of roads, buildings and other works present certain special features from the legal perspective. Having regard to the importance of these contracts in the economic life of the country, it is proper that their legal significance be examined in some detail.

Fuzzy adaptive decision making model for selection balanced risk allocation

The unbalanced allocation of risks among the contracting parties is an important decision leading to increase of the total cost of a specific project and affects the overall relationship between the contracting parties. Due to common risk allocation decision-making process is based on experiential knowledge, is subjective and implicit. This paper presents a fuzzy adaptive decision making model for selection of balanced risk allocation which transforms the linguistic principles and experiential expert knowledge into a more usable and systematic quantitative-based analysis by using the fuzzy logic. The objectives of balanced risk allocation are developed based on the concept of Competence-Tendency trade-off. The proposed model integrates fuzzy logic qualitative approach and analytic hierarchy process (AHP) adaptive capabilities to evaluate allocation of project risks and determine best party to bear each one. Results from this model show its high capability in addressing most proper risk allocation with least contingency applied to the owner.

Empirical Study of Risk Assessment and Allocation of Public-Private Partnership Projects in China

Earlier research studies on public-private partnership (PPP) indicated that an objective, reliable, and practical risk assessment model for PPP projects and an equitable risk allocation mechanism among different parties are crucial to the successful implementation of these PPP projects. However, actual empirical research works in this research area are limited. This paper reports the first stage of a research study, which aims to identify and assess the principal risks for the delivery of PPP projects in China and to address their proper risk allocation between the private and public sectors. An empirical questionnaire survey was designed to examine the relative importance of different risk factors and to analyze the allocation of risk factors to different parties in PPP projects. A total of 580 questionnaires were sent out, and a total of 105 valid responses were obtained for data analysis. The Mann-Whitney U test is employed to investigate whether significant difference in perception existed first between the private and public sectors and second between industrial practitioners and academics in China. The empirical findings show that the three most important risk factors for PPP projects in China are (1) government intervention; (2) government corruption; and (3) poor public decision-making processes. These findings reveal that the Chinese government intervention and corruption may be the major obstacles to the success of PPP projects in China. A major cause for these risks may be attributed to inefficient legislative and supervisory systems for PPP projects in China. After conducting the Mann-Whitney U test on the 105 survey respondents, the empirical findings indicate that the perceptions of all 34 risk factors in China between the private and public sectors were not significantly different. Similarly, there were no significant differences between academics and industrial practitioners except that the former perceived the problem of government corruption to be more severe than did the latter. For risk allocation, the empirical results indicate that the public and private sectors were in general consensus with most of the risks identified. The major risks that the public sector preferred to accept are within the systematic risk category, especially political, legal, and social risks. The private sector preferred to retain the principal risks within the specific project risk category, especially construction, operation, and relationship risks, in addition to economic risks within systematic risk category. The remaining risk, environment risk, is preferred to be shared between the two sectors. This research study enables international construction companies to better understand how risks should be assessed and allocated for PPP projects in China. It also assists in risk response planning and control for future PPP projects in China. DOI: 10.1061/(ASCE)ME.1943-5479.0000049. © 2011 American Society of Civil Engineers.

RISK MANAGEMENT IN ROAD CONSTRUCTION: THE CASE OF SRI LANKA

Risk is an unavoidable phenomenon in construction projects. Proper risk allocation in construction contracts has therefore come to assume prominence because risk identification and risk allocation have a clear bearing on risk handling decisions. The proper management of risks requires that they be identified and allocated in a well‐defined manner. This can only be achieved if contracting parties comprehend their risk responsibilities, risk event conditions, and risk handling capabilities. This research aims at identifying the risk responsibilities of contractual parties in order to improve their risk handling strategies with regard to Sri Lankan road projects. Semi‐structured interviews were used for the primary data collection. This was complemented with documentary evidence. The results show that road construction projects in Sri Lanka are exposed to many risk sources while most risks are borne by parties who were assigned with risks via contract clauses. However, parties not allocated with risks too happened to bear the consequences of such risks. Therefore, it is concluded that there is no one best way to respond to a risk and that different risk handling strategies should be adopted in order to deal effectively with risks. Santruka Rizika ‐ neišvengiamas statybu projektu reiškinys. Todel svarbus tapo tinkamas rizikos paskirstymas statybu rangos sutartyse, nes rizikos nustatymas ir rizikos paskirstymas daro akivaizdžia itaka rizikos valdymo sprendimams. Norint gerai valdyti rizika, reikia ja nustatyti ir tinkamai paskirstyti. Tai imanoma tik tuomet, jei sutarties šalys supranta savo atsakomybe už rizika, rizikos atveju salygas ir rizikos valdymo galimybes. Šiame tyrime, siekiant pagerinti sutarties šaliu rizikos valdymo strategijas, meginama nustatyti, kokia atsakomybe už rizika prisiima sutarties šalys pagal Šri Lankos keliu tiesimo projektus. Pirminiai duomenys surinkti iš pusiau struktūriniu interviu. Jie papildyti dokumentiniais irodymais. Iš rezultatu aiškeja, kad keliu tiesimo projektai Šri Lankoje imlūs daugybei rizikos šaltiniu, o daugeli rizikos rūšiu prisiima šalys, kurioms rizika priskiria sutarties nuostatos. Tačiau šalys, kurioms rizika nera priskirta, kartais irgi patiria tokios rizikos pasekmiu. Todel daroma išvada, kad nera vieno geriausio būdo reaguoti i rizika ir kad reikia taikyti ivairias rizikos valdymo strategijas, siekiant efektyviai spresti rizikos situacijas.

Good project governance for proper risk allocation in public–private partnerships in Indonesia

Parties that are involved in an infrastructure project under public–private partnership (PPP) procurement system typically have different perceptions of proper risk allocation. Consequently, disputes may arise between those parties thus reducing the chances for the project’s success. Moreover, PPP projects are generally challenged with both project management problems which require day-to-day supervision (short-term) as well as partnership problems which require more of a strategic approach (long-term). Consequently, PPP projects can be considered to have governance concerns because they deal with monitoring and overseeing strategic direction as well as strategic decision-making. This research is conducted to discover the perception of proper risk allocation of each party involved and utilises the findings as the foundation to develop the concept of good project governance. Accordingly, this concept will perform as a mean to achieve proper risk allocation in tollway projects that are developed under PPP procurement system which would enhance the project’s performance. A case study research on a tollway project in Indonesia is carried out for this purpose and the preliminary results of the analysis are presented in this paper.

The need for proper risk allocation in build-vs.-buy decisions: A response

The authors are writing in reply to Naill and Sharp's article, Risky Business The Case for Independents, which makes reference to our article published in November, 1990. Naill and Sharp argue that purchasing from IPPs actually reduces risks facing utilities, hence they dispute our contention that purchasing from IPPs will increase the utility's cost of capital. They argue, moreover, that the adjustment the authors propose would simply make IPPs uneconomic depriving consumers of the advantages associated with competition in the production of electricity. The authors disagree. While the many advantages claimed by the authors for IPPs are real, they do not offset the quasi-debt which long-term purchased power contracts add to a utility's bank. Failure to adjust for this effect adds to IPPs' many real advantages an unjustified one, making them seem more economic than they may be. Moreover, since by shifting risks to the utility the IPP reduces its cost of capital, adjusting the utility's balance sheet to reflect these risks will not make cost effective IPPs uncompetitive. Our point is that utilities should take account of all costs and benefits in analyzing bids or negotiated purchases from third parties and adjust the prices accordingly. The primary evidence thatmore » IPPs shift risk to utilities is found in their cost of capital. As shown in our article, IPPs have lower after tax costs of capital than utilities. If, as they suggest, utilities and ratepayers incur the same or less risk when utilities buy power from IPPs as when they own the capacity, one would have to conclude that either utilities are significantly under-leveraged or IPPs are grossly over-leveraged. The large number of utility downgradings and the willingness of institutions to lend money to highly leveraged IPPs suggest that neither is the case. We address their arguments in the order in which they appeared.« less