The Differences on Risk Perception Ways in Construction Projects

Shaokai LU School of Economics and Management

Southwest Jiaotong University Chengdu, China

shaokailu@163.com

Like MO Department of Civil Engineering

Shenzhen University Shenzhen, China

Likemo@163.com

Abstract—This study focuses on the risk perception ways in construction projects . 52 professional contractors are invited to assess these risk factors with perceived risk, probability of occurrence and potential impact, respectively. The expected utility and the variance of risk factors are calculated as the additional two measures of the risk. Results show that the risk rank order obtained by the perceived risk measurement is significantly different than that obtained by the expected utility-based measurement.Results show that contractors’ perceived risk could be taken as a combination of the potential impact and the uncertainty of risk factors. Following the finding, the practical implications for developing effective strategies of risk management are discussed.

Keywords-construction project; contractor; risk management; risk perception

I. INTRODUCTION

Managing risk is always a vital issue for construction projects. Due to the complicated nature of capital projects and the importance of risk management at the early stage, much effort has been devoted into developing methods to identify, analyze and evaluate the relative importance of risk associated with particular considerations such as political, geographic, economic, environmental, regulatory and cultural factors [1-3]. While a lot of various risk management methodologies are provided, most research procedures are heavily depended on the top management perceptions of construction companies, significantly involving individual influence on the validity of results and methodologies. There is little literature focusing on how construction groups or individuals cognize risk. It is therefore suggested that a comprehensive understanding of such risk perception behavior may provide more effective risk managerial strategies.

II. RISK PERCEPTIONS WAYS IN CONSTRUCTION

Traditional risk assessment for construction projects uses perceived risk directly through asking the experts’ opinions with questions such as “How risky do you think this factor

is?” Various types of numerical rating scale and its variations are then used to help professionals to quantify their answers. For example, Ghosh and Jintanapakanont [4] use a five-point Likert scale to establish a risk importance index, where “1” represents “not important” and “5” represents “extremely important”. The mean score of risk factor investigated is often used to rank the relative importance in descending order. Commonly, the calculation uses the following formula:

1

n ijji

SMS

n==

∑ （1）

where iMS =mean score for risk i; ijS =significance score

assessed by respondent j for risk i; and n=number of total respondents.

Another group of risk measures is based on the expected utility theory. Within such expected utility-measures, the respondents, or experts of the construction industry, are required to provide rough assessments about the probability of occurrence and the degree of impact associated with a particular factor. Numerical scales are usually used to score each risk factor in terms of its impact and probability of occurrence, and the product of them is then taken as the base to generate a rank ordering of risks. Tse [5] provides a calculating formula as:

1 12

n ni ij jj jiRSn

α β= ==

∑ ∑ (2)

where iRS =mean score for risk i; ijα =evaluation of ith risk

occurrence probability by the jth person investigated; ijβ =evaluation of the influence resulting from ith of risk

events by the jth person investigated; and n=number of total respondents.

Though both above risk measures are assessed by individuals’ subjective estimates, Ward [6]states that quantifying the risk categories used in an expected utility-measure makes classification of risks less subjective.

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Moreover, with statistical quantities of experts investigated, the expected utility-measures are often used to provide objective baselines for risky decisions [7-8]. Similar opinion is also argued by Baloi and Price[9], which further states that individual knowledge, experience, intuitive judgment and rules of thumb should be structured to facilitate the risk assessment of a particular project rather than probabilities. With respect to the above considerations, risk perception in this paper is only associated with the direct measures and taken as the subjective reflection of a risky event, while the expected utility-measures are represented as the objective one.

Even though some studies focus on using the perceived risk together with methods such as the analytic hierarchy process (AHP) or fuzzy set theory (FST) to assess the risk degree of a project [3], many evidences in the behavior field indicate that the perceptions of humans may get systematic bias from the objective truth[10]. Differences in risk behaviors may be caused by differences in the way risk is perceived[11]. Thus, understanding the way risk is perceived is of vital importance because the following strategies are based on the perceived results.

III. STUDY

A. Questionnaires and Procedure

Questionnaires are used to investigate the risk perception of construction companies. The questionnaire is consisted of fifteen risk factors associated with the construction project. These risk elements are identified from four primary sources: literature review results [8]; the expertise of the research team; structured interviews with 5 senior managers of construction companies; and further review by 3 industrial representatives. The final list of risks is refined and an agreement is reached regarding the exact terms and nomenclature of element definitions. As the purpose of this paper is not focusing on risk factors but risk perceptions, the detailed processes are not introduced here.Respondents see each of the 15 risks thrice in different random orders. They are asked to assess the riskiness of each element by subjective judgment for the first time, to the probability of occurrence the second time, and to rate the degree of impact the third time. The 5-point Likert scale used in the study is in line with Gibson and Walewski [12].

According to the classical risk research in the financial field [13], the uncertainty of a risky event is normally measured by variation. The formula for calculating the variation used in this paper is as follows:

2 2(0 ) (1 ) ( )i i i i i ij j j j j jD RS RSα β α= − × − + − × (3)

where ijD =variation of risk i associated with respondent j;

ijRS =score for risk i as the product of i

jα and ijβ ;

ijα =evaluation of ith risk occurrence probability by the jth

person investigated; and ijβ =evaluation of the influence

resulting from ith of risk events by the jth person investigated.

B. Research Participants

As the questionnaire response rate by the random sample method makes it extremely difficult to achieve a valid benchmark for statistical analysis in China, this research survey adopts a “snowball” approach of distributing questionnaires. Several major cities in China including Beijing, Guangzhou, Shenzhen and Chengdu, are covered by the survey. A number of familiar experts in the local construction industry have very important contacts with other local construction firms. With their support, 52 valid questionnaires are returned and used for analysis. The Cronbach’s Alpha associated with the constructs of perceived risk, probability and impact is 0.86, 0.80 and 0.75, respectively (F statistic=12.39, 15.72 and 11.19, respectively; all p<0.001), which indicated that the survey results of the questionnaire are reliable.

A total of 29 (56%) respondents have greater than or equal to 10 years of construction related experience and 37 (71%) subjects are high-ranking or top-post project managers. In addition, all respondents come from the contracting enterprises qualifying for special and first class ranks in China. Thus, the results can be treated as representative of the contractors that have both experience and are at a high level in construction management.

C. Results

The Spearman rank correlation coefficient (rs) is used to measure the agreement between various measures of risk assessment on their rankings of risk importance indexes. As the results showed in Table 1, it is clearly seen that the two major risk measures of perceived risk and expected utility-measure significantly differed on establishing the risk importance indexes (rs = 0.32, p > 0.05).

TABLE1. SPEARMAN RANK CORRELATION TEST Measure Perceived

Risk

Probability Impact Variation Expected

Utility

Perceived Risk

1.00

Probability 0.13 1.00 Impact 0.89*** 0.12 1.00

Variation 0.81*** 0.44 0.85*** 1.00 Expected

Utility 0.32 0.95*** 0.34 0.63* 1.00

*** refers to no significant disagreement on the ranking at the 0.001 level, and * refers to no significant disagreement on the ranking at the 0.05 level.

In sum, even identical risks are evaluated differently by the same respondents, and different measures may educe various results of risk assessment. On the other hand, it is also showed that the perceived risk may significantly relate to the impact and variation of risk factors (rs = 0.89 and 0.81, respectively; both p < 0.001).

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To further examine the extent to which judgments of perceived risk are associated at the individual-subjective level, we follow the logic of Weber and Hsee [11] and fit the following two groups of regressions to the perceived risk of each respondent and risk factor respectively. The first group regresses on the perceived riskiness on the probability, impact, variation and expected utility associated with a particular respondent, respectively. For the following risk perceived model that makes the assumption that the perceived risk is positive to its attentions, with return being proportionate to the evaluation of what constitutes the risk: ( ) ( )j j j pMS i a b X i= + （4）

Where ( )jMS i =evaluation of the ith risk perceived riskiness

of respondent j; ( )pX i =evaluation of the ith risk with dimension p of respondent j. Individual differences in risk perception are accounted for by differences in the intercept term ja and in the regression weight jb . Each group of models is fit to each respondent’s 15 risks judgments. The regression coefficients of the above models, averaged across respondents within each dimension, are shown in Table 2.

TABLE 2. MEAN REGRESSION COEFFICIENTS

Risk Measure

Perceived Risk

Model (Mean)

Intercept Term

ja

Regression

Weight jb

Adjusted R2

Probability 3.02 Probability 3.02 Impact 1.31 Impact 1.31

Variation 2.57 Variation 2.57 Expected Utility 2.82 Expected Utility 2.82

Due to the fact that these regression models have the same number of predictor variables, their adjusted R2-values as measures of model fit can therefore be compared directly. It is clearly seen that the impact and variation models accounted for an average of 36% and 16% of the variance in the perceived risk across all 52 respondents, with a range from 7% to 82% and 2% to 47%, respectively. The expected utility and probability models, on the other hand, accounted for an average of 4% and 1% of the variance in the perceived risk across respondents, with a range from -3% to 39% and -4% to 26%, respectively. In addition, the means of adjusted R2-valus of probability and expected utility are not significantly different than 0 (T statistic=1.11 and 2.77, respectively; all p>0.001). It therefore can be inferred that the subjective reflections of risk of contractors are mainly measured by the potential impact and the uncertainty of risk factors.

IV. DISCUSSION AND IMPLICATION

Perceived risk is widely used for the risk assessment in the construction field because it effectively captures the real feelings of involved parties for a particular project. As stated by Dikemen et al.[3], the magnitude of risk is determined not

only by its likelihood and impact but also by a firm’s ability to deal with such risks. In other words, the following risk managerial responses of construction companies are more likely established according to their perceived risk. Within such a risk measure, our findings indicate that contractors may take it as a combination of the potential impact and the uncertainty of a risk factor.

These findings can be used to help contractors form effective risk managerial strategies. It seems that the direct use of perceived risk to assess project risk may induce contractors to pay more attentions on risks with serious impact, but ignore those risks only with high probability of occurrence. The study of Tverskey and Kahneman [10]shows that people may underestimate high probability by their subjective feelings. The expected utility-measures therefore ought to be added for reminding them and hence to form a comprehensive view of risk. In addition, with the knowledge of the potential impact and the probability of occurrence of risk factor, it also provided an approach for predicting the subjective feelings of risk associated with corresponding contractors.

On the other hand, the rating result of risk at the early stage is of critical importance to guide contractors in determining whether to undertake a particular project. In order to attract more contractors to join a project, or to get better cooperation with them, effective risk managerial strategies are absolutely necessary. Based on our findings, establishing a risk-sharing mechanism would bring more satisfaction to contractors than reducing the likelihood of occurrence associated with risks. For most risk factors, their potential losses always play a vital role in scaling the perceived risk of contractors. Such a risk-sharing mechanism may produce an atmosphere similar to collectivism, which is considered to help its members to perceive the risk of risky options to be smaller [11]

Reducing the uncertainty of risk factors can also alleviate the magnitude of perceived risk. Except lessening the potential impact, providing more knowledge about risks for contractors is another effective way to decrease uncertainty. According to formula (3), for a given potential impact, the maximum variation would be got when the probability of occurrence is equal to 0.5. That means, particularly for those risk elements which are not taken by contractors solely, that contractors may feel maximum riskiness when it is hard to assess whether the risk elements will occur or not. Thus, employers should provide the information on such risks to alleviate the magnitude of perceived risk as much as possible.

Differences on the approaches of risk assessment used may also provide opportunities for better collaboration between various construction companies. According to our findings, the rank orders of risks are significantly different between the perceived risk and the expected utility-measure. Suppose that there are two risk factors, one with higher than expected utility and lower impact, and the other with lower than expected utility and higher impact. It can be inferred that a construction firm that uses the perceived risk to measure risk factors would

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likely be responsible for the first one, while another group that equates the risk with the excepted utility would likely take the latter.

ACKNOWLEDGMENT This research is partially supported by the Fund of

Southwest Jiaotong University and is gratefully acknowledged.

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