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International Projects Risk Management

in the Construction Industry


Laya Parvizsedghy Dr. Mohammad Hossein Sobhiyah
Planning and Development Department Project and Construction Management
Petroiran Development Company Tarbiat Modares University
Tehran, Iran Tehran, Iran
l.sedghy@yahoo.com sobhiyah@modares.ac.ir

Abstract— Despite to the initial attractions, the international selection was based on the physical progress of projects, so the
projects are potentially high-risk and their negative impacts options were highly limited since there is a very short experi-
can affect international contractors if the risks are not identi- ence on these types of projects in Iran. One of the projects was
fied in the contracting phase. The implementation of an effi- a 10,000 units housing in Venezuela and the other two were
cient risk management process can reduce the negative im- oil and gas fields’ development projects which were com-
pacts of identified risks which may in turn increase the profit pleted in India. Consequently, the risks of these projects were
of these companies. Risks of international projects are identi- identified and since the projects were from different industries
fied and prioritized in this paper. At last some solutions have and countries they had various risks which should have been
been proposed to mitigate top ten risks effects on these pro- combined and generalized in order to constitute a comprehen-
jects. sive checklist to identify the various types of projects’ risks.
Therefore, a checklist with 62 items was prepared which was
grouped in four main sections based on different phases of an
Keywords- International Projects, Risk Management, international project management process as followed:
Construction Industry
1. Tendering Phase
I. INTRODUCTION 2. Resources Transferring Phase
3. Implementation Phase
There is a remarkable consideration to the exporting of en- 4. Production Phase
gineering and technical services in the “Iran Prospect of 1404”
document in order to reach the long-term goals. Besides, there Each risk was included in the group that was considered to be
are limited opportunities in the internal market for the con- mostly influential; although, it could take place in another
struction contractors which motivate them to enter the interna- phase too. Level 1 & 2 of the risk breakdown structure is pre-
tional market. Although they attract international contractors sented in table I.
first, the international projects are potentially high-risk and
their negative impacts can affect international contractors. Table I. Risk Breakdown Structure (Level 1& Level 2)

Risk Breakdown Structure


In this research, first the previous works in the field of in-
I. Commercial & Financial
ternational projects risk management was studied and the most Tendering Phase
comprehensive research found during this step was the disser- II. Political
tation report of Dr. Walewski which was conducted on Ameri- I. Local Human Resources
can contractors who were active in the international construc- Resources Trans-
II. Iranian Human Resources
tion market. Considering ultimate goals to promote Iranian ferring Phase
III. Cultural
contractors, this research was limited to this group of contrac-
tors in order to have a complete checklist with the prioritiza- I. Scope of Work
tion scores and proposed responses to mitigate their impacts. II. Procurement
Implementation III. Engineering and Design
II. RISKS IDENTIFICATION
Phase IV. Construction
Three international projects were selected which were exe- V. Tele-Communication
cuted or under execution in two Iranian companies and some
VI. Legal and Contractual
interviews were conducted with their professionals who had
experiences in the international projects by open questioning I. Operational
Production Phase
method. As the research had to apply past experiences of exe- II. Product
cuted projects in order to forecast risks of future projects, the
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978-1-61284-109-0/11/$26.00 ©2011 IEEE


Table II. International Projects Risk Checklist 1. Constructability of Designed project
Risks Descriptions 2. Unfamiliarity of International Consultants with the Local
Codes
I. Commercial & Financial
3. Quality Reduction as a result of Compulsion to Apply
1. Decrease in the Economic Feasibility of Project
Local Consultants
2. Financing Problems of Project 4. Incompatibility of Design with the Local Culture
3. Recovering the Costs of Project 5. Responsibilities due to Design Faults
4. Changes in Currency Exchange rate
Tendering Phase

5. Global Increase in the Price of Materials, Equipments,


etc. Cotinuation of Table II.
6. Sanctions Effects in Possibility of High-Tech Procure- Risks Descriptions
ments
IV. Construction
7. Increasing Costs as a Result of Sanctions 1. Gaining Civil and Special Construction Permits
II. Political 2. Bad Weather
1. Decrease in the Destination Country's Political Support 3. Availability of Required Infrastructures
2. Abate in the Social Peace of Local Community 4. Nonentity of Local skillful Contractors
3. Political Instability 5. No availability of Convenient Insurance Coverage both for

Implementation Phase
4. Possibility of Company Asset Seizing Workers and Project
V. Tele-Communication
1. No Access to High Speed Internet
I. Local Human Resources 2. Security of Communication Channels
1. Working Customs Un-proportionate to Project Assump- 3. Impossibility of Communication between Headquarters office
tions and Site
2. Making Complaints to the Workers Syndicate VI. Legal and Contractual
3. Local Disbelief in Project Advantages 1. Changes in Tax Related Regulations
4. Unskillful Local Working Resources 2. Changes in Custom Duties
5. Local Efforts of Subverting or Insecuring 3. Unclear Legal Laws
4. Inconvenient Arbitration Place Selection
Resources Transferring Phase

6. Neglecting HSE Standards


5. Bad Environmental Effects
II. Iranian Human Resources
1. Inconvenient Places for Accommodation
I. Operational
2. Diminishing in Iranian Human Resources Stimulations 1. Operational Safety
Production Phase

3. Security of Transferred human Resources in Destination 2. Availability of Skillful Workforces in the production phase
Country 3. Maintenance Cost of Projects Assets
4. Visa Getting Problems II. Product
5. Communication Problems of Resources with Families 1. Unfulfilled Production Level as Mentioned in Contract
6. Incompatibility of Resources with Time Zone and 2. Cost of Properly Storing of Project Productions
Weather 3. Loss of Destined Market As a Result of Delay in Project
7. Nonexistence of Common Working Hours
III. Cultural
1. Misapprehensions Between Resources of Different Cul-
tures III. QUALITATIVE ANALYSIS
2. Communication Obstacles
3. Costs of Recruiting Translator(s) Afterward, in order to prioritize risks upon their severity a
questionnaire with the pre-defined risks was developed in
I. Scope of Work which each expert was asked to answer 4 questions for each
1. Unclear Scope of Work item and they were:
2. Existence of Uncovered Activities in Meeting Project's
Objectives
II. Procurement First: if they were thinking that the risk was applicable to
1. Reluctancy of Approved Contractors to Participate in the their project or not
Tenders Second: if applicable, what was probability of occurrence in
Implementation Phase

2. Disability of Providing Required Materials from First- their project in the range of 1 to 10
hand Vendors
Third: they should have rated the risk based on its impact on
3. Problems in Opening Letter of Credit
4. Impossibility of Transferring Monetary Resources Over-
the project in the range of 1 to 10 and
seas Fourth: whether the risk could be considered as a matter of
5. Disagreement of Foreign Contractors to Give Bank influence on go/no go decision in the tendering phases of
Guarantee project.
6. Reluctance of Foreign Contractors to Submit Original
Purchase Order
7. Persuasion of Accepting High Price Proposals as a Result After gathering up the questionnaires, data was processed
of Sanctions statistically and the scores of risk severity which were defined
8.Delays in procuring Long Lead Items as the average of probability by impact of each risk were com-
9. Impossibility of Transferring Revenues Inside the Coun- puted. The outcome of the frequency of risks which were most
try
chosen as not applicable was not high for any of them (maxi-
III. Engineering and Design


mum around 10% of all), so all were preserved as the potential Table of results of ARS numbers for each group and phase is
risks. By reviewing quantities of severity, it was clear that as followed:
three of the risks had a difference of more than triple of devia-
tion from average. Then the total range was defined between
Table IV: ARS Quantities of Each Phase and Group
the largest and smallest score of severity by eliminating these
3 risks. Afterward, this range was divided in 5 groups with Group's Phase's
Phases Groups
equal distances of one deviation from each other. ARS ARS
Commercial & Financial
Tendering 26.16
21.11
Phase
Political
12.28
Local Human Resources
18.88
Resources
Iranian Human Re-
Transferring 14.67
sources 11.40
Phase
Cultural
13.90

Figure 1: Range of Risk Severity for Each Risk Scope of Work


15.30
Procurement
Furthermore, average relative scores proved that the 14.24
largest total number was also related to the tendering phase of Implementation
Engineering and Design
12.80
international projects with relatively high difference; while, 13.46
Phase
Construction
the other 3 groups had approximately equal total scores. In 16.26
order to calculate average relative scores (ARS) in this survey Tele-Communication
8.83
following function was applied:
Legal and Contractual
11.94
ARS (for each group with m risks) =
Operational
Production 13.83
14.65
Phase
Product
(1) 15.47

ARS (for each phase with o risks) =


As a result, each risk was grouped in either the very high,
(2) high, medium, low or very low group. Analyzing the results of
Table III: Risk Severity Scores for Top 20s (Very High and High) risk groupings resulted in that 40% of the risks with the very
Risk Severity

high and high severities were in the “Tendering Phase” of


Group

risks group.
Score

No
Risk Description
.

1 Increasing Costs as a Result of Sanctions 35.3


2 Decrease in the Economic Feasibility of Project 32.4
Very High

3 Financing Problems of Project 29.0


Sanctions Effects in Possibility of High-Tech Procure-
4
ments 23.8
5 Loss of Destined Market As a Result of Delay in Project 23.8
6 Global Increase in the Price of Materials, Equipments, etc. 23.1
7 Unskillful Local Working Resources 22.7
8 Making Complaints to the Workers Syndicate 22.5
9 Changes in Currency Exchange rate 22.2
10 Problems in Opening Letter of Credit 21.0
11 Decrease in the Destination Country's Political Support 19.7 Figure 2: Percentage of Risks with Very High and High Severities
Impossibility of Transferring Monetary Resources Over-
12
seas 19.7
High

13 Recovering the Costs of Project 19.3 IV. PROPOSED RESPONSES FOR TOP TEN RISKS
14 Local Efforts of Subverting or Insecuring 19.3
Impossibility of Transferring Revenues Inside the Coun-
15 Finally, after prioritizing the risks, responses for the top
try 19.3
16 Gaining Civil and Special Construction Permits 19.2 ten risks were suggested. The following table represents the
17 Bad Weather 19.0 suggested responses to mitigate the effects of top ten risks on
18 Neglecting of HSE Standards by Local Resources 18.4 the international projects.
19 Diminishing in Iranian Human Resources Stimulations 18.4
20 Delays in procuring Long Lead Items 17.9


Table V: Proposed Responses for Top 10 Risks At last, some solutions to increase the capability of Iranian
Risk Description Proposed Responses companies for succeeding in the international projects were
proposed based on 4 important decisions which are recognized
Increasing Costs
Constituting joint ventures with local compa-
necessary for companies intending to enter international mar-
1 as a Result of kets as follow:
nies and applying their credit in tenders.
Sanctions
1. Studying feasibility of projects considering 1- Deciding whether to enter or not enter international mar-
every important factor before participating in
Decrease in the
tenders. kets,
2 Economic Feasi- 2- Selecting target market,
2. Considering all costs in primary estimations
bility of Project
including sanction effects, transferring re- 3- Project selection,
sources, etc. 4- Determining project mark-up.
1. Considering other financing possibilities
including:
i) Internal banks' resources Solutions for each step of international market entering deci-
ii) Overseas banks' financial supports sions were grouped in two parts including organizational and
iii) Loan granting possibility from internal national since some of the problems can’t be solved in the
Financial and Credential Institutions
3
Financing Prob-
iv) Through advance payments from client organization and are highly dependent on strategies taken by
lems of Project government.
v) Issuing project investment bonds with
"Central Bank Guarantee"
vi) Public Private Partnership
viii) Taking loans through allocating part of V. CONCLUSION
the project's revenue to investor
and trying to obtain one. Checklist of identified risks will be helpful for international
Sanctions Effects
1. Investigating market for new vendors. contractors to identify their potential risks in the future pro-
2. Establishing new branches of company in jects in different phases, they can be specialized due to condi-
in Possibility of
4 free zones.
High-Tech Pro-
3. Constituting joint-ventures with local com- tions of their project. The scores of risk severities will help
curements these contractors prioritize risks and also they can do a survey
panies.
Loss of Destina-
1. Considering destination market related
to score on their own conditions.
tion Market for
issues in feasibility studies.
5 Product As a Re-
sult of Delay in
2. Planning based on destination market. Moreover, international contractors should determine their
Project strategy to mitigate top risks effects and increase their chances
1. Forecasting clauses in the main contract of success. The items proposed as responses for top ten risks
related to items which are vulnerable to global should be reviewed and the best action to decrease the nega-
Global Increase in increases such as steel and transferring part of
the Price of Mate- the risk to client.
tive impacts of risks in these projects should be taken. Further
6 considerations should be taken in the tendering phases of in-
rials, Equipments, 2. Purchasing the materials which are vulner-
etc. able to global increase as soon as possible ternational projects as the results show that this phase is vul-
considering storing costs and maintenance nerable to the highest risks of severity scores.
problems.
1. Transferring key resources to the destina-
Unskillful Local tion country. REFERENCES
7 Working Re- 2. Allocating some skillful resources and [1] J. Alan Walewski, “International Project Risk Assesment”, University
sources transferring to the site in order to giving re- Of Texas at Austin, 2005.
lated instructions to the local workers.
[2] PMI, Project Management Body of Knowledge, 2004.
1. Complete familiarity with syndicate regula-
Making Com- [3] I. Dikmen, M. Talat Birgonul, S. Han, “Using Fuzzy Risk Assessment
tions.
8 plaints to the To Rate Cost Overrun Risk In International Construction Projects”,
2. Taking actions for attracting workers and
Workers Syndicate International Journal Of Project Management, 2007, p.499.
creating friendly relations with them.
[4] F. Yean Yng Ling, L. Hoi, “Risks Faced by Singapore Firms when
1. Estimating project costs separately in dif-
undertaking construction projects in India”, International Journal of
ferent currencies and entering them into con-
Project Management, 2006.
tract clauses.
Changes in Cur-
2. Currency insurance overages.
9 rency Exchange
3. Estimating costs of project with the cur-
rate
rency which will constitute major payments.
4. Applying proper currency portfolio hedging
in purchases.
1. Establishing branches of company overseas
Problems in Open-
especially in free zones.
10 ing Letter of
2. Constituting joint ventures with local com-
Credit
panies and applying their credit in tenders.