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ICRAM-1: MODEL FOR INTERNATIONAL


CONSTRUCTION RISK ASSESSMENT
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By Makarand Hastak1 and Aury Shaked2

ABSTRACT: This paper presents a risk assessment model for international construction proj-
ects. The International Construction Risk Assessment Model (ICRAM-1) assists the user in
evaluating the potential risk involved in expanding operations in an international market by
analyzing risk at the macro (or country environment), market, and project levels. The paper
discusses some of the existing models for country risk assessment, presents potential risk
indicators at the macro, market, and project levels, and explains the ICRAM-1 methodology
through an applied example. The ICRAM-1 provides a structured approach for evaluating the
risk indicators involved in an international construction operation and is designed to examine
a specific project in a foreign country. It can be used as a tool to quantify the risk involved
in an international construction investment as one of the preliminary steps in project evalu-
ation. Four main results are obtained from the ICRAM-1 analysis: (1) High-risk indicators;
(2) impact of country environment on a specific project; (3) impact of market environment
on a specific project; and (4) overall project risk.

national operation can be analyzed by evaluating the po-


INTRODUCTION litical stability of a country. The broad spectrum of
Significant changes in the global economy have re- political risk analyses ranges from political science-ori-
sulted in increased business opportunities for architec- ented approaches that remain on the conceptual level to
tural, engineering, and construction (A/E/C) firms empirically based forecasting services that provide quan-
throughout the world. New opportunities are offered by titative but largely subjective risk forecasts. The political
the North American Free Trade Agreement (NAFTA), risk assessment models primarily consider factors such
developments in Eastern Europe and former Soviet as economic, financial, political, legal, and social con-
countries, and emerging markets in Asia and developing ditions as well as policy and the foreign exchange sys-
countries, as well as changes in the European Union tems of the host country (Flanagan and Norman 1993;
(Fridlin 1996). Consequently, more and more A/E/C Goodman 1994; Haner and Ewing 1985; Korbin 1981;
firms are positioning themselves to expand operations in Newman 1980; Ting 1988). However, political risk as-
the international construction market. However, before sessment models provide a limited view of the business
making the decision to expand operation in a new mar- environment of a particular market (or project) in a given
ket, it is important for A/E/C firms to analyze the risks, country and cannot be used in isolation for an investment
benefits, and future market potential of the target country decision (Ashley and Bonner 1987). Political risk anal-
(Hastak et al. 1994; Nielsen 1997; Sloan and Weisberg ysis in itself does not provide any assessment of the
1997; Tucker 1997; Wang et al. 1998). impact of political instability on a specific market or
Several experts in the area of international construc- project in that country. Political instability in a country
tion hold the opinion that the risk involved in an inter- may or may not affect a particular construction project,
but might influence the construction market or an asso-
1
Asst. Prof., Dept. of Civ. and Envir. Engrg., Univ. of Cincinnati, ciated market, which in turn might affect the project un-
P.O. Box 210071, Cincinnati, OH 45221-0071. E-mail: mhastak der consideration. Therefore, to analyze risk from a proj-
@uceng.uc.edu
2 ect point of view, it is important to identify how that
Resident Engr., Moshkovitz Group, 47 Hata’asia St., P.O.B. 418
Industrial Zone, Tel Hanan, Nesher 20302, Israel. E-mail: project is likely to be impacted by the country environ-
shaked@mofet.macam98.ac.il ment and the specific market environment.
Note. Discussion open until July 1, 2000. To extend the closing
date one month, a written request must be filed with the ASCE Man-
ager of Journals. The manuscript for this paper was submitted for RISK INVOLVED
review and possible publication on February 19, 1999. This paper is
part of the Journal of Management in Engineering, Vol. 16, No. 1,
This paper argues that, to get a better understanding
January/February, 2000, qASCE, ISSN 0742-597X/00/0001-0059– of the risk involved in the international construction mar-
0069/$8.00 1 $.50 per page. Paper No. 16866. ket, the risk should be analyzed at three different levels:
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J. Manage. Eng. 2000.16:59-69.


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FIG. 1. Framework of ICRAM-1

(1) Macro (or country), (2) market, and (3) project (Fig. quired that would facilitate a structured analysis of (1)
1). The macro level defines the general risk to an inter- risk at the macro level; (2) the risk at the construction
national investor while expanding operations in a given market level; (3) risk at the project level; (4) impact of
country. The risk associated with a specific international the macro environment on the construction market and
construction market has been defined as the market level project level risk; and (5) impact of the construction
risk, which also includes the impact of the macro level market environment on the project level risk.
on the construction market. The project level defines the This paper fills this important gap by presenting a
risk associated with a project in that specific interna- model for international construction risk assessment
tional construction market, which includes the impact of called ICRAM-1 (International Construction Risk As-
the macro and market levels on the project (Fig. 1). sessment Model-1). The model presented in this paper
The macro, market, and project levels comprise a set assists the decision maker in evaluating the potential risk
of tangible indicators (such as increase in monetary in- at the macro, market, and construction project levels by
flation, foreign exchange reserves, and bidding volume using available information, knowledge, and expertise.
index) and intangible indicators (such as government at- As such, it can be used effectively before conducting
titude toward foreign investors, market suitability for ad- extensive market research and investment in an inter-
vanced technology, and possibility of contractual dis- national construction market, as well as during the proj-
putes). No model currently examines the tangible and ect planning and execution stages. The following sec-
intangible risks faced by foreign investors in the con- tions discuss at length the macro, market, and project
struction industry at these three levels, as well as the level risks and describe the state of the art in evaluating
interaction and risk propagation from one level to an- risk at these levels.
other. Ashley and Bonner (1987) have developed a
model for political risk assessment in international con- MACRO (OR COUNTRY) LEVEL RISK
struction that identifies the impact of political changes
on a construction project in a given country based on Conventional methods of project appraisal incorporate
available information and subjective assessment. How- risk analysis into the overall project evaluation and in-
ever, their model does not consider the collective impact vestment decisions by using various decision-making
of the country and market environments on a particular techniques and models (Ensor 1981; Goodman, A. S.,
construction project. Furthermore, the number and com- Planning and analysis of public works, book in prepa-
plexity of the risk indicators involved at the three levels ration, 1994; Sang 1988). Three major approaches for
(macro, market, and project) makes it difficult to analyze assessing a country’s risk have been identified: (1) the
their impact without a structured method or analysis. Political risk assessment approach; (2) the macrosocio-
Therefore, a comprehensive risk assessment model is re- political (political instability) approach; and (3) the
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J. Manage. Eng. 2000.16:59-69.


exchange instability approach. The model developed by tion rate, interest rates, production, and employment
Ashley and Bonner (1987) segregates political risk for level (Haner and Ewing 1985; Korbin 1981; Ting 1988).
international construction into two categories: political
source and project consequence. They have defined proj- MARKET LEVEL RISK
ect consequence variables as those variables that directly
influence the project, such as labor restrictions, change In addition to the usual risks faced by a local construc-
in per-unit cost of labor, and strikes and labor-impacting tion company in a given country, the international con-
delays. The political source factors have been defined as struction firm must consider added risks, such as bidding
those variables that indirectly influence the project procedures, availability of contractors, and availability
through their impact on the project consequence varia- of resources. Cascio and Serapio (1991) and Shenkar and
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bles. Political source factors include variables such as Zeira (1987) have suggested several important factors
the firm’s relations with the government, nature of the that an international investor should consider. These in-
firm’s operations, government policies, nationalist atti- clude technological advantage over the local market, role
tude toward the firm, and influence of power groups. The of the construction industry in the foreign country’s
political risk in this model is evaluated by subjectively overall economy, availability of construction resources,
assigning financial impact and probability values to the complexity of regulatory processes, attitude of the for-
potential risk-generating project consequence variables eign government toward the construction industry, and
and computing the expected value of impact. Although financing opportunities (Cascio and Serapio 1991; Shen-
a valid approach, this model limits risk analysis to the kar and Zeira 1987). One commonly adopted form of
impact of political events on the project and its conse- risk mitigation in the international markets is to form
quences. Furthermore, it does not consider the indirect joint ventures or partnerships with local companies to
impact of political factors on the construction and other draw benefit from their knowledge and expertise in that
related markets and the potential impact of market fac- region or country (Zink 1973). However, this approach
tors on the project. may not be helpful at all times because of the low pro-
Other models, such as the Business Environment Risk ficiency of local professionals in a host country (Lucas
Information (BERI) model, view the country risk as the 1985).
sum of the political risk, operational risk, and remittance
and repatriation factors. BERI is an empirically based CONSTRUCTION PROJECT RISK
forecasting service founded to assist multinational firms
in their business decisions. The service provides a frame- Several studies have been conducted to identify the
work to evaluate risk, make regular periodic updates, and various risk categories in construction projects and to
forecast political and economic events. The BERI model determine the ‘‘ownership of risk.’’ Strassman and Wells
has compiled risk indicators (primarily at the macro (1988) have identified several risk factors associated
level) into three groups: (1) operating risk criteria; (2) with a construction project. From a client’s perspective,
political risk criteria, and (3) financial risk criteria (Ha- these risk factors include fears that (1) Costs will esca-
ner and Ewing 1985). late unpredictably; (2) structures will be faulty and need
The macrosociopolitical (MSP) models approach risk frequent repairs; and (3) the project will simply be aban-
from the macro level perspective. Most of the MSP mod- doned and partially paid for but incomplete and useless.
els express the political instability factor as a function Similarly, from a contractor’s perspective the risk factors
of various economic, ideological, and social forces. The include (1) fears of inclement weather; (2) delays in site
assumption is that political events can affect the devel- availability; (3) unforeseen subsoil conditions; (4) inad-
opment of economic and business conditions in the host equate detail drawings; (5) late material deliveries; (6)
country. The complex array of development in the host unanticipated price changes; (7) faulty subcontracting;
country’s sociopolitical environment might lead to po- (8) unproductive labor and strikes (Strassman and Wells
litical instability, resulting in drastic changes in the busi- 1988).
ness environment, including expropriatory actions by the Kangari (1995) has conducted a survey of the top 100
host government (Haner and Ewing 1985; Knudsen U.S. construction contractors. In this survey, different
1974; Ting 1988). The major shortcomings of the MSP construction risk factors were classified under three cat-
approach are (1) they do not analyze the effect of polit- egories as owner, contractor, and shared risk to define
ical instability on the actual investment projects or busi- the party responsible for the risk. This survey identified
ness ventures, and (2) they lack specificity in relating 23 risk descriptions, such as permits and ordinances, de-
the impact of expropriation. fective design, labor disputes, contractor competence, fi-
The exchange instability approach analyzes the free- nancial failure of any party, and defensive engineering.
dom to convert local currency in a foreign country. The results of this survey identify the changing trend in
Exchange rate instability in the host country can cause risk allocation as well as the level of importance for each
serious financial and payment-related risks of currency risk description. The results of these works as well as
exposure for international investors. Changes in the the studies conducted by Akinci and Fisher (1998); Am-
exchange rate occur due to disturbances in the host coun- miano (1988), Bullock (1989), Kumaraswamy (1997);
try’s balance of payments or as a consequence of Lifson (1982); McKim (1982); and Rubin and Wordes
changes in its basic economic factors, such as the infla- (1997; 1998) are all useful in identifying the potential
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J. Manage. Eng. 2000.16:59-69.


risk indicators, as well as the ownership of risk in a of the three levels due to their respective environments.
construction project. A total of 73 risk indicators were identified at the three
The models available for international construction levels that have a potential to influence the project
risk assessment primarily analyze risk at the macro (or through either the macro, market, or project levels (Ta-
country) level and do not consider the impact and prop- bles 1–3). The risk indicators were primarily identified
agation of macro risk on either market or project level through an extensive literature review and discussion
indicators. While a number of important approaches ex- with experts. The identified risk indicators do not com-
ist, an integrated approach that takes into consideration prise an exhaustive list but a generic representative sam-
the individual risk at macro, market, and project levels, ple that will change with the requirements of the deci-
as well as the transfer of risk from one level to another, sion problem and the country, market, and project under
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is still missing. The research presented in this paper fills consideration (Shaked 1997). Due to editorial con-
this important gap. straints, the significance of all the identified risk indi-
cators has not been presented in this paper. It is, how-
INTERNATIONAL CONSTRUCTION RISK ever, a subject of another paper.
ASSESSMENT MODEL (ICRAM-1) The identified risk factors were grouped according to
specific criteria and subcriteria to establish the interre-
The ICRAM-1 has been designed to assist decision lationship and hierarchy between the various risk factors
makers at the preliminary stages of project evaluation to at the macro, market, and project levels (Tables 1–3). It
analyze various risk indicators and to subjectively iden- was important to achieve this level of arrangement of
tify risks at the macro, market, and project levels. The risk factors to facilitate data collection, analysis, mea-
framework of ICRAM-1 is illustrated in Fig. 1. As surement, and quantification of intangible risk factors. It
shown in this figure, the macro level environment might further enabled the analysis of this individual and overall
trigger some of the risk indicators at the market and the impact on the cost of a project, as well as on the overall
project level, while market level environment might in- effectiveness of operations in a specific country and its
fluence some of the project level indicators. Apart from construction market. All the identified risk indicators
this, additional indicators might be triggered within each may not have the same level of significance for different

TABLE 1. Hierarchy and Analysis of Macro (Country) Level Risk Indicators

Weight Risk Weighted


Criteria Subcriteria Sub-subcriteria (risk indicators) (From AHP) assessment assessment
(1) (2) (3) (4) (5) (6)
Operational Host government Political continuity 0.031 75 2.312
risk Attitude toward foreign investors and profit 0.020 50 1.014
Naitonalization/expropriation 0.023 50 1.136
Enforceability of contracts 0.018 75 1.349
Government incentives 0.017 25 0.436
Economic & financial Monetary inflation 0.091 75 6.852
Economic growth 0.046 75 3.426
Administration Bureaucratic delays 0.029 100 2.853
Communication and transportation 0.036 75 2.684
Professional services other than construction 0.023 75 1.704
Political risk External causes Hostilities with neighboring country or region 0.091 25 2.284
Dependence on or importance of major power 0.046 75 3.426
Internal causes Fragmented political structure 0.025 100 2.453
Fractionalization by language, ethnic, and regional groups 0.022 100 2.178
Restraints to retaining power 0.021 100 2.066
Mentality, including nationalism, corruption, and 0.010 75 0.730
dishonesty
Social conditions (e.g., population density & wealth 0.010 75 0.775
distribution)
Symptoms of instability Societal conflicts (e.g., demonstrations, strikes, & street 0.082 100 8.194
violence)
Instability because of nonconstitutional changes 0.027 75 2.049
Financial risk Legal framework Actual laws versus practices for repatriation of capital 0.088 50 4.379
Foreign exchange Current account balance 0.048 75 3.619
generation Capital flow 0.016 75 1.206
International reserves Foreign exchange reserves 0.050 75 3.776
Gold and other reserves 0.017 75 1.259
Foreign debt Debt as GDP converted to U.S. dollars 0.029 75 2.186
assessment Capacity service debt 0.029 50 1.457
Budget performance Extent of deficity/surplus 0.042 75 3.151
Sources of revenue and major spending 0.014 100 1.400
[Sum] — — 1.000 ‘‘Almost 70.353
high risk’’

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TABLE 2. Hierarchy and Analysis of Construction Market Level Risk Indicators

Weight Impacted by Relative impact Risk Weighted


Criteria Subcriteria (risk indicators) (from AHP) macroa (from PWC) assessment assessment
(1) (2) (3) (4) (5) (6) (7)
Technology Investor’s technological advantage 0.057 — — 25 1.428
Technology protection system 0.050 1 0.64 45.026 2.244
Market suitability for advanced technology 0.064 — — 100 6.438
Availability of basic construction/ 0.032 — — 75 2.428
technologies and equipment
Contracts and Type of partnership 0.074 — — 75 5.570
legal Types of contracts 0.036 — — 50 1.814
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requirements Enforceability of construction contract 0.048 1 0.64 45.026 2.157


Procedure for bidding and design approvals 0.039 1 0.64 45.026 1.765
Resources Availability and quality of local contractors 0.031 — — 75.0 2.304
Availability of construction materials 0.046 1 0.80 56.283 2.568
Availability of skilled and unskilled workers 0.042 — — 50 2.098
Labor cost/productivity 0.025 — — 75 1.878
Availability of equipment and parts 0.019 — — 75 1.444
Financing Medium and long term financing for 0.065 1 1.00 70.353 4.583
construction projects
Tax and nontax incentives in construction 0.052 1 1.00 70.353 3.654
industry
Special construction industry index 0.041 1 0.80 56.283 2.328
Business cultural Interaction of foreign management with local 0.047 — — 50 2.363
differences contractors
A/E/C firms client or owner relationship 0.047 — — 50 2.363
Competitive/negotiated bidding 0.047 — — 75 3.544
Market potential Current market volume in core competency 0.045 — — 50 2.264
Future market volume in core competency 0.045 — — 50 2.264
Bidding volume index 0.045 1 0.80 56.283 2.548
[Sum] — 1.000 ‘‘Moderate to 60.047
high risk’’
a
1 = Macro level risk environment; maximum risk = 70.353.

country/market/project situations. Hierarchical assess- the degree of risk associated with the affecting
ment allows systematic evaluation of all the risk indi- level.
cators to establish their level of significance for a par- 5. All the indicators directly impacted by an upper
ticular situation. level (the macro and/or market level) are uniquely
influenced by that level (that is, two indicators
Modeling Assumptions might not have the same degree of impact from an
The ICRAM-1 analyzes 73 risk indicators at three in- upper-level risk environment).
terrelated levels (macro, market, and project). Therefore,
several assumptions were defined to establish the logical All the assumptions have been carefully considered to
boundaries for the decision and risk analysis model and facilitate computation and modeling of the complex na-
to facilitate computation of risk at the three levels. The ture of the problem. The first assumption facilitates mod-
basic assumptions of the ICRAM-1 are eling of the interrelationship between the indicators and
computing their relative level of significance for a par-
1. The criteria, subcriteria, and indicators are related ticular country/market/project situation, although it
to each other according to the hierarchy but are could be argued that all the risk indicators are interre-
independent of each other within their own level lated in the context of construction, economics, and po-
of the hierarchy. litical science and should therefore be considered depen-
2. Risk indicators at the market level could be directly dent. However, it is computationally tedious and
impacted by the macro level risk environment, and unproductive to consider the labyrinth of relationships
risk indicators at the project level could be directly between the indicators. Therefore, it is important to de-
impacted by either the macro or market risk envi- fine a structured and computationally manageable ap-
ronments. proach as defined in the assumption and the correspond-
3. Those indicators directly impacted by an upper ing hierarchies.
level (the macro and/or market level) are not im- The remaining four assumptions define the propaga-
pacted by specific indicators in the upper level but tion of risk among the three levels. The second assump-
rather by the overall risk environment of that level. tion states the relationship between the macro, market,
4. An indicator directly impacted by the risk environ- and project levels, whereas the third assumption was
ment at an upper level (such as a market level in- necessary to contain the computational requirements that
dicator impacted by the macro level risk environ- would have ensued if the individual impact of an indi-
ment) cannot be assessed a risk value greater than cator on the indicators at a lower level had been consid-
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J. Manage. Eng. 2000.16:59-69.


TABLE 3. Hierarchy and Analysis of Project Level Risk Indicators

Weight Impacted by Relative impact Risk Weighted


Criteria Subcriteria (risk indicators) (from AHP) 1 or 2a (from PWC) assessment assessment
(1) (2) (3) (4) (5) (6) (7)
Technology Problems in technology transfer and 0.120 2 1.00 60.047 7.208
implementation —
Retention of technological advantage 0.060 — 50 3.001
Contracts and Possibility of contractual disputes 0.083 — — 50 4.135
legal issues Problems in dispute settlement due to 0.041 — — 50 2.068
country’s laws
Resources Shortage of skilled and unskilled workers 0.056 2 1.00 60.047 3.342
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Availability of special equipment 0.070 2 1.00 60.047 4.191


Delays in material supply 0.044 2 1.00 60.047 2.662
Design Delay in design and regulatory approvals 0.035 2 1.00 60.047 2.111
Defective design, error, and rework 0.034 — — 50 1.686
Work change order 0.019 — — 75 1.394
Difficulties to meet construction programs 0.016 — — 50 0.815
Unforeseen adverse ground conditions 0.010 — — 50 0.516
Quality Bad quality of materials 0.057 2 1.00 60.047 3.415
Bad quality of workmanship 0.057 2 1.00 60.047 3.415
Financial Financing difficulties because of tax or 0.047 1 1.00 70.353 3.328
capital movement restrictions
Financial difficulties because of currency 0.033 1 1.00 70.353 2.346
exchange rate
Drop in project revenue 0.028 1 1.00 70.353 1.937
Difficulty in converting local currency to 0.016 1 1.00 70.353 1.118
foreign exchange
Construction and Construction manager 0.044 — — 50 2.178
cultural Third party delays 0.035 — — 75 2.605
indicators Safety 0.028 — — 25 0.692
Other Weather conditions and other natural causes 0.046 — — 25 1.138
of delay
Physical damage to project by riots, terrorist 0.023 1 0.80 56.283 1.281
act, and so forth
[Sum] — 1.000 — — ‘‘Moderate risk’’ 56.579
a
1 = Macro level risk environment; maximum risk = 70.353; 2 = Market level risk environment; maximum risk = 60.047.

ered. The fourth and fifth assumptions define the logical dicators include the indicators (1) directly influenced by
boundaries for transference of risk between the levels. the macro environment and (2) not directly impacted by
These assumptions collectively provide a structured en- the macro environment, whereas the project risk indi-
vironment for modeling the complex interrelationship cators include the indicators (1) directly impacted by the
between the risk indicators and for making the decision macro environment; (2) directly impacted by the con-
model more responsive to the user. struction market environment; and (3) not directly im-
pacted by the macro or construction market environ-
Framework for ICRAM-1 ments.
The framework for the ICRAM-1 contains three main
modules: (1) A macro level risk assessment module; (2) Discussion of Methods Involved
a market level risk assessment module; and (3) a project The ICRAM-1 uses the Analytical Hierarchy Process
level risk assessment module (Fig. 1). The evaluation (AHP) to analyze the hierarchy of risk indicators within
performed in the first module provides an overall macro each level and to determine the relative importance of
(country) risk assessment; that in the second provides an the risk indicators by establishing priority among the cri-
overall construction market risk assessment; and that in teria, subcriteria, and indicators. This analysis was im-
the third provides an overall project risk assessment portant since all the indicators in a particular level might
(Fig. 1). not have the same degree of significance with respect to
The hierarchy of risk indicators is evaluated at each the project, market, and country under consideration.
level to establish (1) the degree of significance (weight) The hierarchy of risk indicators is systematically evalu-
of the risk indicators; (2) their individual risk impact ated by using a series of matrix computations to deter-
according to a predefined relative scale; (3) the indica- mine the decision maker’s preference order among the
tors influenced by an upper-level risk environment; and various criteria. For additional information on the appli-
(4) the degree of impact of the previous level on the cation of AHP, refer to Hastak (1998); Hastak and Halpin
impacted indicators. The sum of the weighted risks as- (1998); Saaty (1980; 1982; and 1990); and Vargas
sociated with each indicator provides the overall risk at (1990).
that level. The risk associated with each indicator is subjectively
As shown in Fig. 1, the construction market risk in- established by the primary decision maker (PDM) by
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J. Manage. Eng. 2000.16:59-69.


TABLE 4. Risk Assessment Scale with the maximum weight is assigned the full risk im-
Definition pact of the previous level, whereas the other selected
Degree of risk (fn. = function of) Assessment indicators are assigned risk according to their modified
(1) (2) (3) weights. Additionally, a relative scale for the ‘‘degree of
No risk (improbable fn. (lowest probability, lowest 0 impact,’’ giving the assessment for each, was developed
situation) severity) for the PWC evaluations and is shown below.
Low risk fn. (probability, low severity) 25
Moderate risk fn. (moderate probability, 50
moderate severity) • Much more impacted: 1.5
High risk fn. (moderate–high probability, 75 • More impacted: 1.25
high severity) • Same impact: 1.0
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Prohibitive risk fn. (high probability, very high 100


• Less impact: 1/1.25 = 0.8
severity)
• Much less impact: 1/1.5 = 0.67

using a predetermined scale of 0–100, where 0 implies


To obtain the aggregate risk at a particular level, the
no risk and 100 implies maximum risk (Table 4). In the
risk transferred from a previous level (macro or both
relative scale shown in Table 4, the risk is defined as a
macro and market) is combined with the weighted risk
function of the probability of the event and the associ-
assessed for that level. The following paragraphs illus-
ated severity (loss), where high, medium, and low se-
trate the methodology in detail.
verity are defined by the user based on the risk-taking
capacity of the user firm. The determination of risk as-
sociated with each indicator (that is, the probability and ICRAM-1 Methodology
severity) is based on the available information about the To illustrate the methodology of the ICRAM-1, a hy-
country/market/project and the knowledge of the user. pothetical example is considered. However, specific
The risk values are estimated by using the predetermined sources have been identified from which data and infor-
scale, as shown in Table 4. The subjective risk assess- mation can be obtained for a given country to perform
ment and weight associated with the indicators (estab- a more realistic assessment of the indicators at the
lished earlier using the AHP) together provide the macro, market, and project levels (Table 5). Efforts are
weighted aggregate risk for a particular level. under way to conduct several country-specific case stud-
The subjectivity of risk assessment is reduced as more ies, and the results will be reported in a subsequent
information about the risk indicators is available to the paper.
user. Since the model relies on subjective assessment of
risk indicators, it is important that the user provide input Risk Information and Data Collection
based on reliable sources of information and his or her Although risk data collection is not an easy task, sev-
own judgment. Presently, the ICRAM-1 allows one user eral methods are available for obtaining, organizing, and
at a time to work with the model and provide input. analyzing the required data. Risk information could be
However, future development of this model will include quantitative or qualitative data. The required data could
a group decision module for synthesizing the input and be obtained either by traveling to the target country or
observations provided by a team of experts evaluating by interviewing people who have been involved with a
the situation. specific host country or region. Such information in-
The ICRAM-1 takes into account the transfer of risk volves expert judgment regarding the sociopolitical con-
between levels. The user identifies the indicators that
could be affected by an upper-level risk environment. TABLE 5. Potential Sources of Information
The transfer of risk from one level to the affected indi- Applicability & Usefulness
cators at the next lower level is established by using a Data source Macro level Market level Project level
modification of the Pair Wise Comparison (PWC) (1) (2) (3) (4)
method (Ahmad 1990). In the PWC method, two indi- Host government U U U
cators are compared at a time to determine their relative publications
importance with respect to the impacting level. The re- Home government U U —
sults of the pairwise comparisons are subsequently nor- publications
United Nations U — U
malized for all the indicators under consideration. publications
The PWC method was modified slightly to account IMF publications U — —
for modeling assumptions (4) and (5) discussed earlier. World Bank U — U
According to these assumptions, all the indicators di- Articles, clippings, etc. U — —
rectly impacted by an upper level are uniquely impacted Professional services U — —
Local construction U U U
by that level and cannot be assessed a risk value greater consultants
than the degree of risk associated with the impacting Accounting firms U U U
level. Therefore, instead of normalizing the comparison Special studies — U U
results (as required by the PWC method), the weights University faculty U U —
are modified by dividing them with the maximum weight Legal firms U U U
First-hand information U U U
obtained by any of the selected indicators. The indicator
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J. Manage. Eng. 2000.16:59-69.


ditions in the host country and economic factors (New- high risk has been defined as a function of moderate to
man 1980). Table 5 lists different sources of data that high probability of occurrence and high severity. On the
could be used to obtain information pertinent to risk in- other hand, ‘‘Government incentives’’ was assigned a
dicators at the macro, market, and project levels. risk value of 25, indicating low risk, that is, some prob-
ability of occurrence and low severity (Table 4). As
Determination of Relative Importance of Risk shown in Table 1, the overall risk at the macro level for
Indicators the hypothetical situation was computed to be 70.353
As discussed earlier, the user determines the relative (say, 70). From the risk assessment scale shown in Table
importance of risk indicators within a hierarchy of a 4, a value of 70 could be categorized as almost high
module by using the Analytical Hierarchy Process. The risk.
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weight associated with an indicator represents the rela-


tive degree of importance of an indicator at that level Module 2: Market Level Risk Assessment
with respect to the business objectives of the user firm, The indicators at the market level consist of two
as well as the specific country, market, and project sit- groups: The first includes risk indicators directly im-
uation (Tables 1–3). Through this process of evaluation, pacted by the macro risk environment, and the second
a risk indicator considered by the user to have limited includes risk indicators activated by the construction
significance in a given country, market, or project level market environment. The risk indicators likely to be im-
environment can be assigned a low relative importance pacted by the macro level risk environment are identified
(or weight) in the analysis, and vice versa for indicators by the user; the modified PWC method (explained ear-
with higher significance. lier) is used to determine the relative impact. For ex-
ample, as shown in Table 2, under the column marked
Assessment of Risk ‘‘Impacted by macro,’’ eight market level indicators are
The available information with respect to the country, identified as impacted by the macro level environment.
market, and project environments is further used to as- According to the modeling assumptions discussed ear-
sess the probable risk associated with an indicator. As lier, these risk indicators would be uniquely impacted by
discussed earlier, the probable risk assessment is based the macro level environment and would not carry more
on a predetermined scale, as shown in Table 4. The prod- risk than the macro level risk assessment. Table 6 illus-
uct of the weight associated with an indicator and the trates the modified PWC method for macro–market im-
probable risk provides the weighted probable risk asso- pact assessment.
ciated with that indicator. Since the weights associated A pairwise comparison of the affected risk indicators
with the indicators at each level in a hierarchy add up is performed (Table 6) by using the ‘‘degree of impact
to unity, the total probable risk is obtained by the sum- sale’’ described earlier. From the comparison, the indi-
mation of the weighted probable risk associated with cators impacted the most are assigned the full risk value
each indicator in the hierarchy. of the macro environment (70.353), whereas the other
affected indicators are assigned risk value in proportion
Module 1: Macro Level Risk Assessment to their relative impact. For example, as shown in Table
The subjective assessment of risk for indicators at the 6, risk indicators designated as ‘‘Medium and long-term
macro (or country) level is based on the pertinent infor- financing’’ and ‘‘Tax and nontax incentives’’ were eval-
mation available for the country. The required informa- uated as having the maximum impact from the macro
tion could be obtained from sources such as those shown environment and were assigned the risk value of 70.353.
in Table 5. A risk value is assigned to each indicator at The relative impact for the risk indicator designated as
the macro level based on the available information and ‘‘Availability of construction material’’ was calculated
the scale shown in Table 4. For example, as shown in to be 80% (that is, 1.25/1.56) and assigned a risk value
Table 1 for the hypothetical situation under considera- of 56.283 (or 70.353? 0.8).
tion, the risk indicator ‘‘Political continuity’’ was as- The user, based on the available information and the
signed a risk value of 75, indicating high risk, where relative scale shown in Table 4, determines the risk as-

TABLE 6. PWC Method for Macro-Market Impact Assessment


Impact of Macro Environment on Market Indicators
Affected risk indicators Pairwise impact Impact assessment Relative impact Risk assessment
(1) (2) (3) (4) (5)
Technology protection system 1.00 — 1.00 0.64 45.026
Enforceability of construction contracts 1.00 1.00 1.00 0.64 45.026
Procedure for bidding and design approval 1.00 1.00 1.00 0.64 45.026
Availability of construction material 1.25 1.00 1.25 0.80 56.283
Medium and long-term financing for construction projects 1.00 1.25 1.56 1.00 70.353
Tax and nontax incentives in construction industry 1.00 1.00 1.56 1.00 70.353
Special construction industry index 1.00 0.80 1.25 0.80 56.283
Bidding volume index 1.00 — 1.25 0.80 56.283
Maximum impact = 1.56 Macro risk = 70.353

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J. Manage. Eng. 2000.16:59-69.


TABLE 7. PWC Method for Macro-Project Impact Assessment

Impact of Macro Environment on Project Indicators


Affected risk indicators Pairwise impact Impact assessment Relative impact Risk assessment
(1) (2) (3) (4) (5)
Financial difficulties because of tax or capital movement 1.00 — 1.00 1.00 70.353
Financial difficulties because of currency exchange rate 1.00 1.00 1.00 1.00 70.353
Drop in project revenue 1.00 1.00 1.00 1.00 70.353
Difficulties in converting local currency to foreign exchange 1.00 1.00 1.00 1.00 70.353
Physical damage to the project by riots, terrorist act, etc. — 0.80 0.80 0.80 56.283
Maximum impact = 1.00 Macro risk = 70.353
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TABLE 8. PWC Method for Market-Project Impact Assessment


Impact of Market Environment on Project Indicators
Affected risk indicators Pairwise impact Impact assessment Relative impact Risk assessment
(1) (2) (3) (4) (5)
Problem with technology transfer and implementation 1.00 — 1.00 1.00 60.047
Shortage of skilled and unskilled workers 1.00 1.00 1.00 1.00 60.047
Availability of special equipment 1.00 1.00 1.00 1.00 60.047
Delays in material supply 1.00 1.00 1.00 1.00 60.047
Delay in design and regulatory approvals 1.00 1.00 1.00 1.00 60.047
Bad quality of materials 1.00 1.00 1.00 1.00 60.047
Bad quality of workmanship — 1.00 1.00 1.00 60.047
Maximum impact = 1.00 Market risk = 60.047

sessment for the indicators that are not affected by the one level might be counterproductive for the project and
macro level. The sources of information that could be the investment. Therefore, risk assessment is required at
used for this assessment are shown in Table 5. As shown each level while carefully analyzing the impact of one
in Table 2, the overall risk assessment for the hypothet- level upon another.
ical situation under consideration was computed to be
60.047 (say, 60), that is, moderate to high risk (Table 4). CONCLUSIONS
Module 3: Project Level Risk Assessment International construction markets are becoming in-
The indicators at the project level consist of three creasingly accessible for A/E/C firms. However, before
groups. The first includes risk indicators directly im- expanding business in the international construction
pacted by the macro risk environment, the second those markets, it is important to analyze the risk involved in
directly impacted by the construction market environ- an international operation. Except for the ICRAM-1, ex-
ment, and the third those activated at the project level. isting methods of risk assessment do not assist A/E/C
The risk impact for the indicators affected by either the firms in analyzing the risk involved in international con-
macro or market level environment is computed by using struction at the macro, market, and project levels. The
the modified PWC method, as explained earlier under need for such a model is critical, and this paper pre-
the market level analysis. The unaffected project level sented a method for filling the knowledge gap.
risk indicators are assessed based on the project situation The ICRAM-1 provides a structured approach for
and information available from different sources (Ta- evaluating the risk indicators involved in an international
ble 5). construction operation. It is designed to examine a spe-
The results for the hypothetical situation under con- cific project in a foreign country and can be used as a
sideration have been illustrated in Tables 3, 7, and 8. tool to quantify the risk involved in an international con-
The project level indicators impacted by the macro and struction investment as one of the preliminary steps in
market level environments were separately evaluated to project evaluation. Four main results are obtained from
determine the relative impact and risk assessment. Tables the ICRAM-1 analysis: (1) high-risk indicators; (2) the
7 and 8 illustrate the macro–project and market–project impact of country environment on a specific project; (3)
impact assessments, respectively. As shown in Table 3, impact of market environment on a specific project; and
the overall project level risk was evaluated to be 56.579 (4) overall project risk.
(say, 57) that is, moderate risk. High-risk indicators can be identified by defining a
From this example, variation in risk can be seen at the threshold-weighted risk for each of the three levels. The
three levels. In this particular example, the risk gradually threshold values would depend on the risk-taking ability
decreased from the macro to the market to the project of the user firm. For instance, in the example under con-
level. However, for a different situation, the risk values sideration, a threshold value of 9% of the total risk at
may show an increasing trend or no trend at all, sug- the macro level (70.353 ? 0.09 = 6.33) identifies Mone-
gesting that decisions based on risk assessment at any tary inflation (6.852) and Societal conflicts (8.194) as the
JOURNAL OF MANAGEMENT IN ENGINEERING / JANUARY/FEBRUARY 2000 / 67

J. Manage. Eng. 2000.16:59-69.


two high-risk indicators (Table 1), whereas 6% threshold Akinci, B., and Fischer, M. (1998). ‘‘Factors affecting contractors’
risk of cost overburden.’’ J. Mgmt. in Engrg., ASCE, 14(1), 67–
at the market level (60.047? 0.06 = 3.6) identifies four
76.
high-risk indicators, and a threshold of 5% at the project Ammiano, M. (1988). ‘‘Risk management cuts losses and costs.’’
level (56.579? 0.05 = 2.8) identifies eight additional Contractor, 35(8), 40–41.
high-risk indicators (Tables 2 and 3). By defining thresh- Ashley, D. B., and Bonner, J. J. (1987). ‘‘Political risks in international
old values, a manageable set of high-risk indicators is construction.’’ J. Constr. Engrg. and Mgmt., ASCE, 113(3), 447–
467.
identified that can be studied in detail to develop risk
Bullock, W. M. (1989). ‘‘Who pays for the unexpected in construc-
mitigation strategies. As in the example above, 14 out tion: A contractor’s viewpoint.’’ Constructed project excellence, R.
of 73 indicators were isolated as the high-risk indicators. J. Bard, ed., Proc., Constr. Congr. I, ASCE, New York.
Further risk management studies need only focus on this Cascio, W. F., and Serapio, Jr., M. G. (1991). ‘‘Human resources sys-
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manageable set of high-risk indicators. tems in an international alliance: The undoing of a done deal?’’
Organizational Dyn., Winter, 63–74.
Another possible use of the ICRAM-1 is in analyzing
Ensor, R. (1981). Assessing country risk. Euromoney Publications,
different countries with respect to a specific project and London.
in comparing different types of projects (such as indus- Flanagan, R., and Norman, G. (1993). Risk management and construc-
trial, residential, commercial, and infrastructure projects) tion. Blackwell Scientific, Cambridge, Mass.
in a specific country. Using the model several times over Fridlin, I. (1996). ‘‘International construction—New opportunities,’’
a defined period can also facilitate monitoring of risk MS thesis, Polytechnic University, Brooklyn, N.Y.
Haner, F. T., and Ewing, J. S. (1985). Country risk assessment—The-
associated with a specific country with respect to the ory and worldwide practice. Praeger Publishers, New York.
macro, market, and project levels. A plot of risk assess- Hastak, M. (1998). ‘‘Advanced automation or conventional construc-
ment data over several years (or periods, that is, t0, t1, tion process?’’ Int. J. Automation in Constr., 7(4), 299–314.
t2, etc.) will indicate the trend of risk indicators in that Hastak, M., and Halpin, D. W. (1998). ‘‘A decision model for life
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tion.’’ Proc., 8th Japan–U.S. Conf. on Composites, Technomic Pub-
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The analysis conducted in this model is not only use- E/C firms.’’ Proc., 1st Congr. on Computing in Civ. Engrg., ASCE,
New York, 735–742.
ful at the preliminary stage of a project/country evalua-
Kangari, R. (1995). ‘‘Risk management perception and trends of U.S.
tion, but can also be used during the planning and exe- construction.’’ J. Constr. Engrg. and Mgmt., ASCE, 121(4), 422–
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ICRAM-1 provides a structured method for analyzing Knudsen, H. (1974). ‘‘Explaining the national propensity to expro-
the risk indicators, the input provided by the user is priate: An ecological approach.’’ J. Int. Business Studies, Spring,
largely subjective in nature and depends on the infor- 54.
Korbin, S. J. (1981). ‘‘Political assessment by international firms:
mation available and the reliability of the sources. An Models or methodology?’’ J. Policy Modeling, May, 250–271.
in-depth risk analysis would be required if a decision Kumaraswamy, M. M. (1997). ‘‘Appropriate appraisal and apportion-
were made to further explore the country/market/project. ment of megaproject risks.’’ J. Prof. Issues in Engrg. Educ. and
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Risk Assessment and Mgmt.: Emergency Plng. Perspectives, Larry
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ing extensive market research and investment in an in- 61–78.
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gineered Constr. in Expanding Global Markets, ASCE, Washington,
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