PEER-REVIEWED PAPER

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

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.
1). The macro level defines the general risk to an inter-
national investor while expanding operations in a given
country. The risk associated with a specific international
construction market has been defined as the market level
risk, which also includes the impact of the macro level
on the construction market. The project level defines the
risk associated with a project in that specific interna-
tional construction market, which includes the impact of
the macro and market levels on the project (Fig. 1).
The macro, market, and project levels comprise a set
of tangible indicators (such as increase in monetary in-
flation, foreign exchange reserves, and bidding volume
index) and intangible indicators (such as government at-
titude toward foreign investors, market suitability for ad-
vanced technology, and possibility of contractual dis-
putes). No model currently examines the tangible and
intangible risks faced by foreign investors in the con-
struction industry at these three levels, as well as the
interaction and risk propagation from one level to an-
other. Ashley and Bonner (1987) have developed a
model for political risk assessment in international con-
struction that identifies the impact of political changes
on a construction project in a given country based on
available information and subjective assessment. How-
ever, their model does not consider the collective impact
of the country and market environments on a particular
construction project. Furthermore, the number and com-
plexity of the risk indicators involved at the three levels
(macro, market, and project) makes it difficult to analyze
their impact without a structured method or analysis.
Therefore, a comprehensive risk assessment model is re-
60 / JOURNAL OF MANAGEMENT IN ENGINEERING / JANUARY/FEBRUARY 2000
J. Manage. Eng. 2000.16:59-69.
quired that would facilitate a structured analysis of (1)
risk at the macro level; (2) the risk at the construction
market level; (3) risk at the project level; (4) impact of
the macro environment on the construction market and
project level risk; and (5) impact of the construction
market environment on the project level risk.
This paper fills this important gap by presenting a
model for international construction risk assessment
called ICRAM-1 (International Construction Risk As-
sessment Model-1). The model presented in this paper
assists the decision maker in evaluating the potential risk
at the macro, market, and construction project levels by
using available information, knowledge, and expertise.
As such, it can be used effectively before conducting
extensive market research and investment in an inter-
national construction market, as well as during the proj-
ect planning and execution stages. The following sec-
tions discuss at length the macro, market, and project
level risks and describe the state of the art in evaluating
risk at these levels.
MACRO (OR COUNTRY) LEVEL RISK
Conventional methods of project appraisal incorporate
risk analysis into the overall project evaluation and in-
vestment decisions by using various decision-making
techniques and models (Ensor 1981; Goodman, A. S.,
Planning and analysis of public works, book in prepa-
ration, 1994; Sang 1988). Three major approaches for
assessing a country’s risk have been identified: (1) the
Political risk assessment approach; (2) the macrosocio-
political (political instability) approach; and (3) the
 exchange instability approach. The model developed by
Ashley and Bonner (1987) segregates political risk for
international construction into two categories: political
source and project consequence. They have defined proj-
ect consequence variables as those variables that directly
influence the project, such as labor restrictions, change
in per-unit cost of labor, and strikes and labor-impacting
delays. The political source factors have been defined as
those variables that indirectly influence the project
through their impact on the project consequence varia-
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bles. Political source factors include variables such as
the firm’s relations with the government, nature of the
firm’s operations, government policies, nationalist atti-
tude toward the firm, and influence of power groups. The
political risk in this model is evaluated by subjectively
assigning financial impact and probability values to the
potential risk-generating project consequence variables
and computing the expected value of impact. Although
a valid approach, this model limits risk analysis to the
impact of political events on the project and its conse-
quences. Furthermore, it does not consider the indirect
impact of political factors on the construction and other
related markets and the potential impact of market fac-
tors on the project.
Other models, such as the Business Environment Risk
Information (BERI) model, view the country risk as the
sum of the political risk, operational risk, and remittance
and repatriation factors. BERI is an empirically based
forecasting service founded to assist multinational firms
in their business decisions. The service provides a frame-
work to evaluate risk, make regular periodic updates, and
forecast political and economic events. The BERI model
has compiled risk indicators (primarily at the macro
level) into three groups: (1) operating risk criteria; (2)
political risk criteria, and (3) financial risk criteria (Ha-
ner and Ewing 1985).
The macrosociopolitical (MSP) models approach risk
from the macro level perspective. Most of the MSP mod-
els express the political instability factor as a function
of various economic, ideological, and social forces. The
assumption is that political events can affect the devel-
opment of economic and business conditions in the host
country. The complex array of development in the host
country’s sociopolitical environment might lead to po-
litical instability, resulting in drastic changes in the busi-
ness environment, including expropriatory actions by the
host government (Haner and Ewing 1985; Knudsen
1974; Ting 1988). The major shortcomings of the MSP
approach are (1) they do not analyze the effect of polit-
ical instability on the actual investment projects or busi-
ness ventures, and (2) they lack specificity in relating
the impact of expropriation.
The exchange instability approach analyzes the free-
dom to convert local currency in a foreign country.
Exchange rate instability in the host country can cause
serious financial and payment-related risks of currency
exposure for international investors. Changes in the
exchange rate occur due to disturbances in the host coun-
try’s balance of payments or as a consequence of
changes in its basic economic factors, such as the infla-
JOURNAL OF MANAGEMENT IN ENGINEERING / JANUARY/FEBRUARY 2000 / 61
J. Manage. Eng. 2000.16:59-69.
tion rate, interest rates, production, and employment
level (Haner and Ewing 1985; Korbin 1981; Ting 1988).
MARKET LEVEL RISK
In addition to the usual risks faced by a local construc-
tion company in a given country, the international con-
struction firm must consider added risks, such as bidding
procedures, availability of contractors, and availability
of resources. Cascio and Serapio (1991) and Shenkar and
Zeira (1987) have suggested several important factors
that an international investor should consider. These in-
clude technological advantage over the local market, role
of the construction industry in the foreign country’s
overall economy, availability of construction resources,
complexity of regulatory processes, attitude of the for-
eign government toward the construction industry, and
financing opportunities (Cascio and Serapio 1991; Shen-
kar and Zeira 1987). One commonly adopted form of
risk mitigation in the international markets is to form
joint ventures or partnerships with local companies to
draw benefit from their knowledge and expertise in that
region or country (Zink 1973). However, this approach
may not be helpful at all times because of the low pro-
ficiency of local professionals in a host country (Lucas
1985).
CONSTRUCTION PROJECT RISK
Several studies have been conducted to identify the
various risk categories in construction projects and to
determine the ‘‘ownership of risk.’’ Strassman and Wells
(1988) have identified several risk factors associated
with a construction project. From a client’s perspective,
these risk factors include fears that (1) Costs will esca-
late unpredictably; (2) structures will be faulty and need
frequent repairs; and (3) the project will simply be aban-
doned and partially paid for but incomplete and useless.
Similarly, from a contractor’s perspective the risk factors
include (1) fears of inclement weather; (2) delays in site
availability; (3) unforeseen subsoil conditions; (4) inad-
equate detail drawings; (5) late material deliveries; (6)
unanticipated price changes; (7) faulty subcontracting;
(8) unproductive labor and strikes (Strassman and Wells
1988).
Kangari (1995) has conducted a survey of the top 100
U.S. construction contractors. In this survey, different
construction risk factors were classified under three cat-
egories as owner, contractor, and shared risk to define
the party responsible for the risk. This survey identified
23 risk descriptions, such as permits and ordinances, de-
fective design, labor disputes, contractor competence, fi-
nancial failure of any party, and defensive engineering.
The results of this survey identify the changing trend in
risk allocation as well as the level of importance for each
risk description. The results of these works as well as
the studies conducted by Akinci and Fisher (1998); Am-
miano (1988), Bullock (1989), Kumaraswamy (1997);
Lifson (1982); McKim (1982); and Rubin and Wordes
(1997; 1998) are all useful in identifying the potential
 risk indicators, as well as the ownership of risk in a
construction project.
The models available for international construction
risk assessment primarily analyze risk at the macro (or
country) level and do not consider the impact and prop-
agation of macro risk on either market or project level
indicators. While a number of important approaches ex-
ist, an integrated approach that takes into consideration
the individual risk at macro, market, and project levels,
as well as the transfer of risk from one level to another,
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of the three levels due to their respective environments.
A total of 73 risk indicators were identified at the three
levels that have a potential to influence the project
through either the macro, market, or project levels (Ta-
bles 1–3). The risk indicators were primarily identified
through an extensive literature review and discussion
with experts. The identified risk indicators do not com-
prise an exhaustive list but a generic representative sam-
ple that will change with the requirements of the deci-
sion problem and the country, market, and project under

is still missing. The research presented in this paper fills
this important gap.
INTERNATIONAL CONSTRUCTION RISK
ASSESSMENT MODEL (ICRAM-1)
The ICRAM-1 has been designed to assist decision
makers at the preliminary stages of project evaluation to
analyze various risk indicators and to subjectively iden-
tify risks at the macro, market, and project levels. The
framework of ICRAM-1 is illustrated in Fig. 1. As
shown in this figure, the macro level environment might
trigger some of the risk indicators at the market and the
project level, while market level environment might in-
fluence some of the project level indicators. Apart from
this, additional indicators might be triggered within each
consideration (Shaked 1997). Due to editorial con-
straints, the significance of all the identified risk indi-
cators has not been presented in this paper. It is, how-
ever, a subject of another paper.
The identified risk factors were grouped according to
specific criteria and subcriteria to establish the interre-
lationship and hierarchy between the various risk factors
at the macro, market, and project levels (Tables 1–3). It
was important to achieve this level of arrangement of
risk factors to facilitate data collection, analysis, mea-
surement, and quantification of intangible risk factors. It
further enabled the analysis of this individual and overall
impact on the cost of a project, as well as on the overall
effectiveness of operations in a specific country and its
construction market. All the identified risk indicators
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’’

62 / JOURNAL OF MANAGEMENT IN ENGINEERING / JANUARY/FEBRUARY 2000

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

 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-
ment allows systematic evaluation of all the risk indi-
cators to establish their level of significance for a par-
ticular situation.
Modeling Assumptions
The ICRAM-1 analyzes 73 risk indicators at three in-
terrelated levels (macro, market, and project). Therefore,
several assumptions were defined to establish the logical
boundaries for the decision and risk analysis model and
to facilitate computation of risk at the three levels. The
basic assumptions of the ICRAM-1 are
1. The criteria, subcriteria, and indicators are related
to each other according to the hierarchy but are
independent of each other within their own level
of the hierarchy.
2. Risk indicators at the market level could be directly
impacted by the macro level risk environment, and
risk indicators at the project level could be directly
impacted by either the macro or market risk envi-
ronments.
3. Those indicators directly impacted by an upper
level (the macro and/or market level) are not im-
pacted by specific indicators in the upper level but
rather by the overall risk environment of that level.
4. An indicator directly impacted by the risk environ-
ment at an upper level (such as a market level in-
dicator impacted by the macro level risk environ-
ment) cannot be assessed a risk value greater than
JOURNAL OF MANAGEMENT IN ENGINEERING / JANUARY/FEBRUARY 2000 / 63
the degree of risk associated with the affecting
level.
5. All the indicators directly impacted by an upper
level (the macro and/or market level) are uniquely
influenced by that level (that is, two indicators
might not have the same degree of impact from an
upper-level risk environment).
All the assumptions have been carefully considered to
facilitate computation and modeling of the complex na-
ture of the problem. The first assumption facilitates mod-
eling of the interrelationship between the indicators and
computing their relative level of significance for a par-
ticular country/market/project situation, although it
could be argued that all the risk indicators are interre-
lated in the context of construction, economics, and po-
litical science and should therefore be considered depen-
dent. However, it is computationally tedious and
unproductive to consider the labyrinth of relationships
between the indicators. Therefore, it is important to de-
fine a structured and computationally manageable ap-
proach as defined in the assumption and the correspond-
ing hierarchies.
The remaining four assumptions define the propaga-
tion of risk among the three levels. The second assump-
tion states the relationship between the macro, market,
and project levels, whereas the third assumption was
necessary to contain the computational requirements that
would have ensued if the individual impact of an indi-
cator on the indicators at a lower level had been consid-

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
boundaries for transference of risk between the levels.
These assumptions collectively provide a structured en-
vironment for modeling the complex interrelationship
between the risk indicators and for making the decision
model more responsive to the user.
Framework for ICRAM-1
The framework for the ICRAM-1 contains three main
modules: (1) A macro level risk assessment module; (2)
a market level risk assessment module; and (3) a project
level risk assessment module (Fig. 1). The evaluation
performed in the first module provides an overall macro
(country) risk assessment; that in the second provides an
overall construction market risk assessment; and that in
the third provides an overall project risk assessment
(Fig. 1).
The hierarchy of risk indicators is evaluated at each
level to establish (1) the degree of significance (weight)
of the risk indicators; (2) their individual risk impact
according to a predefined relative scale; (3) the indica-
tors influenced by an upper-level risk environment; and
(4) the degree of impact of the previous level on the
impacted indicators. The sum of the weighted risks as-
sociated with each indicator provides the overall risk at
that level.
As shown in Fig. 1, the construction market risk in-
64 / JOURNAL OF MANAGEMENT IN ENGINEERING / JANUARY/FEBRUARY 2000
dicators include the indicators (1) directly influenced by
the macro environment and (2) not directly impacted by
the macro environment, whereas the project risk indi-
cators include the indicators (1) directly impacted by the
macro environment; (2) directly impacted by the con-
struction market environment; and (3) not directly im-
pacted by the macro or construction market environ-
ments.
Discussion of Methods Involved
The ICRAM-1 uses the Analytical Hierarchy Process
(AHP) to analyze the hierarchy of risk indicators within
each level and to determine the relative importance of
the risk indicators by establishing priority among the cri-
teria, subcriteria, and indicators. This analysis was im-
portant since all the indicators in a particular level might
not have the same degree of significance with respect to
the project, market, and country under consideration.
The hierarchy of risk indicators is systematically evalu-
ated by using a series of matrix computations to deter-
mine the decision maker’s preference order among the
various criteria. For additional information on the appli-
cation of AHP, refer to Hastak (1998); Hastak and Halpin
(1998); Saaty (1980; 1982; and 1990); and Vargas
(1990).
The risk associated with each indicator is subjectively
established by the primary decision maker (PDM) by

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
JOURNAL OF MANAGEMENT IN ENGINEERING / JANUARY/FEBRUARY 2000 / 65

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

 ditions in the host country and economic factors (New-
man 1980). Table 5 lists different sources of data that
could be used to obtain information pertinent to risk in-
dicators at the macro, market, and project levels.
Determination of Relative Importance of Risk
Indicators
As discussed earlier, the user determines the relative
importance of risk indicators within a hierarchy of a
module by using the Analytical Hierarchy Process. The
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weight associated with an indicator represents the rela-
tive degree of importance of an indicator at that level
with respect to the business objectives of the user firm,
as well as the specific country, market, and project sit-
uation (Tables 1–3). Through this process of evaluation,
a risk indicator considered by the user to have limited
significance in a given country, market, or project level
environment can be assigned a low relative importance
(or weight) in the analysis, and vice versa for indicators
with higher significance.
Assessment of Risk
The available information with respect to the country,
market, and project environments is further used to as-
sess the probable risk associated with an indicator. As
discussed earlier, the probable risk assessment is based
on a predetermined scale, as shown in Table 4. The prod-
uct of the weight associated with an indicator and the
probable risk provides the weighted probable risk asso-
ciated with that indicator. Since the weights associated
with the indicators at each level in a hierarchy add up
to unity, the total probable risk is obtained by the sum-
mation of the weighted probable risk associated with
each indicator in the hierarchy.
Module 1: Macro Level Risk Assessment
The subjective assessment of risk for indicators at the
macro (or country) level is based on the pertinent infor-
mation available for the country. The required informa-
tion could be obtained from sources such as those shown
in Table 5. A risk value is assigned to each indicator at
the macro level based on the available information and
the scale shown in Table 4. For example, as shown in
Table 1 for the hypothetical situation under considera-
tion, the risk indicator ‘‘Political continuity’’ was as-
signed a risk value of 75, indicating high risk, where
TABLE 6. PWC Method for Macro-Market Impact Assessment
Impact of Macro Environment on Market Indicators
Affected risk indicators Pairwise impact Impact assessment
(1) (2)
Technology protection system 1.00
Enforceability of construction contracts 1.00
Procedure for bidding and design approval 1.00
Availability of construction material 1.25
Medium and long-term financing for construction projects 1.00
Tax and nontax incentives in construction industry 1.00
Special construction industry index 1.00
Bidding volume index 1.00
Maximum impact = 1.56
66 / JOURNAL OF MANAGEMENT IN ENGINEERING / JANUARY/FEBRUARY 2000
J. Manage. Eng. 2000.16:59-69.
high risk has been defined as a function of moderate to
high probability of occurrence and high severity. On the
other hand, ‘‘Government incentives’’ was assigned a
risk value of 25, indicating low risk, that is, some prob-
ability of occurrence and low severity (Table 4). As
shown in Table 1, the overall risk at the macro level for
the hypothetical situation was computed to be 70.353
(say, 70). From the risk assessment scale shown in Table
4, a value of 70 could be categorized as almost high
risk.
Module 2: Market Level Risk Assessment
The indicators at the market level consist of two
groups: The first includes risk indicators directly im-
pacted by the macro risk environment, and the second
includes risk indicators activated by the construction
market environment. The risk indicators likely to be im-
pacted by the macro level risk environment are identified
by the user; the modified PWC method (explained ear-
lier) is used to determine the relative impact. For ex-
ample, as shown in Table 2, under the column marked
‘‘Impacted by macro,’’ eight market level indicators are
identified as impacted by the macro level environment.
According to the modeling assumptions discussed ear-
lier, these risk indicators would be uniquely impacted by
the macro level environment and would not carry more
risk than the macro level risk assessment. Table 6 illus-
trates the modified PWC method for macro–market im-
pact assessment.
A pairwise comparison of the affected risk indicators
is performed (Table 6) by using the ‘‘degree of impact
sale’’ described earlier. From the comparison, the indi-
cators impacted the most are assigned the full risk value
of the macro environment (70.353), whereas the other
affected indicators are assigned risk value in proportion
to their relative impact. For example, as shown in Table
6, risk indicators designated as ‘‘Medium and long-term
financing’’ and ‘‘Tax and nontax incentives’’ were eval-
uated as having the maximum impact from the macro
environment and were assigned the risk value of 70.353.
The relative impact for the risk indicator designated as
‘‘Availability of construction material’’ was calculated
to be 80% (that is, 1.25/1.56) and assigned a risk value
of 56.283 (or 70.353? 0.8).
The user, based on the available information and the
relative scale shown in Table 4, determines the risk as-
Relative impact Risk assessment
(3) (4) (5)
— 1.00 0.64 45.026
1.00 1.00 0.64 45.026
1.00 1.00 0.64 45.026
1.00 1.25 0.80 56.283
1.25 1.56 1.00 70.353
1.00 1.56 1.00 70.353
0.80 1.25 0.80 56.283
— 1.25 0.80 56.283
Macro risk = 70.353
 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
macro level. The sources of information that could be
used for this assessment are shown in Table 5. As shown
in Table 2, the overall risk assessment for the hypothet-
ical situation under consideration was computed to be
60.047 (say, 60), that is, moderate to high risk (Table 4).
Module 3: Project Level Risk Assessment
The indicators at the project level consist of three
groups. The first includes risk indicators directly im-
pacted by the macro risk environment, the second those
directly impacted by the construction market environ-
ment, and the third those activated at the project level.
The risk impact for the indicators affected by either the
macro or market level environment is computed by using
the modified PWC method, as explained earlier under
the market level analysis. The unaffected project level
risk indicators are assessed based on the project situation
and information available from different sources (Ta-
ble 5).
The results for the hypothetical situation under con-
sideration have been illustrated in Tables 3, 7, and 8.
The project level indicators impacted by the macro and
market level environments were separately evaluated to
determine the relative impact and risk assessment. Tables
7 and 8 illustrate the macro–project and market–project
impact assessments, respectively. As shown in Table 3,
the overall project level risk was evaluated to be 56.579
(say, 57) that is, moderate risk.
From this example, variation in risk can be seen at the
three levels. In this particular example, the risk gradually
decreased from the macro to the market to the project
level. However, for a different situation, the risk values
may show an increasing trend or no trend at all, sug-
gesting that decisions based on risk assessment at any
JOURNAL OF MANAGEMENT IN ENGINEERING / JANUARY/FEBRUARY 2000 / 67
one level might be counterproductive for the project and
the investment. Therefore, risk assessment is required at
each level while carefully analyzing the impact of one
level upon another.
CONCLUSIONS
International construction markets are becoming in-
creasingly accessible for A/E/C firms. However, before
expanding business in the international construction
markets, it is important to analyze the risk involved in
an international operation. Except for the ICRAM-1, ex-
isting methods of risk assessment do not assist A/E/C
firms in analyzing the risk involved in international con-
struction at the macro, market, and project levels. The
need for such a model is critical, and this paper pre-
sented a method for filling the knowledge gap.
The ICRAM-1 provides a structured approach for
evaluating the risk indicators involved in an international
construction operation. It is designed to examine a spe-
cific project in a foreign country and can be used as a
tool to quantify the risk involved in an international con-
struction investment as one of the preliminary steps in
project evaluation. Four main results are obtained from
the ICRAM-1 analysis: (1) high-risk indicators; (2) the
impact of country environment on a specific project; (3)
impact of market environment on a specific project; and
(4) overall project risk.
High-risk indicators can be identified by defining a
threshold-weighted risk for each of the three levels. The
threshold values would depend on the risk-taking ability
of the user firm. For instance, in the example under con-
sideration, a threshold value of 9% of the total risk at
the macro level (70.353 ? 0.09 = 6.33) identifies Mone-
tary inflation (6.852) and Societal conflicts (8.194) as the

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

 two high-risk indicators (Table 1), whereas 6% threshold
at the market level (60.047? 0.06 = 3.6) identifies four
high-risk indicators, and a threshold of 5% at the project
level (56.579? 0.05 = 2.8) identifies eight additional
high-risk indicators (Tables 2 and 3). By defining thresh-
old values, a manageable set of high-risk indicators is
identified that can be studied in detail to develop risk
mitigation strategies. As in the example above, 14 out
of 73 indicators were isolated as the high-risk indicators.
Further risk management studies need only focus on this
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manageable set of high-risk indicators.
Another possible use of the ICRAM-1 is in analyzing
different countries with respect to a specific project and
in comparing different types of projects (such as indus-
trial, residential, commercial, and infrastructure projects)
in a specific country. Using the model several times over
a defined period can also facilitate monitoring of risk
associated with a specific country with respect to the
macro, market, and project levels. A plot of risk assess-
ment data over several years (or periods, that is, t0, t1,
t2, etc.) will indicate the trend of risk indicators in that
country. This data could also be used for conducting sim-
ulation studies to determine the trends of risks and the
relationship between the risks at the macro, market, and
project levels.
The analysis conducted in this model is not only use-
ful at the preliminary stage of a project/country evalua-
tion, but can also be used during the planning and exe-
cution stages. However, it should be noted that although
ICRAM-1 provides a structured method for analyzing
the risk indicators, the input provided by the user is
largely subjective in nature and depends on the infor-
mation available and the reliability of the sources. An
in-depth risk analysis would be required if a decision
were made to further explore the country/market/project.
However, this model provides users with initial knowl-
edge of the degree of risk in the macro, market, and
project levels in the examined country prior to conduct-
ing extensive market research and investment in an in-
ternational construction market. This model could be
useful in evaluating several construction markets at the
same time with respect to their risk and future potential.
The results obtained at each level in the model facilitate
screening out low-risk indicators from in-depth analysis
and measurement.
Future research based on the ICRAM-1 will conduct
several case studies for various countries in order to ex-
amine the sensitivity of the model. In addition, a group
decision aspect for model input is being developed in
order to improve the assessment of the risk indicators,
as well as to assess the reliability of the sources of in-
formation. The ICRAM-1 has provided a first step in the
direction of analyzing risk at the macro, market, and
project levels that is critical for investment decisions in
an international construction environment.
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