Identifying the latest risk probabilities affecting construction projects in Egypt according to political and economic variables. From January 2011 to January 2013

Peer review under responsibility of Housing and Building National Research Center.

Abstract

The aim of this paper is to identify the latest top major risk probabilities in construction projects in Egypt according to political and economic variables between the time period Jan 2011 and Jan 2013. Risks were prioritized according to their significance of influences and their sources, whether internal or external. The paper describes, on the basis of a questionnaire survey of project management practices, the construction risks, which are generally perceived as events that influence project objectives of cost, time and quality. A statistical analysis was carried out in order to identify the top major construction project risks. It is concluded that however risk factors vary considerably across industry and countries, the study of risk management for construction projects will provide a reference for other projects that might be executed in similar circumstances. The paper ends up with suggesting the risk response strategies appropriate for each type of identified risk. The research findings will contribute to both practice and research in risk management for the Egyptian construction industry and will also provide valuable information for international companies which intend to provide construction projects in Egypt.

Keywords:

• Risk management
• Construction projects
• Egypt

Introduction

Great efforts are needed to identify and manage the top major risks resulting from the emerging political and economic variables from January 2011 to January 2013 in the Egyptian construction industry. In this critical period, the construction activities in Egypt were exposed to many risks which were partly neglected and needed proper management.

This paper firstly presents a literature review on risks, risk management and the types of risks that normally accompany construction projects. The paper then discusses the current practice of risk management in Egypt. The nature of Risks in this period drastically changed due to the emergence of some political and economic variables. The findings of this paper will contribute to both the practice and research aspects of risk management for the Egyptian construction industry and will provide valuable information for international companies which intend to provide construction projects in Egypt.

Defining risk

Risk management is essential to construction activities in minimizing losses and enhancing profitability. In general, the construction industry is widely associated with a high degree of risk due to the nature of construction business activities, processes, environment and organization. Construction projects entail long period, complicated processes, financial intensity and dynamic organization structures [1]. This type of risk has gained vast attention from construction project managers because of both time and cost overruns that are almost part of any construction project [2].

There were many different attempts to define risk, among which was that risk is “the potential for unwanted or negative consequences of an event or activity” [3].

Risk can also be generally recognized among those within the construction industry as the phenomenon of continually facing a variety of situations involving many unknown, unexpected, frequently undesirable and often unpredictable factors [4]. But the latter definition of risk tends to ignore its double-edged nature, which was recognized in defining risk as “the chance of something happening that will have an impact on objectives; may have a positive or negative impact” [5].

This paper aims at identifying the top major risks regardless of their nature of impact, whether positive or negative, through considering the probability of their occurrence and their impact or magnitude of consequence.

Sources of risk in construction projects

Sources of risk influence projects’ performance in terms of time, cost and quality in negative or positive ways. These sources are classified according to their nature into physical, environmental, design, logistics, financial, legal, political, construction and operation risks [2]. They are also classified into internal and external risks. Internal risks include financial, design, contractual, construction, personal and operational risks, whereas external risks include economic, social, political, legal, public, logistical and environmental risks [6].

Management of risk

Risk management in the context of construction projects is a systematic way of identifying, analyzing and dealing with risks associated with a project with the aim of achieving the project objectives [7]. Although risks cannot be excluded, they can be effectively managed. The PMBOK described management of risk as ‘the processes concerned with conducting risk management planning, identification, analysis, responses and monitoring and control on a project’ [12].

Risk management starts with an early and effective identification and assessment of risks [1]. The process focuses on defining the objective of the project (what is to be achieved) and making sure about the procedures needed to achieve success [7]. The process of management of risks also includes risk response strategies that are defined as risk retention, risk transfer, risk reduction and risk avoidance [8].

Classification of risk

Risk classification is an integrative part of risk identification; its main objective is to structure the diverse risks affecting a construction project [7]. Risk passed through many serious tries to classify its sources as a step to help project managers to predict risks. Although many ways can be used to classify the risks associated with construction projects, the reasoning for choosing a method must serve the purpose of the research. In this paper, risks are grouped with reference to the project management institute (PMI), which classified risks into external and internal, in order to study risks according to the political and economic variables.

Though internal risks may be under control of the project manager, they cause uncertainty that may affect the project. They includes technical risks (government regulations, natural hazards, labor stoppage, cash flow problems, safety issues and natural catastrophes), nontechnical risks (changes in technology, changes in state of the art, design issues and operations/ maintenance issues) and legal risks (licenses, patent rights, lawsuit, subcontractors’ performance and contractual failure). External risks are out of the project manager’s control, but may affect the direction of the project; these risks include costs, borrowing rates and raw material availability [12].

Current practice of risk management techniques in Egypt

The construction industry in Egypt is one of the main supports of Egyptian economy. The rapid growth of the Egyptian Construction Projects together with the unrest of the Egyptian society due to political and economic variables in the period that followed the 25th January Revolution calls for massive development in risk management techniques. These variables bring opportunities to researchers in the field of project management to develop effective risk management techniques to cope with risks associated with construction activities and to implement the projects in accordance with project objectives including time, cost, quality and safety.

Another factor that adds additional risks to construction projects in Egypt is the participation of foreign partners with the local stakeholders. This imposes risks such as differences in practices between domestic and foreign partners, policy and financial risks and legal and political risks. In addition to those risks, the inflation rate in Egypt is quite high: 10.2% (2011 EST.) [9], while the national currency is relatively weak, as in Feb. 2013 the USD reached 6.73 Egyptian pounds [10]. The above mentioned factors emphasize the vitality of monitoring and controlling the efficiency of risk management practices in construction projects in Egypt.

The political and economic variables in the discussed period in Egypt have been accompanied by a group of key risks, like the workers’ strikes, lack of fuel, unsecured roads between cities, changes that took place on the level of governmental officials, in addition to fire risks and major changes in currency prices. These risks that have lately become obvious and devastating were identified as major risks that entail efficient risk management strategies in the form of suitable mitigation actions.

Study objective

The objective of this paper is to identify the latest top major risk probabilities that affected construction projects in Egypt. This was fulfilled through obtaining feedback from different practitioners on the different aspects of risk management that aimed at:

•	Examining risk perception by the construction industry.

•	Identifying the latest probabilities of risk that were not weighed before in the risk management practices in Egyptian projects.

•	Classifying different types of risks regarding their source (external or internal risks).

•	Suggesting a strategy to manage risk in the form of a mitigation action for each type of identified risk.

Methodology

Although the need to manage risks in construction is relevant to all professionals and groups (client groups, design team, project management team, contractors, etc.) in the construction industry, this paper concentrated on the project management practices. The selected research methodology comprised a literature review, an open interview and a questionnaire. Primary data were collected by questionnaires and in-depth interviews, while secondary data were gathered by site visits and personal observations. Secondary data were collected with the aim of providing multiple sources of data for comparison. The questionnaire consisted of two kinds of questions; open- and closed-ended questions. It comprised two main sections, the first included general information about the respondents and the second carried a total of 65 risks associated with construction projects and asked respondents to review and indicate the likelihood of occurrence of these risks. The results of the respondents were compared to the likelihood of the occurrence of these risks before the specified time period of the study, where the variance was identified.

Target groups

The Egyptian construction industry comprises 14 registered houses of experience for consulting only, in addition to an undefined number of contracting companies and management firms [13]. The target groups of this study included representatives from 32 major construction project companies. The chosen companies have budgets that exceed 40 million USD. All the project management organizations deal with large-scale buildings, providing a wide range of project management services.

Three groups of variables were categorized to test differences in the opinions of respondents. These were: the working experience of the respondent, the respondents’ job position and the sector to which the respondents’ company belongs, whether public sector (owned by the government) or private sector (owned by individuals).

Work experience variable group

Two categories of respondents based on work experience are represented: the first refers to more than or equal 10 years of working experience, while the other group is less than 10 years of working experience. The questionnaires were completed by top management in the organizations (mainly directors and partners) and almost all of them (more than 90%) had over 10 years of construction experience. The respondents thus have the required professional and academic qualifications.

Job position variable group

A wide range of job position groups are included in this study; these groups are Management, top managers, Project Managers, Managers and vice-managers of functional departments, employees and project team members.

Company type variable group

This study included a variety of company types: government-owned companies, joint venture companies and private companies.

Verification of Samples

The Chi-Squared (χ²) test was chosen for testing hypotheses about variances in the respondents’ answers. This is represented in the Eq. (1(1) ${\chi }^2=(\text{O}-\text{E})2/\text{E}$(1) ), where (O) is the Observed Frequency in each category and (E) is the Expected Frequency in the corresponding category, the null hypothesis in this study is that the variables in the same group do not differ among themselves. The statistical significance level of 10 percent was used for the statistical tests. Since the study dealt with people’s opinion, 10 percent significance level is acceptable [11].(1) ${\chi }^2=(\text{O}-\text{E})2/\text{E}$(1)

Data analysis

A total of 32 questionnaires were distributed on the above company-type groups. A response rate was about 65%¹ and a variety of years of experience groups between 25 and 55 years old were included in this investigation. Ages from 45 to 55 were project managers; they represented about 60% of the research sample. All respondents had at least bachelor degree, 2 of them were PHD holders and 5 were master degree holders. Table 1 represents the distribution of respondents’ age, working experience and highest education. It also shows the age groups and education group sample. Thus on the basis of position, work experience and educational and professional background, it can be inferred that the respondents have adequate knowledge of the activities related to construction and associated risk.

Table 1 Distribution of respondents’ age, working experience and highest education.

	Percent%
Age
Group 25–45	40
Group 45–55	60
Total	100
Experience
<10 years	15
⩾10 years	85
Total	100
Highest education
Bachelor	66.7
Master	23.8
Doctor	9.5
Total	100

Determination of expected risks

In order to determine the major risks in construction projects, a checklist of risks was sourced from a wide range of literature including journal papers and books worldwide; this includes Perry and Hayes [15], Flanagan and Norman [14], Chapman [16] and Shen et al. [17]. A consultation was conducted with industry experts in Egypt to verify the risk list.

The list was then applied through the open interviews, where each respondent was asked first to identify the major key risks influencing their projects. The managers were then asked to prioritize these key risks. Finally, they were requested to judge two attributes of each risk: the probability of occurrence, denoted by (P), and the degree of impact, denoted by (I). The risk factor or index, denoted by (R), is the function of these two attributes, Eq. (2(2) $R=P\times I$(2) ):(2) $R=P\times I$(2)

The three variables (R), (P) and (I) are all measured numerically. The respondents judged the Probability of occurrence using the five-level judgment scale of: very high, high, medium, low and very low. The same scale was also applied to the degree of impact of the risk.

To apply the model, the opinion judgment scale was converted into numerical scales. The “very high” took a value of 0.9, and the “high,” “medium,” “low” and “very low” took values of 0.7, 0.5, 0.3 and 0.1 respectively [12].

Risk identification process

New probabilities of risk that were never used or weighed before in risk management for Egyptian projects were identified from Table 2. It represents the risk factors that are identified as previously mentioned by Eq. (2(2) $R=P\times I$(2) ) and calculates the deviation between expected and observed values as mentioned by Chi-Squared test in Eq. (1(1) ${\chi }^2=(\text{O}-\text{E})2/\text{E}$(1) ). Moreover, a classification is submitted to Table 2 for each risk to be classified into internal or external risk.

Table 2 Identification of risks.

Rank	Risk factor	Risk classification	R (Eq. (2(2) $R=P\times I$(2) ))	Deviation/variance (Eq. (1(1) ${\chi }^2=(\text{O}-\text{E})2/\text{E}$(1) ))
1	Currency fluctuation	External	0.4857	0.2213
2	Change in taxation/new tax rates	External	0.4767	0.212
3	Change energy cost/lack of fuel	External	0.4419	0.1989
4	Safety/unsecured roads	External	0.4324	0.2017
5	Official changes	External	0.4276	0.2029
6	Workers’ strikes	Internal	0.4252	0.1974
7	Fire risk	External/Internal	0.4195	0.2135
8	Bad communications between stakeholders	Internal	0.3938	0.1791
9	Poor documentations	Internal	0.3938	0.1756
10	Poor project planning & control	Internal	0.389	0.1724
11	Owner hesitation about design	Internal	0.3795	0.1735
12	Lack of decision making	Internal	0.361	0.1729
13	Poor material management & planning	Internal	0.3457	0.161
14	Poor equipment management & planning	Internal	0.3367	0.1648
15	Poor labor planning	Internal	0.3348	0.1767
16	Replacement of consultant	Internal	0.3343	0.1776
17	Increased material waste	Internal	0.3324	0.1588
18	Force majeure	External	0.331	0.1694
19	Geo-technical risks	External	0.3252	0.1884
20	New governmental acts or legislations	External	0.3224	0.1677
21	Change in regulations	External	0.3181	0.1887
22	Permits and licenses	External/Internal	0.3171	0.1885
23	Difficulties to erect temporary facilities	External/Internal	0.3157	0.1208
24	Restrictive site conditions	External/Internal	0.311	0.1659
25	Undefined authority	Internal	0.2986	0.1505
26	Safety regulations	Internal	0.2986	0.1489
27	Shortage of project facilitates	Internal	0.2857	0.1443
28	Delay of mobilization	Internal	0.2814	0.1444
29	Delay in material delivery	External/Internal	0.279	0.1776
30	Accept delay	Internal	0.2733	0.1828
31	Fridays’ Demonstrations	External	0.2657	0.1643
32	Governmental Delay Laws	External	0.2643	0.1864
33	Improving environment quality cost	External/Internal	0.2548	0.1546
34	Import/export restrictions	External	0.2543	0.1904
35	Cash Shortage	Internal	0.251	0.1156
36	Delay of owner payments	Internal	0.2443	0.1963
37	Currency fluctuation	External	0.2276	0.1176
38	Interest rate changes	External	0.2238	0.1625
39	Funding risk	External	0.2221	0.1726
40	Improper budgeting & contingencies	Internal	0.2205	0.1399
41	Replacing imported materials with local	External/Internal	0.22	0.1235
42	Change of material prices	External	0.2167	0.1681
43	Lack of experience	Internal	0.2014	0.1461
44	Third party for supervision	Internal	0.1881	0.1203
45	Quality assurance	Internal	0.1852	0.1433
46	Incomplete design	Internal	0.1795	0.1685
47	Defective design	Internal	0.1662	0.1059
48	Complexity of design	Internal	0.1629	0.1162
49	Ambiguities, inconsistency of specifications	Internal	0.149	0.1224
50	Surveying mistakes	Internal	0.14	0.1102
51	Defective work	Internal	0.1033	0.1011
52	Shortage of approved construction drawings	Internal	0.2386	0.167
53	Construction document conflicts	Internal	0.2276	0.1176
54	Contractor understanding to project nature	Internal	0.2238	0.1625
55	Construction technology available	External/Internal	0.2221	0.1726
56	Improper construction methods	Internal	0.2205	0.1399
57	Quality control & testing methods	Internal	0.22	0.1235
58	Defective material	Internal	0.2167	0.1681
59	Material storage	Internal	0.3171	0.2085
60	Material transportation	External/Internal	0.3157	0.1208
61	Conflict between actual quantities and contract quantities	Internal	0.311	0.1959
62	Equipment storage	Internal	0.2986	0.1505
63	Equipment transportation	Internal	0.2986	0.1489

Findings

The findings of this paper are concerned with the process of identifying, analyzing, classifying and mitigating the top major risks in construction projects in Egypt.

Identifying and analyzing top major risks

From the above (Table 2), it is noticed that the top risks due to economic and political variables are identified and could be analyzed into the following items:

Currency fluctuation

Political unrest is always associated with economic unrest and decrease in investments, which severely affect currency prices that, in turn, has major effects on imported materials or foreign consultants’ fees. The following Fig. 1 represents the exchange rate variation starting from Aug. 2012 to Feb. 2013.

Fig. 1 Currency Price changes. Dollar VS EGP [10].

Change in taxation/new tax rates

Due to the economic situation in Egypt after the 25th of January Revolution, the government changed rules of taxes that became unstable, thus affecting prices of materials (local or imported), equipment and even salaries of workers in the projects.

Change energy cost/lack of fuel

By the end of 2011 and until the time of writing this research, lack of fuel greatly affected the projects, especially when the project is based on mechanical machines. Also Car gas, natural gas and electric power are severely affecting the progress of projects. This problem had never appeared before 2011 or was ranked as low probability risk.

Safety/unsecured roads

Insecurity in general became a new risk in the Egyptian society, as Egypt was always known for security, especially between cities. This led some companies to use airplanes to transfer engineers between projects or make insurance on transferred materials or machines that crucially affect the project’s budget.

Official changes

Due to political unrest, government official changes led to problems concerning special cases of projects’ phases, regarding the built area or construction duration due to exceptional rules for these projects agreed upon with previous officials. This case is typically seen in large scale projects.

Workers’ strikes

This behavior was not commonly seen by workers before political changes happened in Egypt. After the 25th of January 2011 Revolution, workers’ strikes became one of the most common risks that could affect the time schedule of a project as well as its budget, depending on the reason of the strike, which is mostly financial.

Fire risk

Since the 25th of Jan. Revolution Egypt suffered from the occurrence of demonstrations all over the Egyptian cities, which led to increasing the events of violence, especially when the project happened to be beside a political party headquarters or demonstration squares (Tahrir square in Cairo, Al-Qa’id Ibrahim in Alex., Al-Arbi‘in in Suez, etc.), which were at risk of getting on fire by demonstrators; thus the probability that the project might catch fire increased.

Classification of top major risks

By analyzing the top risks from Table 2, it is obvious that during political and economic unrest the deviation of risk factor is extremely affected by external sources from the project. The top risks previously identified could be expressed in terms of external and internal risks, as shown in Table 3.

Table 3 Identifying, analyzing and classifying the top major risks due to economic and political variables.

Rank	Id of top major risk	Affecting variable		Source of risk		Risk factor/index R (Eq. (2(2) $R=P\times I$(2) ))	Deviation/variance (Eq. (1(1) ${\chi }^2=(\text{O}-\text{E})2/\text{E}$(1) ))
		Economic	Political	Internal	External
1	Currency fluctuation	√	√		√	0.49	0.2
2	Change in taxation/new tax rates	√	√		√	0.48	0.2
3	Change energy cost/lack of fuel	√	√		√	0.44	0.2
4	Safety/unsecured roads		√		√	0.43	0.2
5	Official changes		√		√	0.4276	0.2029
6	Workers’ Strikes	√	√	√		0.43	0.2
7	Fire risk		√	√	√	0.42	0.2

Suggested risk response strategies

In this part, the paper suggests suitable risk response strategies for the seven major identified key risks. The strategies include the implementation of some positive risk responses, such as exploiting, sharing, enhancing and accepting, and other negative risk responses, such as avoidance, mitigation, transfer and acceptance, Table 4.

Table 4 Risk response strategies.

Rank	Id of top major risk	Mitigation strategy (risk response)	Action taken
1	Currency fluctuation	Exploit share enhance accept	To be negotiated in contracts or meetings of stakeholders
2	Change in taxation/new tax rates	Avoidance mitigation transfer acceptance	Provide budget margin
3	Change energy cost/lack of fuel	Mitigate transfer accept	Provide schedule/budget margin
4	Safety/unsecured roads		Assigned to a professional party
5	Official changes	Avoidance mitigation transfer acceptance	Define authority between stakeholders with a flexibility of change- Selection of qualified/experienced consultant
6	Workers’ strikes	Avoidance mitigation transfer acceptance	Provide specified contracts with labor
7	Fire risk	Avoidance mitigation transfer acceptance	Provide assurance

Conclusions

Egyptian projects suffered newly identified risk probabilities that resulted from political and economic variables that took place between the time period January 2011 and January 2013, leading to the change of the risk management map of Egyptian projects.

This paper presents the research results obtained through questionnaire surveys conducted in Egypt. A total of 7 key risks were detected, based on a comprehensive assessment of their risk–index/score (R) comprising both the likelihood of occurrence (probability) and magnitude of consequence (impact), as well as the variance or deviation of this risk. The top major risks identified to be put into consideration in the risk process include: Currency price changes, New tax rates, Lack of fuel, Unsecured roads, Official changes, Workers’ strikes and Fire risk.

In addition to identifying the top major key risks, the paper also suggests a group of risk response strategies that suit each of the identified key risks. These risks and their equivalent response strategies have been identified to be added, if they do not already exist, or to have high probability in the risk process, in order to support project stakeholders to pick up their risk-response strategies at early stages of setting their risk plan.

Recommendations

This paper provides a number of recommendations for decision makers in construction projects in Egypt. These are:

•	Establishing an organization that follows the Ministry of Planning or the Ministry of Investment to be responsible for early warnings, the broadcasting of risks facing different fields of projects and for providing data to stakeholders before starting the project and during the phase of execution.

•	Improving the role of universities in developing risk knowledge within the construction profession by spreading the knowledge of risk standards among graduated engineers and adding risk courses to the under-graduate studies.

•	Developing new laws by Contractors Union and Engineering Syndicate that put into consideration risk factors that affect projects to maintain any problems which take place among project parties, especially due to political reasons.

•	Improving the role of insurance companies that help in eliminating a wide range of risks and assisting these companies to pay their financial legalities.

Conflict of interest

None.

Notes

Peer review under responsibility of Housing and Building National Research Center.

1 The response rate is typical of a construction industry questionnaire survey and cannot be regarded as biased according to Moser [18].