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PhD thesis Chapter 1

PhD thesis Chapter 1
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  University of ReadingSchool of Construction Management andEngineering How contractors takeaccount of risk in thetender process: theoryand practice Submitted in partial fulfilment of therequirements for the degree of Doctor inPhilosophySamuel Laryea  November 2008 2  DECLARATION I confirm that this is my own work and that the use of all materialfrom other sources has been properly and fully acknowledged.………………….Samuel LaryeaNovember 2008i  ABSTRACT Formal and analytical models that contractors can incorporate intothe bidding process for pricing risk have been proposed by academicresearchers in recent years. However, they are rarely used inpractice. Indeed, a comprehensive survey of the constructionmanagement literature showed that 67 such models haveproliferated since 1971. Some studies have elicited reasons for thelow take-up of risk models by contractors but none has gone as far asexamining what contractors actually do. Following an exploratoryinterview and documentary analysis study involving sevencontractors in Ghana and five in the UK, four participant observationcase studies were carried out in different construction firms wherethe whole tender process was shadowed to gain a betterunderstanding of how contractors arrive at a bid price, and how thatprice is influenced by the apportionment of risk. This was comparedto propositions in 67 analytical risk models and significant differenceswere found. The tender process depended on the prevailing dailycircumstances of those involved in preparing the bid. The maintendering activities were estimated as calculations (67%),conversations (22%) and correspondence (11%). However, analyticalapproaches dwell mainly on calculations. Risk allowances of around1-2% of project cost were included in some bids. However, the mainmechanisms used for taking account of risks were the use of assumptions, qualifications, and clarifications in the tenderprogramme and price. In fact, most contractors would carry out acommercial analysis of the proposed conditions of contract anddecide on the best way to approach risks: either to avoid bidding atall, or qualify (or clarify) the commercial risks as part of the tendersubmission for post-tender negotiations. In relation to operationalrisks, most of the contractors tended to state clear assumptions uponwhich their offer was based. Thus contractors acknowledge the riskthat they should price. But the final settlement depends on a set of complex, micro-economic factors; hence risk accountability may besmaller than its true cost to a contractor. Risk apportionment occursat three stages of the whole bid-pricing process but analytical modelstend not to incorporate this. Indeed, contractors have benefited fromproject risk management theory in how a risk schedule is preparedfor assessing risks. However, to be effective, the 60+ modelsexamined ought to address the commercial exigencies of bidding,sporadic nature of the tender process, and the different stages androles involved in how contractors actually apportion risk in bids.ii  ACKNOWLEDGEMENTS First, I thank God Almighty for helping me with all the abilities andopportunities I have always needed to succeed. These thanks areexpressed in Psalms 18 and 144.I thank Professor Will Hughes, my supervisor, for providing me withthe initial idea, encouragement, guidance, and every support I haveneeded to do this work.I thank my family for their love and support for me: my mum, and mybrothers (Amartey, Ebenezer, and Amarlai). My parents sacrificedmuch for my education. But sadly, my dad died just one month afterI started this PhD. Therefore, I honour him, and I dedicate this workto the remembrance of his role in how far I have come.I thank the following people and institutions for helping me in diverseways: Mr Tim Carter, Mr John Laverty, Mr Eric Danso, Mr I. G. Duah,Prof. J. S. K Ayim, Prof. K. A. Andam (deceased), Prof. K. K. Adarkwa,Prof. Edward Badu, Prof. I. K. Dontwi, Prof. Denis Cioffi, Prof. GeorgeOfori, ABE Ventures, CAL Bank Ghana, Wilkado Construction Ltd, Travel House Ltd, Sarfo Mensah, Alex Bruce-Ghartey, Patrick Maison,Kwaw Andam, Paul Alagidede, Samuel Adu-Gyamfi, and Rev. PeterSagoe. Thank you to Jeni Giambona and Abbas Elmualim for your usefulcomments on earlier drafts. I thank all contractors who participatedto make the study possible. I thank the Kwame Nkrumah Universityof Science and Technology, Kumasi, Ghana.Finally, I thank everyone and all institutions in Ghana, US, UK, andSingapore who supported me while I studied at these various placesduring the PhD. Thank you all.iii
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