Risk Pricing in Construction Contracts in Saudia Arabia - Research Proposal Example

This report sets out some of the general risks to be taken into consideration, for application in the Saudi Arabian region. Most construction contracts originate through sealed bid auctions. The bids are generally prepared using approximations, with a risk allowance being included to cover any unforeseen circumstances, and inaccuracies in estimations.(Skitmore, 2001:800). Most construction companies have an overall risk management strategy, and the major issues arising in this context are (a) risk ownership, i.

e, which party owns the risk and (b) risk financing, i.e, how to allocate and use risk contingencies (Smith and Mema, 2006:5). One of the most important risks arising in construction contracts is the management of uncertainty, caused by two major factors: (a) complexity – where information is available in principle, but is too costly or time consuming to analyse (b) unpredictability – where past events do not provide a reliable guide for the future. In instances where there is enough data that is available to assign meaningful probabilities to the information that is required, then the uncertainty becomes a question of risk (Winch 2010:7).

The element of uncertainty is especially applicable in the context of price, because the price agreed to at the time of singing the contract and the actual price incurred are likely to change due to external factors in the environment that cannot be effectively predicted. In terms of managing the risk, dynamic uncertainty refers to the relative uncertainty at any point on the project life cycle, relative to earlier and later points on the cycle, but when adequate amounts of information are obtained in progressive stages, the levels of uncertainty are also reduced.

As Smith and Mema(2006:6) have pointed out, the management of risk largely entails the exercise of control over events in the future and this may involve the ability to