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OBAJU, BIODUN NATHANIEL

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PROJECT TOPIC AND MATERIAL ON AN ASSESSMENT OF CONTRACTOR’S RISKS EXPOSURE WITHIN SOME STANDARD FORMS OF BUILDING CONTRACT IN NIGERIA

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  • Name: AN ASSESSMENT OF CONTRACTOR’S RISKS EXPOSURE WITHIN SOME STANDARD FORMS OF BUILDING CONTRACT IN NIGERIA
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ABSTRACT

Construction projects are subjected to several risks due to different activities involved.
The activities are performed by several parties under different circumstances. Among
the various stakeholders the Contractor has been identified to be the party that carries
the highest number of risks. They are mostly exposed to contractual risks which occur
as a function of contract provisions and clauses. This research work identified and
assessed the risks which Contractors are exposed to within some Standard Forms of
Contract in Nigeria. It further determined the likelihood of occurrence of the identified
risks, impact on the risks on Contractors and the level of risks. Data were collected
through questionnaires distributed to some Contractors around Abuja and analysed
using qualitative risk analysis technique. The research identified 35 potential risk
factors with 54% of the risks emanating from the Clients, 31% from the Architect, 6%
from the Quantity Surveyor, 6% from the Project Managers and 3% from the
government agents. It also found out that failures to write instructions regarding
variations and documents which are not issued on time are the major potential risk
factors with high likelihood of occurrence while the other risk factors have moderate
likelihood of occurrence. Thirteen (13) potential risk factors were found to have high
impact on Contractors and fifteen (15) are high degree of risk. It concluded that
Contractors must understand the nature of risks, their source and the extent of
exposure so as to pay attention to dealing with such risks in present and future
projects. The study therefore recommended that Contractor should pay attention to
risks with high likelihood of occurrence so as to reduce their impact, should protect
themselves against risks by contingency, warn parties of potential delays and its
implications, negotiate construction schedule with client and allow for buffer time, the
contractor should ensure working with carefully prepared and coordinated drawings,
establish clear line of communications for receiving and responding to instructions and
collaborative effort from all the participants of the project.

TABLE OF CONTENTS

Title page … … … … … … … … … i
Declaration …. … … … … … … … … …. ii
Certification … … … … … … … … … iii
Dedication … … … … … … … … … iv
Acknowledgement … … … … … … … … v
Abstract … … … … … … … … … … vi
Table of Content … … … … … … … … …. vii
CHAPTER 1
1.0 INTRODUCTION
1.1 Background of Study…………………….…………………………………………1
1.2 Statement of Problem……………………………………………………….……….3
1.3 Significance of the Study…………………………………..………………………..3
1.4 Aim and Objectives………………………………………….…………….……..….4
1.5 Scope…………………………………………………………………….………..….4
1.6 Limitation………………………………………………………………..………..…..5
CHAPTER 2
2.0 LITERATURE REVIEW
2.1Nature of construction contracts…………………………………………………….6
2.2The Standard Forms of Building Contract……………………………….……….…8
2.3Participants in the Building Construction……………………………….…….…….10
2.4 Obligations of the Parties to the Contract…………………………….……………12
2.4.1Contractors Obligations…………………………………………………..……..…..12
2.4.2 Employers Obligations…………………………………………………..……….….13
2.5 Risk in Construction Projects……………………………………..………………….15
2.51Risk Classification…………………………………………………………..…..……19
2.5.1.1 Construction Related Risks……………………………………….…………..19
2.5.1.2 Contractual and Legal Risks………………………………………….……….19
2.5.1.3 Financial and Economic Risks……………………………………………….20
2.5.1.4 Physical Risks………………………………………..………………………..20
2.5.1.5 Performance Related Risks…………………………..…………………………20
2.5.1.6 Political and Social Risks………………………………..…………………….21
2.5.2 Sources of Risks in Construction Projects…………………………………..……21
2.5.3 Risk Assessment……………………………………………………….……..23
CHAPTER 3
RESEARCH METHODOLOGY
3.0 Research Design…………………….………………………………………….…..28
3.1 Research instrument……………….………………………………………..….…..28
3.2 Data Collection…………………….………………………………………………..29
3.3 Data Analysis……………………………………………………………………….29
CHAPTER 4
RESULT AND DISCUSSION
4.1 Presentation of Results……………………………………..………………….…..33
4.1.2 General Information of Respondent…………….………………………….…..33
4.1.3 Potential Risk Factors………….…………………………….………..………….35
4.1.4 Sources of Risks to Contractors…………………….…………………………..38
4.1.5 Likelihood of Occurrence of the Risks…………..…………………….……….40
4.1.6 Impact of the risks………………………………….………………….…………42
4.1.7 Degree of Risk……………………………….…………………………………..44
4.2 Discussion of Result……………………………………………………………46
4.2.1 Sources of Risk factors………………………………………………………….46
4.2.1.1 Client as a Source of Risk……………….……………………………………..47
4.2.1.2 Architect as a Source of Risk…………………………………………………47
4.2.1.3 Quantity Surveyor as a Source of Risk………………………………………47
4.2.1.4 Project Manager as a Source of Risk……………………….………………48
4.2.1.5 Government as a Source of Risk……………………….……………………48
4.2.2 Likelihood of occurrence of Risk Factors………….…………………………48
4.2.2.1 Failure to Write Instruction regarding Variations…………………………….49
4.2.2.2 Drawings and Documents not issued on time…………………..…………49
4.2.3 Impact of Risk Factors on Contractors and Degree of Risk……………..……..49
4.2.3.1 Delay in Making Interim payments………………….……………………….50
4.2.3.2 Failure to Reimburse for Direct Loss and Expenses……………………….…..50
4.2.3.3 Verbal Instructions not Backed by Writing…………………………………….51
4.2.3.4 Delay in Issuing Interim Certificate……………………….………..………51
4.2.3.5 Adjustment to the Completion Time of Project…………………….………51
4.2.3.6 Inadequate or Insufficient Site Information…………………………………52
4.2.3.7 Inaccessibility to Necessary Contract Documents……………….………….52
4.2.3.8 Unfair or Unrealizable Programme of Work………………………………..53
4.2.3.9 Delay in issuing and Responding to Instructions…………………………..53
4.2.3.10 Defective/incorrect Design……………………………………..……………53
4.2.3.11 Misinterpretation in Contract Conditions……………………….……….….53
4.2.3.12 Discrepancies in Drawings and Specifications……………….………….…54
4.2.3.13 Changes in Design…………………………………………..…………….….54
CHAPTER 5
CONCLUSIONS AND RECOMMENDATIONS
5.1 Summary of Findings……………………………………………….…………51
5.2 Conclusions…………………………………………………………………….51
5.3 Recommendations………………………………………………………….…52
5.4 Major Contributions to Knowledge………………………………………….53

CHAPTER ONE

BACKGROUND OF STUDY
The construction industry is a unique and dynamic industry of the economy; in Nigeria it
accounts for over 1.4% of its Gross Domestic Product and also it is a large employer of
labour (Oluwakiyesi, 2011). But over the years it has been criticized for its expensive and
wasteful nature, low productivity, quality problem and project delay. The reasons for all
these being are as varied, diverse and complex as the products of this industry itself. The
process of developing a project from initial investment appraisal to completion and into
use is complex (Flanagan and Norman, 2003). It is a generally recognized fact that those
within the construction industry are continually faced with a variety of situations
involving many unknown, unexpected, frequently undesirable and often unpredictable
factors. These uncertain situations according to Turner (1990) have made many projects to
fall short of the desired objectives of cost, time, quality and satisfaction.
Project Management Institute (2000) defines risk as uncertain event or condition that if it
occurs has a positive or negative effect on the project objective. Bufaied (1987) also
describes risk in relation to construction as a variance in the process of a construction
project whose variation results in uncertainty as to the final cost, duration and quality of
the project. There are many risks involved in construction projects, which could be
attributed to a number of reasons; amongst them are the nature of the construction process,
the complexity and time-consuming design and construction activities, the involvement of
a multitude of people, from different organisations, with different skills and interests, all
resulting in accumulative associated risks for the project. Hence, a great deal of effort is
required to co-ordinate the wide range of activities that are undertaken (Chapman and
Ward, 1997; Shen, 1999). As the size and complexity of the projects have increased, the
ability to manage risks throughout the construction processes has become a central
concern in the attempt to prevent unwanted consequences (Maytoren et al., 2007).
Different project risks have to be allocated to the party to the project on the basis of who
has best qualifications for dealing with a specific risk (Sou, 2000). However, in many
projects there are attempts by parties trying to avoid risks as far as possible and let
somebody else in the value chain deal with the risks. Majority of project risks are usually
borne by contractors (Andi, 2006); this is because contractors are usually visible for
almost the entire project life- cycle, hence contractors are exposed to risks and are
constantly saddled with the responsibility of managing risks and uncertainties inherent in
the project life-cycle.
Studies carried out by Akintoye and Mcleod (1997), Olatunji (2007) Onukwuba et al
(2009) and Tang (2009) identified some risks contractors are commonly exposed to while
executing contracts. These risks are grouped into; Contractual, Political, Performance,
Financial, Technical and Environmental risks. The consequences of these risks factors are
claims, dispute, poor quality work, delay, disruption of work, increase in price of
materials, dispute, and stoppage of work etc. The studies further revealed that contractual
risks have the greatest effect on projects because the actions of parties to contract in
responding to duties and obligations dictate the speed of the project execution and
eventual completion. These challenges prompted this study on risks that contractors are
exposed to within some standard forms of building contracts in Nigeria.
1.2 STATEMENT OF RESEARCH PROBLEM
Akintoye and Macleod (1997) identified contractual risks as a fundamental risk in project
management, recognized as having most adverse consequences on the successful
completion of construction project. Contractual risks was also revealed to be the risk
mostly encountered by contractors in Nigeria (Olatunji, 2007) and identified to have the
consequences of claims, disputes, disruption of work, stoppage of work, lack of coordination,
delays and inflated costs. Since construction projects are often executed under
contractual agreement and impose numerous obligations and duties on parties to the
contract; this study intends to identify common contract provisions that form as risks to
contractors within some standard forms of building contract in Nigeria.
Furthermore, a study carried out in South Africa by Harinarain et al (2008) to identify and
quantify contractors’ risk sources as imposed by Joint Building Contract Committee
(JBCC) Principal Building Agreement Series 2000 found out that the risk sources to the
contractors (ranked from highest to the least) are client, subcontractor, quantity surveyor,
principal agent, architect, engineer, government authorities and suppliers. However,
Chapman & Ward (1997) and Project Management Book of Knowledge (2008) revealed
that it is not just enough to identify risks and their sources without prioritizing them by
assessing and combining their probability of occurrence and consequences, or impact.
Williams (1996) also argue that proper consideration of project risk requires the
consideration of both likelihood and impact of risk. Hence there is a need to carryout
study with reference to the standard forms of building contract that are being used in
Nigeria.
1.3 SIGNIFICANCE OF THE STUDY
Risk has significant impact on construction projects delivery (Ahmad et al., 2007) and the
issue of risk has also become quite topical and its study within the construction industry is
one that needs to be considered in order to have a clearer and structured approach to
handling potential risks. Therefore it has become imperative to critically address risks
exposed to contractors in some standard forms of contract in Nigeria in order to ascertain
not just their sources but also their intensity or severity.
This study would enable contractors pay attention when dealing with stakeholders and
risks associated with them in present and future projects. Furthermore, the study will assist
contractors to be aware of contract provisions that intend to increase their risk and also
expose weak links in the construction process. The research would add and enrich existing
knowledge in the management of risk in the Nigeria’s construction industry.
1.4 AIM AND OBJECTIVES OF THE STUDY
The aim of this research is to assess risks that contractors are exposed to within some
Standard Forms of Building Contract in Nigeria.
To achieve this aim the following are the objectives;
i. To identify potential risk factors contractors are exposed to within the Standard
form of Building Contracts.
ii. To classify sources of these risk factors.
iii. To determine the likelihood of occurrence as well as impact of these risks.

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