RISK MANAGEMENT AND ALLOCATION IN CONSTRUCTION PROJECTS APPLYING GAME THEORY

Abstract

The most principal source of the emergence of claims and conflicts in the contracts of design and construction is the lack of reconnaissance and management of risks in projects. As a result, it is expected that, with the management of the recognized risks via the contractual capacities, one can prevent the emergence and instatement of such claims and conflicts in this industry to a considerable extent. In the process of risk allocation, assigning full liability of certain risks to the contractor is not correct, since it results in making certain defensive policies on part of the contractor including the quality drop and approaching towards claims and suits which, ultimately, ends in the rise of costs and time of the project. As a result, with regard to this type of risks, it is required that the liabilities caused by the risk is shared among various factors involved in the contract and thus, in other words, the quantitative allocation of risk is carried out. In the process of negotiation for determining the percentage of the risk allocated to each of the contractual parties, despite the existence of the conflict of interests to be found among these factors or agents, there is a high tendency towards collaboration and arriving at a sort of agreement. In the present research, for the quantitative allocation of risk, game theory is applied which is a branch of science for studying mathematical models of conflict and collaboration between and among rational decision-makers. The suggested model presents a highly useful tool which can sufficiently address the criteria of preference such as utility and fairness and thus specify the percentage of a fair risk allocation.

Keywords:

Risk Management, Risk Management Allocation, Construction Projects, Game Theory