Role of expert knowledge in managing risks in the international growth projects of construction

contractors and suppliers

Lauri Palojärvi, TKK Helsinki University of Technology (e-mail: lauri.palojarvi@tkk.fi)

Juhani Kiiras, TKK Helsinki University of Technology (e-mail: juhani.kiiras@tkk.fi)

Pekka Huovinen, TKK Helsinki University of Technology (e-mail: pekka.huovinen@tkk.fi)

Abstract

The objective is to justify a pivotal role of expert knowledge and managerial expertise when a construction contractor or a building product supplier is managing risks in international growth projects. In the literature, the competent risk identification is a mandatory starting point for managing risks. In the case of construction projects, both history data and relevant information about future are, however, very rarely available in a real-time decision making situation. Therefore, statistical methods e.g. as part of a knowledge base are not feasible for risk identification or analysis in project-specific contexts. However, the assessment of consequences or alternative response measures may be performed with statistical means. In turn, the literature emphasizes primarily a reliance on human expert knowledge during risk identification, analysis, and response. Thus, it is proposed that practicing managers rely on expert knowledge. This role of expert knowledge is herein initially verified in the case of managing a major supplier’s FMO Tapiola office project in Finland. In principle, the full exploitation of expert knowledge can be enabled through various contractual arrangements and, thus, the high level of risk management can be assured in particular in complex, highly risky projects.

Keywords: building product supply, construction contracting, expert knowledge management, internationalization, risk management

1. Introduction

This paper is part of the ongoing doctoral study (within the area of construction management and economics at TKK) on managing risks in the international growth businesses of Finnish construction contractors and building product suppliers The rationale involves the growing international businesses of the Finnish construction industry. The national federation estimates that the combined volume of the export and the other foreign operations will exceed the domestic business volume in Finland by the year 2013 (Figure 1). Thus, the study seeks to find better methods to manage risks within the evolving context of international entries, start-up projects, mergers, acquisitions, post-merger integration projects, capacity investments, etc.

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Figure 1: Actual value (1993, 1998, and 2003) and forecasted value (2008 and 2013) of the foreign operations of the Finnish construction industry [1].

The literature on uncertainty, risk, crisis, and complexity implies that risk identification is a profound base for any proactive actions of risk management (e.g. [2] and [18]). It seems that there are two main lines of managing risks, i.e. (i) computer-based simulations are relied upon in assessment stages and (ii) (human) expert knowledge is being harnessed and exploited for entire risk management. Expert knowledge is herein recognized as one of the mandatory components of viable firm management. For the exploitation of internal or external expert knowledge, a necessary amount of managerial expertise is needed as well. This challenge of managing expert knowledge is herein addressed in particular in terms of finding and executing effective responses to many problems and peculiarities (aligning with Ofori [3]) in the focal context, i.e. when construction contractors and building product suppliers are managing their international growth projects.

The main objective of this paper is to justify the pivotal role of expert knowledge and managerial expertise when a construction contractor or a building product supplier is managing risks inherent in its international growth projects. In the case of construction projects, both history data and relevant information about future are very rarely available in a decision making situation. Therefore, statistical methods e.g. as part of a knowledge base are not feasible for risk identification or analysis in project-specific contexts. However, the assessment of consequences and alternative response measures may be well performed with statistical means. In turn, the reviewed literature emphasizes a reliance on expert knowledge during risk identification, analysis, and response.

Accordingly, the paper is structured as follows. The key findings from within the relevant risk management literature are reviewed in section 2. The proposed insights in managing international growth projects effectively with the help of expert knowledge are introduced in section 3. The initial verification of the role of expert knowledge is reported upon in section 4.

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Finally, both the contradictory and complementary aspects of the findings from within the literature, the proposed insights, and their verification are discussed in section 5.

2. Relevant findings in the risk management literature

The selected, relevant literature findings briefly highlight (a) a logical relationship between uncertainty and risk, and how to move from uncertainty to risk management, and (b) a process of proactive risk management in the construction industry as follows.

2.1 Uncertainty and risk management

Uncertainty prevails when a decision-maker has no historic data (e.g. “a group of instances”) relating to a situation for an event, conditions etc. to occur [4], [5]. Risk is a possibility that expectations are not met [6]. Risk is defined to arise from uncertainty by assessing, either rationally or intuitively, a probability and an impact of an uncertain event [7]. For the construction industry, risk management process has been defined to include risk identification, risk classification and analysis, and risk response (e.g. [8], [7]). Some authors stress an additional phase of risk control in order to emphasize the need of continuous feed-back and updating response actions. As to risk management strategies, the current thinking emphasizes pro-activeness, i.e. a profound importance of risk identification and response measures, rather than a detailed mathematic analysis of a probability and consequence distribu-tions for assessing consequences. Thus, focal companies should direct their efforts toward effective responses, calling for expert knowledge, especially when time is a scarce factor.

2.2 Risk identification in international construction projects

Standard project risk identification methods [9] such as checklist analyses, information gathering techniques, and documentation reviews rely on the archive information of somewhat similar and/or comparable projects or tasks, the careful collection of information from experts in various disciplines, and the corresponding documentation, e.g. in a form of risk registers. The latter may contain also information on the causes of risks, potential responses, and so on. In the context of construction, many authors have compiled the long, comprehensive lists of sources of risk such as success and failure factors in country/industry specific situations. Typically, Hansen and Millar [10] note that “the dominant sources of risk arise from errors in the specification of requirements and a lack of coordination within a network of project participants”. The identification itself can be repeated over and over again within the limits of time and other resources, when this is perceived necessary. Also “weak signals” or “early warnings” with their distant sources of prime events [11] can be used as the indicators of the expected occurrence of an identified significant risk.

It is herein posited that this standard approach is not enough vis-à-vis managing international growth projects. This is evident when we ask: What implications could international business

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environments bring along onto risk identification, compared with a situation where a focal stakeholder (e.g. a client, a contractor or a developer) operates in its national or home environment? What kind of expert knowledge should be mobilized to identify at least such risks which could significantly jeopardize the attainment of vital business goals? And further, what particular competence is needed for launching proactive response actions instead of just sitting and waiting for eventually crushing risk consequences to be dealt with? Relevant literature on managing risks in construction projects in foreign business environments is scarce but some relevant references were found as follows.

In the early 1990s, Flanagan [12] suggested flatter organizations to enable firms to move quickly into new markets. In turn, Radujkovic [13] has analyzed the main sources of internal and external risks and their drivers in construction projects (in Croatia) and he stated that many authors believe that the qualitative analysis (of risk) is most essential. There is much responsibility on company heads and project managers in dealing with risk and consequences. More recently, Ofori [3] defines that an internationalizing contractor must possess certain prerequisites and that managerial expertise is considered the most important because of the peculiarities and problems of overseas projects. Overall, many other country-specific papers exist but it is difficult to extract from them any universal list of problems and peculiarities which a successful firm must be able to cope.

3. Proposed insights on expert knowledge and managerial expertise required in the focal RM context

Herein, a set of insights on expert knowledge required in the focal RM context are synthesized based both on the prior findings and the primary author’s direct (admittedly subjective) experiences in various international business environments. Each construction project is one of a kind. No proper history exists and future events are uncertain. This uncertainty is amplified when a project type, a business environment or a business situation is new to a focal actor, resulting in a high rate of complexity. In order to move from uncertainty to competent risk management, one has to identify risks as well as to assess a probability and an impact of such uncertain events. Risk identification requires expert knowledge which may or may not be equipped with experience on somewhat similar or comparable situations. Besides, necessary managerial expertise must be available, literally embedded in the manager(s) in question, for leading the work of knowledgeable experts.

A starting point of effective risk management is a set of relevant expectations such as assumptions, believes, and so on. Professional risk identification –“what may cause a deviation and have significant consequences”- is being built on the expectations that are discussed, prioritized, and written down within the documentation on the focal business or project and its environment. If expectations are ill-defined, or entirely missing, then it will not be possible to define whether they will be met or not, and the respective risk cannot be identified nor responded to. The core objectives of construction projects are set at least in terms of cost (and/or profit), time and quality (comprising of scope and standard). Other objectives may be

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expressed e.g. in a form of influencing on corporate image, disturbing competitors, etc. A list of objectives may be updated at various project stages. By specifying “what could cause a problem”, a deviation, from those objectives, immediate respective risks can be identified and classified. By applying foreseen consequence(s) onto the respective probabilities of risk events, the significance of each risk can be assessed. The assessed risks can be presented e.g. with the isobars of Temper system [14] for the easy prioritization of risks and further response actions.

Causative events to immediate risks and their respective causative events can further be identified as far as appropriate (see Table 2). For the sake of order, identified risks must be classified into e.g. host country-related, contract-related, and force majeure risks [8], or external, internal, and unforeseen risks [7]. Likewise, many other authors have produced extensive lists for many kinds of projects and environments, and within their own contexts, they may serve well as checklists during risk identification.

What risks could be classified as related to international construction projects? Let us try to give a short and sketchy list of such local peculiarities, causing risks, to illustrate a need of local expert knowledge eventually required. (i) Local indigenous culture has its ways: In West Africa, the starting point, to measure streets, sewer lines and locations of 1200 residential dwellings, could not be marked on its place. The main reason was that the Resident Engineer was hesitant to take the responsibility. After 2 weeks of hassling back and forth, the Project Manager decided to tramp down the mark with his big rubber boot, and the surveyors started from that. All went well. (ii) Visible regional projects, to demonstrate innovations, new technologies etc., may become a subject of well-meaning but in reality disturbing local political ambitions: E.g. in Finland, regional politicians favored sometimes wood products and/or raw materials even regardless of their competitiveness. Some projects suffered from quality risk consequences on budgets and time schedules quite apart of image problems.-In Vietnam, an industrial dockyard, donated by Finland, was not suitable for the surrounding infrastructure, and turned out to be a big waste of money, time and effort.

(iii) Bribing of all magnitudes is always a highly peculiar, and local, venture: In Russian Military Village Program, it was well co-ordinate by client parties, and did not get “out of hands”. Some Finnish companies decided to stay out of it, and let the German main contractors to deal with the issue if applicable. Instead, the bankrupted Haka decided to obtain huge amounts of advance payments and has been a subject to several trials which the representatives of the bankrupted firm try to clarify. –In some other areas the problem has been avoided by making the “sponsorship” of e.g. 3 % mandatory, provided by a local company. (iv) Local national patterns may affect organizational structures: In an acquisition and merger project in Benelux-countries it turned out that is nearly impossible to place Dutch and Belgium national managers “ on top of each other” in the organization schemes , even when they were speaking similar languages of Dutch and Flemish.- In Nigeria, the sewer systems of Moslems and Christians had to be built separate even in the same building.- Finns have sometimes been good intermediators provided they have understood the local peculiarities well enough. (v) Local currencies may cause considerable risk: In Kenya, a Finnish contractor made a significant gain

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on the local Shilling, because it had contracted a large part of the contract sum to be payable in Swiss Francs, instead of Kenyan Shillings.

4. Exemplary case project – FMO Tapiola in Finland

An exemplary growth case project of a leading Finnish mechanical wood product supplier is herein briefly introduced, followed by the review of the relevant risk management actions in order to initially verify the proposed insights. The risk management of this real-life case is documented well (e.g. in the authentic memos and the minutes of the decision making meetings) due to a fact that the primary author could assume a role of an action researcher through all the stages of the project development process during the years 2002-2005. The case project was one of the piloted ones executed in the cross-cultural conditions to enable the execution of Metsäliitto/Finnforest’s “add value strategy” towards international markets primarily in Europe. It is easy to find out that an exemplary list (in section 3) can be applied to every cultural area, e.g. in the case of a French company trying to enter Finland’s market.

4.1 Brief of the development project

In September 2002, the Board of Finnforest Oy (later: FF) accepted a formal proposal to proceed with an architectural competition for a new office development in Southern Tapiola in the City of Espoo, next to the existing offices of Metsäliitto Group. It was to be the tallest office with wood in Europe- a 4-5-storey building of app. 8 000 sqm of office space and 5000 sqm of underground garage, with wooden structures and facades, with a total investment of app. 20 M€. The project “Finnforest Modular Office Tapiola” (later: FMOTapiola) was formally launched, first for the appraisal, and finally by the end of the year 2003 for the implementation.

In the case of FMO Tapiola Case Project, (1) the combined business and project objectives (set in 2002) were to enhance the company’s brand as an overall pioneer of building with wood and the internal cohesion, and (2) the project objectives included the competitive building cost frame (23-25 M€), the schedule (15 months), and the quality to attract investors (2003). In September 2002, the commitment was made to launch an international architectural competition for a FMO design. No fixed schedule was set, but the completion date was anticipated to be in the early 2005. The multiplication of the FMO concept elsewhere in the Scandinavia and the Western Europe was planned for. In September 2003, the well-known Pekka Helin was selected as the winner. The actual architectural design was guided to ensure a competitive building cost which could attract an insurance group to buy the object upon the completion, on a condition that FF remains as a tenant. The final decision on the investment would be made only when the cost budget was known and within a given frame of 23-25 M€. In addition, FF management set also the competitive schedule for the completed construction around the mid-2005. At this stage, the main risks, with consequences on the construction schedule, the cost budget, and/or the quality, were the land acquisition, the urban planning, and “too a good” building design.

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Table 1: Brief of an exemplary, FMO Tapiola case project developed in the years 2002-2005.

Project developer

Finnforest Corporation (a part of Metsäliitto)

Ultimate (current) owner

Tapiola (a major Finnish insurance group)

Project location

Tapiola in City of Espoo, Finland

Strategic background

To campaign for more value added wood products in construction.

Mean to campaign

To develop a real and visible pioneering building object; a new concept to be multiplied in large foreign building markets.

Building object

A 4-storey 8000 sqm office building with wooden structures, facades, and interiors plus a 5000 sqm car park as the foundation. The total investment of app. 25 M€. To be competitive against a simulated concrete building of the same size and office layout design.

Schedule

In total, 3 years consisting of the 15-month construction stage between June 2004 and September 2005.

Figure 1: FMO Tapiola case project.

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In December 2003, the FF Board approved the final plan with the targets for the incorporation of the entire real estate object, the project management, the cost budget, the financing based on the future selling of the object, and the schedule. Thereafter, the project was to be carried out as a separate company “FMO Tapiola” with its own Board and general manager (GM). The final project objective was that FMO should be competitive in terms of the quality, the cost, and the construction schedule. The main specified risks were the urban planning (causing delays), design (increasing the cost), and performance of the wood structures. The risk assessment was based on the expert knowledge and the choice of the corresponding management actions, because no computerized tools were available for these unique tasks.

4.2 Business brief, uncertainty and risk identification, and risk management actions

In Autumn 2002, FF launched the architectural competition, a relatively minor stake, because uncertainty about the viability of the entire idea was not fully removed yet. Therefore, no capital was really committed. Complexity was reduced by separating the design competition (including the identification of a suitable plot of land) and the consequent appraisal from the actual implementation stage. The brand and reputation-related business objectives were timely built into the competition program. It was imminent that FF´s management cadres of the mechanical wood industry culture did not have all the required competencies to manage the complex project. The primary risks were dealt with as follows.

If (1) a risk of not having required competencies would materialize, there would have been direct consequences on the project cost, the schedule, and the overall quality, besides the brand and image. Consequently, a strong CM consultant was hired for FMO, first for programming and budgeting purposes. The other external specialist was engaged to find a suitable plot. For the architectural competition, a jury was established with City of Espoo and SAFA (Finnish Architects´Association). FF´s specialists were working on wooden building part solutions to be incorporated within the competition program. The good publicity for the competition was secured by announcing the results exactly on the 50th anniversary of Tapiola Garden City – the well-known place to architects around the world.

During the competition, it was discovered that, by strong outsiders, the jury was pushed to select a given company to win. This was of course against the ethical rules. How to manage such a risk of future interventions? Somehow the project would have to be made immune against inappropriate interventions during the implementation. (2) A risk of crisis could not be taken. Thus, the entire project was planned to be incorporated, which form was to give a sufficient independency – and even a protection – for project management through the implementation stage. A real estate company was to be formed and it was to be supported by the original CM consultant, assigned already in Autumn 2002.

With these prerequisites, including the architects and their winning design, the uncertainty of the cost (the key to raise the project financing) was by now turned into a risk. With the fixed

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quality of the design, the budget frame was not to be exceeded. Accordingly, (3) various identified reasons to cause overruns of budget (or time schedule) as consequences, were considered as risks. The complexity was high: The tallest wood-structured office building in Europe, with the 25-M€ budget, in maximum, and the major insurance company as the future owner, FF´s unusual double role as the developer and supplier of the building frame and the façade, the evident and challenging product development needs, FF’s individual units as the suppliers with the involvement in the erection works, the fire safety issues, etc. All these items were accumulating to the high degree of complexity. A fact that the first-class consultants were to be assigned for the CM-based implementation did certainly not reduce the complexity. Consequently, a risk of a lack of competence was responded to by hiring the competent external key experts of the relatively independent real estate company and by establishing a multi-skilled Board with the members (the regular FF managers) having the skills on the general and project management, the finance, the law, and the wood products) for the real estate company. The other mandatory skills were secured through the trade contracts.

The remaining main risks, as identified in December 2003, were to be managed as follows. (4) A risk of delays due to the urban planning and the building permission complications was managed by the early co-operation with City of Espoo. In turn, the city badly wanted to sell the land for cash. Besides, local residents were informed about the project early rather than late. (5) A risk of the performance of the wood products was the most demanding part of the object in technical terms. This risk was managed by retaining it with FF´s own units. They were by far in the best position to understand and to control such a risk, they cooperated with the designers, and they were contractually in charge of the erection as well. The competitive quality was to be provided by the designers, under the new concept of the architect to become “Principal Designer”, except for the structural engineering. The structural design was further confirmed with the other new method of “Pruefung” by the separate independent engineers. The quality from end users’ point of view was pre-planned to be measured with the three indicators: the quality of inside air, the acoustics, and the lamination. The ordering for the redesign work was allowed for in the respective contracts.

When the main design was almost complete, and several work package tenders available, an almost 15 % budget overrun was envisaged (in Spring 2004). Both the room program and the standard of the design were changed to bring the budget into the frame. The selected contractual form of the divided contracts, coordinated by the CM consultants, allowed this. Instead, a general contract form had been difficult due to so many changes and a fact that bidders on construction works had laid high risk premiums on wood. The attainment of the schedule targets involved the solving of many problems throughout the construction period. CEO´s hasty announcement of the completion date at the architectural competition ceremony worsened this by causing a “regret risk” as Lofthus’ [16] syndrome. The early delay of the six weeks in the concrete foundation works – due to the contractor’s poor performance - was never caught up, and the delay was even increased during the concreting of the upper parts of the floors. However, the increased control meetings, the official pushing of the contractor plus the allowed reserve in the overall schedule managed to keep the original inauguration date on Sept 4, 2005 –Tapiola Garden City’s 52nd Anniversary.

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Table 2: FMO Tapiola Case – The authentic major risk breakdown structure for the developer’s view (applying Hillson [15]).

In the project case, the vital risks were identified by the external and internal experts of the respective project environment (in Finland), although the planned future market area included most of the Northern and Western Europe. The response called for several management decisions, some proposed by those experts and some not. In many cases, the roots were laying deep in FF´s corporate culture which could not be changed overnight. The major design change and the flexible CM contract with the divided packages were vital in order to meet the budget.

Because the project type, a medium-storey building, was new to the entire wood product industry in Finland, FMO RE company as the developer hired fairly many outside experts from the other industries, but kept the business management tightly within its own hands. During the discussion afterwards, it was contemplated whether the expert knowledge and the managerial expertise in risk management could have been replaced with other methods (tools).

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5. Discussion

The relevant literature is limited [19]. Nevertheless, some seasoned authors suggest that the use of expert knowledge and managerial expertise is pivotal for construction project risk management in foreign business environments. Uncertainty is being turned to risk without much help of quantitative risk assessments based on computer simulations. No widely adopted, detailed lists of risk types exist for identification. Existing lists are rather industry, project, business environment and even situation type specific – one of a kind and without a history.

Within the exemplary project case, a few identified risks were duly managed, following the combined or even dominant opinions of the individual experts. Also the sources of risks were analyzed, by individual experts, for better understanding of alternative measures of response. However, an unidentified risk occurred with potentially important consequences but, again, expert knowledge was used to manage the consequences in a satisfactory way. The main risks of the case project could not have been identified with any available risk registers, except the risk of the slow urban planning procedures. The other main risks were highly wood product industry or actor (FF) specific, or both. A young history of some similar instances did exist and the experts knew about them. It was very much along with the best practices of the profession to find the effective solutions to the identified risks and the problematic issues, by relying on the expert knowledge. The project management team was made strong enough and immune even against the foreseeable interventions and changes of the building design or the main contracts.

It seems that available computer-based quantitative methods (e.g. Monte Carlo simulation, fuzzy logics, and Temper-like programs) are mainly designed to assess consequences but not to identify risks or to work out response actions. The reasonably managed expert meetings were here sufficient to find the adequate response or at least to deal with the consequences (even the ones of an unidentified risk). The only foreseeable, eventual crisis was not possible to be assessed by running it through computer simulations for confidentiality reasons. Suitable simulation methods were not available for the other main risks, not even with the assigned high-class CM professionals. Nobody wanted to try any such methods for the first time. The hiring of the experts called for such managerial expertise which was not available within FF due to the prevailing corporate culture. The common threat to exceed the budget was turned down with the flexible, divided contracts. Consequently, the changes of the design were possible without the huge claims of the main contractor and the budget was kept. This action required the thorough understanding of the local conditions in terms of high demand, wary main contractors, and the bad reputation of the earlier large building contracts with wood in Finland.

Finally, it is summed up that the knowledge of many disciplinary experts was harnessed and coordinated with the appropriate, embedded managerial expertise. The method was to conduct the meetings and discussions for the identification, assessment and response through all the stages (aligning with Sun et al. [17]). Ex post, one can state that various budget and schedule deviations might have been possible to be simulated (by e.g. risk assessment techniques) but the response actions, the most important stage upon identification, had most likely not benefited

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from relying upon such methods. Same applies to the only foreseeable potential crisis where the obvious need of confidentiality prevented such a simulation.

References

[1] RT The Confederation of the Finnish Construction Industries. 2007. Statistics on the development of foreign operations of the Finnish construction industry. RT, Helsinki.

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[3] Ofori, G. 2003. Frameworks for analyzing international construction. Construction Management and Economics, 21(June): 379-391.

[4] Knight, F.H. 1921. Risk, uncertainty, and profit. Houghton Mifflin, Boston.

[5] Smith, N.J., (ed.). 2003. Appraisal, risk, and uncertainty. Thomas Telford.

[6] Lifson, M.W. & Scheifer, E.F. 1982. Decision and risk analysis for construction management. John Wiley & Sons.

[8] Palojärvi, L. 1986. How to manage risk in construction export. Licentiate thesis. Publication No. 76. TKK Construction Economics and Management, Espoo. (in Finnish)

[9] PMP Study Guide. 2005. Wiley Publishing, Hoboken.

[10] Hansen, K.L. & Millar, J.E. 1997. Constructing reasonably believable edifices: Lessons from software, implications for construction. Kähkönen, K. & Artto, K.A. (eds.) Managing Risks in Projects. E & FN Spon, London: 255-264.

[11] Nikander, I. 2002. Early warnings - A phenomenon in project management. Doctoral Thesis. Helsinki University of Technology, Espoo.

[12] Flanagan, R. 1994. The features of successful construction companies in the international construction market. Proceedings of A.J.Etkin Seminar. CIB and Tecnion, Haifa.

[13] Radujkovic, M. 1997. Risk sources and drivers in construction projects. Kähkönen, K. & Artto, K.A. (eds.) Managing Risks in Projects. E & FN Spon, London: 275-283.

[14] Kähkönen, K. 2004. Project risk management in international construction.

[15] Hillson, D. 2002. PMI Proceedings, Oct 3-10, 2002.

[16] Lofthus, M. 1997. Lecture. EPPW. UMIST, Manchester.

[17] Sun, Y., Fang, D., Wang, S., Dai, M. & Lv, X. 2008. Safety risk identification and assessment for Beijing Olympic venues construction. Journal of Management in Engineering, 24(1): 40-47.

[18] Artto, K., Kähkönen, K. & Pitkänen, P. 2000. A story of risk management. PMA Finland, Helsinki.

[19] Ahonen, L. 2007. Managing uncertainty, complexity, risk and complexity in construction. Master’s thesis. TKK Helsinki University of Technology, Espoo.

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