doi:10.3850/978-981-08-7920-4_S1-CP16-cd

ABSTRACT

Two contradictory assertions have been made in the field of international construction risk. One is that high-risk projects should yield high-returns, as in the field of financial investment. The other maintains that high-risk projects have a likelihood of increasing cost overruns, thereby decreasing profitability. This study is aimed at testing empirically these contradictory hypotheses on the basis of utility theory.We investigated 137 international construction projects carried out by 14 Korean contractors in 34 countries. This survey examined contingency, planned overhead and profit, cost overruns, and profit rate. Furthermore, the level of 71 risk factors was evaluated before and after starting construction. This study reveals that projects predicted as high-risk have a slight tendency to appropriate high contingency and planned overhead profit, but moderately experience cost overruns, thereby having a slight negative relationship with profits. In addition, projects that actually experience high-risk events after the start of construction trigger strongly cost overruns, thereby significantly lowering profitability. These results mean that the rules of “high risk, high return” should not be equally applied to the field of international construction. Although these results can be varied if the concept of return is extended to other values, such as obtaining know-how and future opportunities, this study contributes to evaluating the risk behavior for international construction projects.

Keywords: High-risk, High-returns, International construction risk, Risk behavior, Contingency, Expected profit cost variance, Actual profit rate.

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