Risk assessment of construction projects using Monte Carlo simulation

Abstract

Purpose

This paper aims to develop a process for prioritizing project risks that integrates the decision-maker's risk attitude, uncertainty about risks both in terms of the associated probability and impact ratings, and correlations across risk assessments.

Design/methodology/approach

This paper adopts a Monte Carlo Simulation-based approach to capture the uncertainty associated with project risks. Risks are prioritized based on their relative expected utility values. The proposed process is operationalized through a real application in the construction industry.

Findings

The proposed process helped in identifying low-probability, high-impact risks that were overlooked in the conventional risk matrix-based prioritization scheme. While considering the expected risk exposure of individual risks, none of the risks were located in the high-risk exposure zone; however, the proposed Monte Carlo Simulation-based approach revealed risks with a high probability of occurrence in the high-risk exposure zone. Using the expected utility-based approach alone in prioritizing risks may lead to ignoring few critical risks, which can only be captured through a rigorous simulation-based approach.

Originality/value

Monte Carlo Simulation has been used to aggregate the risk matrix-based data and disaggregate and map the resulting risk profiles with underlying distributions. The proposed process supported risk prioritization based on the decision-maker's risk attitude and identified low-probability, high-impact risks and high-probability, high-impact risks.

Citation

Qazi, A. and Simsekler, M.C.E. (2021), "Risk assessment of construction projects using Monte Carlo simulation", International Journal of Managing Projects in Business, Vol. 14 No. 5, pp. 1202-1218. https://doi.org/10.1108/IJMPB-03-2020-0097