A quantitative risk management approach to the selection of construction contract provisions

[Extracts from introduction] … the purpose of this research .. is to illustrate a framework within which decisions pertaining to the contract documents are susceptible to quantitative evaluation. More specifically, the decisions to be considered are those contract decisions which deal with the treatment of risks … It should be made clear that the purpose of this research is not the discovery or invention of a new quantitative decision tool, but rather the application of many existing tools from other disciplines … should the application of these other disciplines afford a better way of approaching the unanswered questions of construction contracting, then this research will have made a contribution to the field of construction management. … The major conclusion of this research is that through the application of many other disciplines there is a better method for making decisions concerning the content of construction contracts than the "seat of the pants" or "majority rules" methods of the past. This dissertation develops the necessary steps to achieve that better method. The field of Risk Management has provided a rational method for the identification of risks and a logical approach to the classification of the various methods of dealing with an identified risk. The principles of Engineering Economy have provided the quantitative approach necessary to deal with the time value of money. Probability Theory has allowed the quantification of the uncertainty associated with making decisions which have future unknown consequences. Cardinal Utility Theory has provided a method of quantifying the varying risk attitudes among decision-makers, thus allowing this parameter to be entered directly into the decision problem. Probabilistic Decision Theory, an offshoot of Probability Theory, contributed a decision formulation procedure which enables the decision-maker to give structure to the decision problem. It enables the decision-maker to approach a complex problem by considering one aspect at a time. The field of Computer Science and the application of Monte Carlo Simulation made feasible the calculations and mathematical manipulations necessitated by the use of a probabilistic representation of uncertainty.