Risk Management of Construction Works by Means of the Utility Theory: A Case Study

Abstract

The construction works are implemented under conditions of risk. In this paper, a suggested method of risk analysis has been presented, based on the application of utility theory. This procedure embraces the following: data about conditions of construction, data about the economic situation, including a relationship between supply and demand, seasonality. Besides this approach includes variants of decisions, historical data, conditional probability, utility function. The method of defining the utility function can be briefly described as follows: the decision maker (for example, a contract engineer, building site manager) is faced with a choice between a certitude of a given result (a monetary value), and a lottery was to extreme results. The two contrasting (but practical) cases of function of utility, that is characteristic of a decision maker with an aversion to risk, and decision maker with a predilection to risk, are then analysed in detail. The economic effects of their decisions are then presented.