Since the financial crisis of 2007, construction companies in the Netherlands have seen shrinking profit margins, due to for instance project and process success criteria that have been extended beyond economic objectives to include environmental and social requirements, increasing stakeholder requirements, disrupted supply chains due to global shocks, increased material costs and labor shortages. As part of the call for the continued professionalization of internal business processes, aimed at increased transparency and improved accountability, a holistic approach to risk management at the enterprise level has been on the rise to deal with cross-company risk. Enterprise Risk Management (ERM) is the leading paradigm for holistic company-wide risk management as it aims to bridge the traditional company silos and connect risk management, decision-making, company objectives and control structures.

Designing and developing an ERM system at a construction company requires a customized approach that strikes a balance between top-down and bottom-up information flows and diverse sectional interests while aligning vertical and horizontal risk management (RM) and internal control (IC) structures in order to sculpt an ERM system that is fit-for-purpose. In spite of efforts to the contrary, the academic literature shows however that ERM implementation can often result in decoupling (Arena et al., 2010). When this happens, ERM and RM processes are not integrated into work practices and are perceived as cumbersome tick-the-box exercises, contributing little to core tasks, and are seen as compliance and assurance controls for the benefit of external stakeholders that purport to achieve the “risk management of everything” (Power, 2004) which due to a lack of any real meaningfulness in the minds of practitioners leads in fact to the “risk management of nothing” (Power, 2009).

The integration of existing RM and IC practices into a company wide risk management system is no easy task. External frameworks such as COSO’s Enterprise Risk Management Framework (2004) offer prescriptive, idealized guidance that is difficult to translate to practice. The academic literature shows that contextual factors play a critical role in designing ERM systems and therefore the quality and influence of these factors must be identified and understood in order to shape ERM implementation in a specific setting. This study promotes the argument put forth by multiple authors such as Bresnen et al. (2004), Hsu et al. (2014) and Jack & Kholeif (2007) that the use of domain theory (i.e. theory on ERM and organizational culture) combined with social theory (i.e. theory from the field of sociology and behavioral sciencies) can offer a more complete view of the factors at play in this process. To this end, concepts from Giddens’ Structuration Theory (1984) have been used as sensitizing concepts in the analysis of the data. The central tenet of ST is the ‘duality of structure’ which examines the relationship between the ST idea of ‘structure’ (i.e. organizational structures of meanings, power and norms) and ‘agency’ (i.e. actions of organizational actors). In this study, the examination focuses on how decisions and resulting actions of the board and top management (ST agency) affects company risk culture and the design of formal ERM elements (together ST structures). The outcomes of this feedback loop can be observed in ERM and RM practices at different levels of the company though time. Analyzing ERM implementation in this way offers a view on how ERM and RM practices change or endure and lays bear the mechanisms that contribute to this...

Despite the severity and high frequency of cost overruns in construction projects, it is considered a rule rather than an exception. This phenomenon occurs when the initially estimated budget does not suffice the actual costs needed to realise the project. Uncertainty and bias challenge the ability to make cost estimates. Incorrect estimates of indirect costs, including risks, reservations and project organisational costs, are acknowledged as a frequent cause for cost overruns. Regardless of the risk and cost contingency management tools in literature and their application in practice, project uncertainties are still underestimated and insufficiently managed.

During the execution phase projects are monitored with performance indicators, which provide information about past events or activities. This means these indicators are lagging, hence it limits proactive project management. On the contrary, leading indicators could function as early warning signs as they present themselves before potential issues arise, or risks materialize.

The objective of this research is to improve the cost contingency process by implementing early warning signs, in order to proactively manage projects and minimise cost overruns and materialized risks. In order to achieve this objective the following main research question is formulated: “How can early warning signs be used in large construction projects to improve accuracy of cost contingency estimates and management in order to minimize cost overruns?”

Concluding from the empirical study, early warning signs can be implemented in the cost contingency process by shifting the focus of risk management from mitigating and managing the effects of risks towards the causes of risks. Subsequently, risk strategies and mitigation measures can be more effective when aimed at the origin of the issue, instead of the direct issue leading to the risk. It is valuable to examine the risks as a system or network, instead of single problems, because it provides a better representation of reality and the links between risks or other events reveal information about correlation or side effects. Consequently, mitigation measures can increase in efficiency, when one cause, leading to multiple risks, is targeted. Furthermore, materialization of a risk is detected as an early warning sign which contains information about causes or circumstances that trigger other risks as well. Additionally, the increase of a RISMAN score indicates a change in project circumstances and therefore can be used as an early warning for materialization of risks. The justification for an increase in RISMAN score is diverse, and should thus be analysed to reveal the specific information needed to prevent materialization of risks.

A common database contributes to the early warning sign approach as well, because it overcomes the in the case study identified ‘surveillance filter’, by improving collection and transfer of information. Tracking the cost contingency increases the accuracy of this estimate in general, because it provides insight into the development during project phases and the actual spending pattern. And when this info is stored in a database it allows referencing from previous projects, hence including an ‘outside view’.

Risk management is undoubtedly a precious component of the overall project management field. It assists in identifying, assessing and mitigating the uncertainties that are present in a project. These uncertainties affect important measures of a project, of which cost and schedule are the most prominent, and consequently put project success under pressure. Risk analysis, especially in its quantitative form, is a core process of risk management that provides valuable insights regarding these uncertainties. Numerous different procedures for quantitative risk analysis exist, but generally, they can be classified in two types based on the way they treat the cost and schedule components of a project. In the Separated Approach two risk analyses are performed, one for schedule and one for cost, which are independent of each other. In the Integrated Approach one risk analysis is performed, where schedule and cost components are simultaneously analyzed, and are no longer independent of each other. The advantages and disadvantages for each approach are well described in literature. However, there is little empirical evidence of the performance of different approaches when they are applied on real projects. This research tries to fill this gap by comparing the outcomes of different approaches when they are implemented on a real project, against the actual outcomes of the project to get an indication of their relative performance. Particularly, the Proposed Separate Approach, the Proposed Integrated Approach and the Company’s Separated Approach are applied on a completed project and their outcomes regarding cost and schedule contingency are compared to each other and to the actual project outcomes. Based on this comparison, a conclusion is drawn, and an answer is given on which approach is more accurate. Regarding cost contingency estimate, the Proposed Integrated Approach was the more accurate, while for schedule contingency estimate, the Company’s Separated Approach was the most accurate. A similar research should be conducted on a large number of projects to be able to generalize this conclusion though.