An impartial decision model for financial risk and decision analysis in construction projects

Abstract

In financial decision-making processes, especially in the construction industry, tangible and intangible criteria always co-exist and their weights have significant impact on the final decision outcome. Human cognitive thinking cannot be easily modelled and quantified by rational rules in conventional multi-criterion decision aid (MCDA) methods while uncertainties such as bias of decision-maker who either under or over estimates a criterion should be quantified as it contributes heavily in weight evaluation. Entropy has been useful in quantifying uncertainty in decision-making. This paper illustrates an Impartial Decision Model (IDM) that is entropy-based in three dimensional vectors to the solution of multi-criterion financial decision analysis in construction. A two-dimension plane is formulated as the inclusion of four principal vectors which are the relative weights between sub-criteria (activities); the relative weights between alternatives (projects); the relative weights between criteria (financial risks); and the weights of criteria for each sub-criterion arising on each alternative. Risk adjusted discount rate (RADR) of each vector is incorporated with the weights derived by the two-dimension plane to obtain final decision weights. The financial risks of multi-projects being undertaken by a medium-size construction firm in Hong Kong were assessed to evaluate the model. The results indicated that uncertainties in each vector have been quantified to provide an upper, mean and lower bound financial risks on projects with inconsistencies or total uncertainty level 0.009, 0.032 and 0.036 on all sub-criteria in one alternative respectively. The risk adjusted discount overall cash flow was 0.97 millions more than the original forecasted (20.84 millions). An accurate, objective and realistic decision on financial risk analysis can be provided to the decision-maker to evaluate, select and control the projects by rating impartially and discounting the cash flow in terms of risk rate.