A Study on the Evaluation of Cost Variation Caused by

Geotechnical Risk Involved in Underground

Construction
Projects

Hiroyasu Ohtsu
Department of Urban and Environmental Engineering, Kyoto University, Kyoto, Japan
E-mail: ohtsu@geotech.kuciv.kyoto-u.ac.jp

ABSTRACT: This paper presents the design methodology considering the evaluation of
geotechnical risk involved in underground construction projects. In details, a basic method to
evaluate the variance of construction cost due to geotechnical risk adopting geo-statistics
theory is presented. Finally, as concluding remarks, results point out the applicability of basic
concept presented in this study for discussions on unforeseeable geological conditions.

1 INTRODUCTION

Currently, the severe economic condition in Japan has come to foster national
concerns on the promotion of infrastructures. As a methodology to satisfy this
national demand, the necessity to investigate cost-benefit of construction projects
has been highlighted. Up to now, many sophisticated models to evaluate benefits
of construction projects have been proposed. However, researches on the
reasonableness of construction cost have not sufficiently been studied. The
reason for it is that construction projects essentially involve many uncertainties
and/or risks (Flanagan and Norman, 1993; Chapman and Ward, 1997). Among
various risk factors involved in the execution of construction projects,
geotechnical risk, which is so-called unforeseeable geological condition, is a
typical one (Ohtsu et al., 2002A).
It is well known that underground construction projects involve uncertain factors
related to geological conditions, which are very difficult to completely foresee in
design phase. The difficulties concerning unforeseeable geological conditions,
actual construction of underground structures such as caverns and/or tunnels
generally often require the modification of support patterns, which are prescribed
in accordance with rock classification pre-determined based on preliminary in-situ
survey. Consequently, the modification often causes cost overrun, which damages
not only interest of project owner but also social benefit.
Until now, in research fields of project management, the problem
associated with who bears extra-expense due to cost overrun has been always
main theme to be discussed. However, until now, discussions associated with the
evaluation of geotechnical risk have not been made sufficiently in Japan. The
reasons for it would be guessed as follows: 1) Owners with deep pockets
represented by government bodies had been able to allocate
budget enough to cope with unforeseeable geological condition during
execution of
construction projects by re-measuring the amount of items involved in
construction fees. 2) Contractors also had not paid serious attention to the
financial loss due to the delay of the
completion of projects, since their concern on projects were limited to the total
amount of
contracted cost paid by owners. In other words, geotechnical risk has been
generally regarded as an act of God. Consequently, it was very rare to discuss the
maturity of basic design involving uncertain geotechnical factors.
However, the adoption of new procurement system of infrastructures, private
finance initiative, PFI project based on Engineering-Procurement-Construction,
EPC, contract, may
Table 1 Examples of PFI Hydropower Producing Projects in The world

Status Contract Layout (MW) Country Project name

Construction EPC Underground power 150 Philippin Casecnan
(('00 house e
Finance closed EPC Dam (200m) + 345 Philippin San Roque
(('99 Tunnel e
(Operation ('98 Non EPC Tunnel 210 RPD Lao Theun
Hinboun
(Operation ('00 Non EPC Dam (77m) + Tunnel 150 RPD Lao Houay Ho
Construction Non EPC Underground power 60 Nepal Khimti I
(('00 house
Construction EPC (Dam (62m 672 Turkey Birecik
(('00
Construction EPC (Dam (125m 1,450 Brasil Ita
(('00
(Operation ('98 EPC Dam (41m) + Tunnel 140 Brasil Guilman-
Amorin

Figure 1 An Example Composition of Players Part in a PFI project

change current risk allocation rule of geotechnical risk between owners and
contractors drastically, as discussed later. As shown in Table 1, many
underground construction projects have been executing under the EPC contract
even in developing countries.
Here, the serious problem due to the adoption of the new procurement system
is that the system requires transparent explanation on risks involved in projects
for participants in projects, whose majors are not engineering. Figure 1
schematically shows the fundamental composition of a PFI project jointed by
various types of players as follows:
← Shareholders
← Project Company; Single Purpose Company
← Engineering Procurement Construction Contractor
← Various subcontractors concerning the construction and/or the equipment
← Lenders

Table 2 Risk Allocation Rules of Geotechnical Risk by Standard Contract

Risk Allocation
Contract Owners Contract Condition Contract name
ors
○ Design and/or
GCW
Construction Separation
○ Design and/or
FIDIC Red
Construction Separation
○ Design and Construction FIDIC Yellow
○ EPC/Turn Key FIDIC Silver

GCW: General Conditions of Government Contract Works of Building and Civil

Engineering Construction (1989)

The most important step stone to execute a PFI project is to get the approval of
all
participants, whose majors are not engineering, such as shareholders, lenders
and so on shown
in Figure 1. In other words, without the agreement with response to all risks
including
geotechnical risk between each participant, the PFI project is never started.
Therefore, the
documentation of clear understandings among the participants is inevitable.
Authors have proposed the basic concept to express project cost fluctuation
due to
geotechnical risk by adapting the definition of risk established in financial
engineering filed
(Ohtsu et al., 2002B). In financial engineering, based on probabilistic theory,
return and risk
are defined as expected value and standard deviation respectively. In a same
manner, by
considering the variance of geotechnical parameters involved in design, which is
modeled
adopting geo-statistics theory, standard deviation of construction cost can be
regarded as risk
 measured due to geotechnical risk.
From such a viewpoint, this paper presents the methodology to evaluate
geotechnical risk
involved in underground construction projects based on financial engineering
theory. In
details, the applicability of risk-expected plane proposed in this study is
presented and a basic
methodology to evaluate cost fluctuation due to geotechnical risk adopting geo-
statistics
theory is also presented. Finally, as concluding remarks, results obtained in this
study point
out the applicability of the concept presented in this study for discussions on
unforeseeable
geological conditions.

2 ALLOCATION RULE OF GEOTECHNICAL RISK IN CONSTRUCTION

CONTRACTS

In order to reconfirm the treatment of geotechnical risk specified in various

contract article, this study pick up four construction contracts, GWC (1989),
FIDIC Red (1999A), FIDIC Yellow (1999B) and FIDIC Silver (1999C). In Table 2,
both the contract condition and the rule of risk response to geological risk
corresponding to each contract are summarized. As shown in Table 1, the other
contracts except FIDIC Silver are based on re-measurement contract, and FIDIC
Silver is based on turnkey contract. Therefore, the treatment of geotechnical
risk specified in various contract articles listed above could be interpreted as
follows:
← Under contract conditions except FIDIC Silver, an owner essentially pays the
expense relating to geotechnical risk as shown in Table 2.
← Under the contract condition of FIDIC Silver, EPC contractor essentially pays
the

expense relating to geotechnical risk as shown in Table 1. Based on the

findings mentioned above, it seems that without the adoption of FIDIC Silver,
contractors never suffer financial losses from geotechnical risk. However, it
should be noted that though financial losses of contractors is reduced by re-
measuring the amount of items involved in construction fees based on Bills of
Quantities, BOQ, contractors may suffer indirect loss due to the delay of the
completion of projects caused by geotechnical risk. Therefore, not only owners
but also contractors should pay serious attention to the investigation of losses
caused by geotechnical risk in spite of contract conditions. Furthermore, it is not
also to mention that in a PFI project, EPC contractors should pay the most serious
attention to the investigation of geotechnical risk. In order to reconfirm the
treatment of geotechnical risk specified in various contract article, this study pick
up four construction contracts, GWC, FIDIC Red, FIDIC Yellow and FIDIC Silver. In
Table 2, both the contract condition and the rule of risk response to geological
risk corresponding to each contract are summarized. As shown in Table 2, the
other contracts except
Figure 2 The Schematic View of the Variance of the Construction Cost

FIDIC Silver are based on re-measurement contract, and FIDIC Silver is based on
turnkey contract. Therefore, the treatment of geotechnical risk specified in various
contract articles listed above could be
interpreted as follows:
• Under contract conditions except FIDIC Silver, an owner essentially

pays the expense relating to geotechnical risk as shown in

Table 2.
Under the contract condition of

Figure 3 The Plot of The Distributionof Construction

FIDIC Silver, EPC

contractor Cost on Risk-Expected Plane

essentially pays the expense
relating to geotechnical risk as
shown in Table 2. Based on the findings mentioned above, it seems that
without the adoption of FIDIC Silver, contractors never suffer financial losses from
geotechnical risk. However, it should be noted that though financial losses of
contractors is reduced by re-measuring the amount of items involved in
construction fees based on Bills of Quantities, BOQ, contractors may suffer
indirect loss due to the delay of the completion of projects caused by geotechnical
risk. Therefore, not only owners but also contractors should pay serious attention
to the investigation of losses caused by geotechnical risk in spite of contract
conditions. Furthermore, in a PFI project, EPC contractors should pay the most
serious attention to the investigation of geotechnical risk.
3 BASIC METHODOLOGY

This chapter presents the basic methodology with associated with how to estimate
the variance of construction cost as geotechnical risk.

3.1 General View

A project owner provides geological condition of the project based on preliminary
investigation to contractors as fundamental information for bidding. However, it is
easily understood that a lot of uncertain factors would be involved in geological
condition presented by owners. If one permits the variance involved in geological
condition, one should consider the methodology associated with how to evaluate
the variance in design phase. A solution to the problem mentioned above is the
adoption of probabilistic modeling of geotechnical properties. Based on the results
of design considering the variance involved in geological condition numerically,
the adoption of probabilistic modeling would enable to estimate the variance of
the construction cost required to the completion of the investigated project as
shown in Figure 2 (a). In Figure 2, standard deviation σF, which is regarded as so-
called risk in finance engineering field, is presented as the index to denote the
variance of the construction cost. The expression helps participants in projects,
whose major is not civil engineering, understand the variance of the construction
cost caused by geotechnical risk. Here, necessity of the additional in-situ
investigation as a method to investigate geotechnical risk should be stressed. It is
easily understood that the additional in-situ investigation following preliminary
research would be very effective to investigate the variance involved in geological
condition. However, the limitation of the budget allocated for site-investigation
makes it difficult to make decision as to whether the additional in-situ
investigation is necessary or not. In order to overcome the difficulty mentioned
above, the expression in accordance with the risk definition of financial
engineering, as shown in Figure 3 helps to decide effectively. For an example, if
the standard deviation σA, which denotes the variance of the construction cost
calculated based on the results of the additional in-situ investigation as shown in
Figure 2 (b), is obtained, the benefit of the execution of the additional in-situ
investigation, B, would be expressed as follow:

σ ≥
F σA

(1)
B = σF − σ A

It is obviously impossible to evaluate the standard deviation σA explicitly prior to

the execution of the additional investigation. Therefore, the standard deviation σA
presented here would be regarded as an imaginary value. However, the value
would be very useful to discuss the relationship between the cost of the additional
in-situ investigation and the benefit to be obtained corresponding to the
investigation in the earlier stage. And, after the investigation, it is possible to
directly discuss the relationship between the invested cost and the benefit
accepted actually. From such viewpoints, this study adopts Kriging method, which
is a method of geo-statistic theory, to evaluate the variance involved in geological
condition.
3.2 Basic Concept of Kriging Method Applied in This Investigation
In Kriging method, which is a method called Best Linear Unbiased Estimator, BLUE,
it is assumed that optimum estimated value Z0 would be expressed as the
*

following linear function:

Zo =∑λ0 Zi (2) i
* i

In which, Zi and λ0 denote the measured values and the corresponding weights at
i

measured point i respectively. In this study, as for the method to define the
spatial distribution of estimated values, semi-variogram, which associates the
value, Z(x), at the location of x with the value,
Z (x +h ), at the location of x+h, is adopted as follow:

γ()h = 1 E {[Z(x +h)−Z()x ] }2

(3)
2

In which, E{x} is the operator to denote expected value corresponding to

value x. In general, various types of functions are proposed as to the function
defining semi-variogra() and also various methods are proposed as to the
methodology to optimize the

γh
approximate function. In this study, in order to simplify the methodology, semi-
variogram γ()h is modeled as the spherical function and non-linear least square
method is adopted. By solving the following equations, both λ0 and µ are finally
i

obtained:
ji

)
∑λ0 γ(xi −xj +µ=λ0 γ(xi −x0 )
 j
(4)
∑λ0 =1
i
i

The Borehole The Borehole outside Embankment inside Embankment

Embankment

River
Alluvium Sand Layer

Alluvium Clay Layer

Diluvium Layer

Figure 4 Geological Profile of Sub-layers under the River Embankment

Substituting the obtained λ0 into equation (2), optimum estimated value Z0 is
i *

obtained. Furthermore, estimated error variant, σE , is also evaluated as follow:

2

σ = µ +∑λ0 γ(xi − x0 )
E
2 i
i

(5)
3.3 Case Study
This study examines the geological profile of river embankment shown in Figure 4
as an example to investigate the variance involved in geological condition. On this
site, feasibility study, F/S, associated with highway construction project beside
river embankment is being planned. Since the case study to determine the
formation level of highway to be constructed is being carried out at the current
stage, geometrical information such as the width of sub-layers under the river
embankment is one of the most dominant factors affecting the estimation of
construction cost. Therefore, in this study, as the first step of F/S, the spatial
distribution of
Frequency

40

30

20

10

0
 -6-4-20 2 4 6 Depth　(O.P. m)

Figure 5 Histogram of the Depth of Diluvium Layer

geometrical information such as the Figure 6 Semi-Variogram of the Depth of Diluvium

Layer width of sub-layers is focused on. As shown in Figure 5, based on the results
of in-situ investigation using boreholes, which are approximately placed with the
interval of 200 m in the longitudinal direction, the sub-layer in this site are
classified to three layers, alluvial clay layer, alluvial sand and diluvium layer.

4 RESULTS AND CONSIDERATION

In this study, Kriging method is applied to the evaluation of the spatial distribution
of the width of each sub-layer. Firstly, Figure 4 shows histogram of the depth of
diluvium layer, which are obtained with the averaged interval of 200 m. It is not
necessary to explain that it is a very important factor to determine the formation
level of highway to be constructed. As shown in Figure 5, both the mean value and
variant of sampled data are 0.00 and 1.40 respectively. Consequently, the
variation of sampled data is relatively small. Secondly, among the results of
obtained semi-variogram, which are substituted into equation (2), Figure 6 shows
the semi-variogram of the depth of diluvium layer. As shown in Figure 4, the
spherical function obtained shows the good coincidence with measured values.
Finally, the results of the spatial distribution of the depth of diluvium layer
evaluated by

Depth(O.P.m)

Figure 7 The Comparison of the Results of Kriging

Kriging method are discussed. Figure 7 (a) shows the spatial distribution of the
depth of diluvium along the center axis of the river embankment in the left side of
the river. The result plots both the estimated value and the estimated value ±
standard deviation respectively. Since the variant of sampled data, which is
essentially equivalent to the sill of semi-variogram, is relatively small, the values
estimated by means of Kriging seems to have very high preciseness. In order to
make the findings related to the preciseness of the estimated values obvious,
Figure 7 (b) shows the spatial distribution of the depth of diluvium based on the
sampled data, of which interval is 800 m. The results clearly point out that the
estimation on geological condition using sampled data with wider interval of
boreholes gives less preciseness than that with smaller interval of boreholes
Here, as an example to discuss the effect of preciseness of in-situ investigation
on the design of actual project, by using results shown in Figure 7, the variation of
the construction cost due to the change of interval of boreholes is examined. In
details, the sensitivity of the thickness of alluvial soil layers shown in Figure 7 on
construction cost of retaining wall excavation works with steel sheet is
investigated.
Table 3 Construction Cost Variation of Sheet Pile
 Estimated value Estimated value
Estimated
-Standard + Standard
value
deviation deviation
m2 171,175 m2 176,480 173,780m2 200m
Interval
yen 290,997,500 yen 300,016,000 295,426,000
yen
m2 167,245 m2 180,150 m2 173,740 800m
Interval
yen 284,316,500 yen 306,255,000 295,358,000
yen

Figure 8 The Plot of Construction Cost on Risk-Expected Value Plane

Table 3 shows cost variation of retaining wall excavation works with steel sheet,
which are estimated based on the depth of alluvial soil layer of the estimated
value and the estimated value ± standard deviation respectively. Furthermore,
Figure 8 shows the plots of estimated cost on risk-expected value plane in
accordance with Figure 3.As shown in Figure 3, using sampled data with smaller
interval of boreholes obviously can reduce risk on construction cost.
Consequently, the finding mentioned above shows that the relationship presented
in equation (1) holds. However, the difference between both cases on expected
value of construction cost is very little. When expected value of construction cost
does not vary, the effectiveness of additional in-situ investigation such as
borehole survey should be discussed by comparing the benefit B presented in
equation (1) and the cost due to the execution of additional in-situ investigation.
In this example, the benefit B is worthy of 6 million yen as shown in Figure 8.
However, the cost of in-situ investigation with the small interval of boreholes is
much more expense than the benefit mentioned above. In other words, this result
reveals that though additional in-situ investigation is very effective to reduce risk
involved in construction works, the expected benefit is less than extra-expense
associated with the execution of additional in-situ investigation. From such a
viewpoint, results shown in Figure 8 obviously point out that the effect of
geometrical condition on construction cost in this example is relatively small.
Consequently, this methodology of risk evaluation associated with geotechnical
risk helps to investigate the cost-benefit of in-situ geotechnical survey.
However, the discussion presented in this paper is limited to the sensitivity of
geometrical factors on construction cost. Therefore, further investigation
considering the effect of mechanical properties on construction cost should be
required, in order to verify the applicability of risk evaluation method in this
paper.CONCLUDING REMARKS

In this study, by applying geo-statistics theory to geotechnical properties observed

at boreholes around river embankment, the features of the spatial variation of
geotechnical properties observed are discussed. Finally, results shown in Figure 8
obviously point out that the effect of geometrical condition on construction cost in
this example is relatively small. Consequently, it is pointed out that this
methodology of risk evaluation associated with geotechnical risk helps to
investigate the cost-benefit of in-situ geotechnical survey.
However, the discussion presented in this paper is limited to the sensitivity of
geometrical factors on construction cost. Therefore, additional investigation
considering the effect of mechanical properties on construction cost should be
required, in order to verify the applicability of risk evaluation method in this paper.

References:

Central Construction Industry Council of Japan, 1989, Standard Form of Agreement and General
Conditions of Government Contract for Works of Building and Civil Engineering Construction,
Eighth Edition (In Japanese).
FIDIC, 1999A. Conditions of Contracts for Construction for
Building and Engineering Works Designed by the Employer,
First Edition. FIDIC, 1999B. Conditions of Contract for Plant
and Design-Build for Electrical and Mechanical Plant and for
Building and Engineering Works by the Contractor, First Edition. FIDIC, 1999C. Conditions of
Contract for EPC Turnkey Projects, First Edition. Flanagan, R. and G. Norman 1993. Risk
Management and Construction, Blackwell Science. Chapman, C. and S. Ward 1997. Project Risk
Management, John Wiley & Sons. Ohtsu, H. and Y. Ohnishi, 2002A. A Study on The Risk
Management Methodology of The Oversea Construction
Projects from A Viewpoint of Contractors, Journal of JSCE, No.707/VI-55, pp.207-218 (in
Japanese). Ohtsu, et al., 2002B. A Study on The Evaluation of Geotechnical Risk Based on Geo-
statistic Theory，Proc. of Probabilistics in GeoTechnics: Technical and Economic Risk
Estimation, Graz, Austria, pp.113-120.