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Impact of Deterioration and Negotiation on Sewer System O&M Contracts from the Real Option Perspective

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  • Taeil Park
  • Byungil Kim
  • Hyoungkwan Kim

Abstract

Operation and maintenance (O&M) service contracts for water and sewer systems have increased considerably in the United States over the last 20 years. Successful O&M contract establishment requires a reasonable estimation of the O&M service contract coupled with a reliable risk-hedging mechanism, such as a ceiling agreement. Because the accurate valuation of an O&M contract is substantially influenced by the future O&M cost, which is subject to the future performance of the system, it is crucial that contracting parties develop realistic O&M cost scenarios based on a sound deterioration model. This study provides a real option-based methodology for the valuation of O&M contracts by modeling future O&M cost scenarios using deterioration models. Using sensitivity analyses, this study also investigates how surrounding conditions and negotiation options could affect the valuation of O&M contracts. The proposed methodology is expected to assist contracting parties in developing a fair and attractive O&M service contract. Copyright Springer Science+Business Media B.V. 2012

Suggested Citation

  • Taeil Park & Byungil Kim & Hyoungkwan Kim, 2012. "Impact of Deterioration and Negotiation on Sewer System O&M Contracts from the Real Option Perspective," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 26(10), pages 2973-2989, August.
    • Handle: RePEc:spr:waterr:v:26:y:2012:i:10:p:2973-2989
    DOI: 10.1007/s11269-012-0059-4
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    References listed on IDEAS

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    Cited by:

    1. Byungil Kim & Kyle Anderson & SangHyun Lee & Hyoungkwan Kim, 2014. "A Real Option Perspective to Value the Multi-Stage Construction of Rainwater Harvesting Systems Reusing Septic Tank," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 28(8), pages 2279-2291, June.
    2. Taeil Park & Changyoon Kim & Hyoungkwan Kim, 2014. "Valuation of Drainage Infrastructure Improvement Under Climate Change Using Real Options," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 28(2), pages 445-457, January.

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