IDEAS home Printed from https://ideas.repec.org/a/wly/mgtdec/v41y2020i4p631-640.html
   My bibliography  Save this article

A real options approach to optimal bidding in construction projects considering volume uncertainty

Author

Listed:
  • João Adelino Ribeiro
  • Paulo Jorge Pereira
  • Elisio Moreira Brandão

Abstract

Building on the numerical solution by Ribeiro et al. (2108), this paper proposes a model to assess the impact of volume uncertainty on construction projects' value and on the optimal bidding price. The model's outcome is the threshold amount for the incremental investment that managers have to undertake in order to resolve the uncertainty regarding the volume of work to be performed. Any amount of investment below the threshold will add value to the project and produces a more competitive bid price. A numerical example is presented, and a sensitivity analysis is performed to the model's most relevant components.

Suggested Citation

  • João Adelino Ribeiro & Paulo Jorge Pereira & Elisio Moreira Brandão, 2020. "A real options approach to optimal bidding in construction projects considering volume uncertainty," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 41(4), pages 631-640, June.
    • Handle: RePEc:wly:mgtdec:v:41:y:2020:i:4:p:631-640
    DOI: 10.1002/mde.3126
    as

    Download full text from publisher

    File URL: https://doi.org/10.1002/mde.3126
    Download Restriction: no
    File URL: https://libkey.io/10.1002/mde.3126?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Francis Ng & Hans Bjornsson, 2004. "Using real option and decision analysis to evaluate investments in the architecture, construction and engineering industry," Construction Management and Economics, Taylor & Francis Journals, vol. 22(5), pages 471-482.
    2. Akintola Akintoye & Eamon Fitzgerald, 2000. "A survey of current cost estimating practices in the UK," Construction Management and Economics, Taylor & Francis Journals, vol. 18(2), pages 161-172.
    3. Douglas Dyer & John H. Kagel, 1996. "Bidding in Common Value Auctions: How the Commercial Construction Industry Corrects for the Winner's Curse," Management Science, INFORMS, vol. 42(10), pages 1463-1475, October.
    4. Yong-Tao Tan & Li-Yin Shen & Abd. Ghani Khalid & Sio-Chong Song, 2008. "An examination of the factors affecting contractors' competition strategy: a Hong Kong study," International Journal of Project Organisation and Management, Inderscience Enterprises Ltd, vol. 1(1), pages 4-23.
    5. Samuel Laryea & Will Hughes, 2008. "How contractors price risk in bids: theory and practice," Construction Management and Economics, Taylor & Francis Journals, vol. 26(9), pages 911-924.
    6. John Rooke & David Seymour & Richard Fellows, 2004. "Planning for claims: an ethnography of industry culture," Construction Management and Economics, Taylor & Francis Journals, vol. 22(6), pages 655-662.
    7. Mahdi Mattar & Charles Cheah, 2006. "Valuing large engineering projects under uncertainty: private risk effects and real options," Construction Management and Economics, Taylor & Francis Journals, vol. 24(8), pages 847-860.
    8. Heng Li & Peter Love, 1999. "Combining rule-based expert systems and artificial neural networks for mark-up estimation," Construction Management and Economics, Taylor & Francis Journals, vol. 17(2), pages 169-176.
    9. C. Y. Yiu & C. S. Tam, 2006. "Rational under-pricing in bidding strategy: a real options model," Construction Management and Economics, Taylor & Francis Journals, vol. 24(5), pages 475-484.
    10. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    11. David Ford & Diane Lander & John Voyer, 2002. "A real options approach to valuing strategic flexibility in uncertain construction projects," Construction Management and Economics, Taylor & Francis Journals, vol. 20(4), pages 343-351.
    12. João Adelino Ribeiro & Paulo J. Pereira & Elisio M. Brandão, 2018. "An option pricing approach to optimal bidding in construction projects," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 39(2), pages 171-179, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Gorupec Natalia & Brehmer Nataliia & Tiberius Victor & Kraus Sascha, 2022. "Tackling uncertain future scenarios with real options: A review and research framework," The Irish Journal of Management, Sciendo, vol. 41(1), pages 69-88, July.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. João Adelino Ribeiro & Paulo Jorge Pereira & Elísio Brandão, 2013. "Volume Uncertainty in Construction Projects: a Real Options Approach," CEF.UP Working Papers 1309, Universidade do Porto, Faculdade de Economia do Porto.
    2. João Adelino Ribeiro & Paulo Jorge Pereira & Elísio Brandão, 2012. "Reaching an Optimal Mark-Up Bid through the Valuation of the Option to Sign the Contract by the Successful Bidder," CEF.UP Working Papers 1201, Universidade do Porto, Faculdade de Economia do Porto.
    3. Anubha Srivastava & Manjula Shastri, 2020. "A Study of Black–Scholes Model’s Applicability in Indian Capital Markets," Paradigm, , vol. 24(1), pages 73-92, June.
    4. Juan Pineiro-Chousa & Marcos Vizcaíno-González, 2020. "A mathematical model for the role of third party funding in reputation building of academic institutions," Review of Managerial Science, Springer, vol. 14(2), pages 365-377, April.
    5. Marzouk, Mohamed & Ali, Mohamed, 2018. "Mitigating risks in wastewater treatment plant PPPs using minimum revenue guarantee and real options," Utilities Policy, Elsevier, vol. 53(C), pages 121-133.
    6. Mahdi Mattar & Charles Cheah, 2006. "Valuing large engineering projects under uncertainty: private risk effects and real options," Construction Management and Economics, Taylor & Francis Journals, vol. 24(8), pages 847-860.
    7. Di Corato, Luca & Dosi, Cesare & Moretto, Michele, 2018. "Multidimensional auctions for long-term procurement contracts with early-exit options: The case of conservation contracts," European Journal of Operational Research, Elsevier, vol. 267(1), pages 368-380.
    8. Pineiro-Chousa, Juan & Vizcaíno-González, Marcos, 2016. "A quantum derivation of a reputational risk premium," International Review of Financial Analysis, Elsevier, vol. 47(C), pages 304-309.
    9. William R. Morgan, 2023. "Finance Must Be Defended: Cybernetics, Neoliberalism and Environmental, Social, and Governance (ESG)," Sustainability, MDPI, vol. 15(4), pages 1-21, February.
    10. Filipe Fontanela & Antoine Jacquier & Mugad Oumgari, 2019. "A Quantum algorithm for linear PDEs arising in Finance," Papers 1912.02753, arXiv.org, revised Feb 2021.
    11. Weihan Li & Jin E. Zhang & Xinfeng Ruan & Pakorn Aschakulporn, 2024. "An empirical study on the early exercise premium of American options: Evidence from OEX and XEO options," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 44(7), pages 1117-1153, July.
    12. Jun, Doobae & Ku, Hyejin, 2015. "Static hedging of chained-type barrier options," The North American Journal of Economics and Finance, Elsevier, vol. 33(C), pages 317-327.
    13. Thomas Kokholm & Martin Stisen, 2015. "Joint pricing of VIX and SPX options with stochastic volatility and jump models," Journal of Risk Finance, Emerald Group Publishing Limited, vol. 16(1), pages 27-48, January.
    14. Paul Ormerod, 2010. "La crisis actual y la culpabilidad de la teoría macroeconómica," Revista de Economía Institucional, Universidad Externado de Colombia - Facultad de Economía, vol. 12(22), pages 111-128, January-J.
    15. An Chen & Thai Nguyen & Thorsten Sehner, 2022. "Unit-Linked Tontine: Utility-Based Design, Pricing and Performance," Risks, MDPI, vol. 10(4), pages 1-27, April.
    16. Kearney, Fearghal & Shang, Han Lin & Sheenan, Lisa, 2019. "Implied volatility surface predictability: The case of commodity markets," Journal of Banking & Finance, Elsevier, vol. 108(C).
    17. Boyarchenko, Svetlana & Levendorskii[caron], Sergei, 2007. "Optimal stopping made easy," Journal of Mathematical Economics, Elsevier, vol. 43(2), pages 201-217, February.
    18. Robert C. Merton, 2006. "Paul Samuelson and Financial Economics," The American Economist, Sage Publications, vol. 50(2), pages 9-31, October.
    19. Eduardo Abi Jaber, 2022. "The characteristic function of Gaussian stochastic volatility models: an analytic expression," Working Papers hal-02946146, HAL.
    20. Peter Carr & Liuren Wu, 2014. "Static Hedging of Standard Options," Journal of Financial Econometrics, Oxford University Press, vol. 12(1), pages 3-46.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:mgtdec:v:41:y:2020:i:4:p:631-640. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www3.interscience.wiley.com/cgi-bin/jhome/7976 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.