Sing, T F (2002) Time to build options in construction processes. Construction Management and Economics, 20(2), pp. 119-130. ISSN 01446193
Abstract
Time to build is a very important factor in a real estate development venture. Delay in completion of a project not only affects the financing costs and the rental revenue but also it may, on a more strategic note, determine the success or failure of a project. A time to build option model consisting of a stochastic rate of completion and a stochastic net project payoff is applied to the sequential construction process of a large scale construction project. The results of the sensitivity analysis show that the optimal payoff value, that triggers the exercise of the option to invest at a maximum rate, increases positively with the increases in cash flow volatility, input cost uncertainty, excess asset return per unit risk and maximum rate of investment. However, it has a negative relationship with the rental yield. In a case study involving a commercial project, the premium for hedging the payoff risks by pre-leasing a project was estimated at 11.29%, whereas the additional cost incurred for shielding a project against input cost risks in a design and build contract was estimated at 7.80%, where each is given as a percentage of the total construction costs.
| Item Type: | Article |
|---|---|
| Uncontrolled Keywords: | input cost uncertainty; option premium; project payoff uncertainty; sequential investment; time to build option |
| Index terms: | financing, design and build, construction cost, revenue, case study, real estate development, cash flow, construction process, construction project, option, shielding, leasing, sensitivity analysis, exercise |
| Subjects: | production management, environmental hazards, financial management, economic development, contractual arrangements, economic analysis, health behaviours and lifestyles, data collection methods, financial and cost management, building construction, safety engineering, land economics, decision analysis |
| Topics: | Risk Management, Research Practice, Health and Safety, Engineering Principles, Site Management, Project Management, Urban Studies, Sustainability, Business Strategy, Procurement, Cost Management |
| Descriptive scope: | 3 PCE |
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