Tseng, C L; Zhao, T and Fu, C C (2009) Contingency estimation using a real options approach. Construction Management and Economics, 27(11), pp. 1073-1087. ISSN 1466433X
Abstract
In construction projects, contingency is the budget which is made available to cope with uncertainties that would incur schedule and cost overruns. Contingency estimation requires considering project cost, schedule and technology variability. The effect of dynamic project management of the decision maker should also be taken into account. Accordingly a real options approach for estimating contingency from the owner's point of view is presented. This approach not only explicitly recognizes the uncertainty in the life cycle of a construction project, but also incorporates a dynamic project management mechanism into contingency estimation. The contingency is valued by minimizing the expected project cost via a multi-stage stochastic model that accounts for the variability of project cost and schedule and the exercise of dynamic project crashing. The numerical results indicate that the value of the decision maker's dynamic project management makes up an important portion of the contingency.
| Item Type: | Article |
|---|---|
| Uncontrolled Keywords: | contingency; estimating; project management; real options; stochastic modelling |
| Index terms: | cost overrun, estimating, crashing, exercise, construction project, project management, real option, life cycle, modelling, project cost, variability, owner, estimation |
| Subjects: | economics, value management, health behaviours and lifestyles, project controls, sociology, project management theory and practice, analytical methods, financial and cost management, statistical analysis, economic analysis, production management |
| Topics: | Time Control, Research Practice, Health and Safety, Engineering Principles, Project Management, Stakeholder Management, Cost Management, Business Strategy |
| Descriptive scope: | 2 PC |
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