A real options approach to valuing strategic flexibility in uncertain construction projects

David Ford, Diane Lander and John Voyer

Construction Management and Economics, 2002, vol. 20, issue 4, 343-351

Abstract: To maximize project value, managers of construction projects must recognize, plan for and strategically manage uncertainty. Current construction planning, estimating, and management practices regarding uncertainty can undervalue projects by failing to exploit opportunities to increase project value, as well as minimize risks. Dynamic uncertainties are described as project conditions that cannot be resolved adequately through improved description or planning for pre-project strategy selection. A real options approach is proposed for proactively using strategic flexibility to recognize and capture project values hidden in dynamic uncertainties. An example of a proposal for a toll road project demonstrates a method of valuing managerial flexibility to evaluate and select strategies. Impacts of real options in other domains, along with this example, are the basis for concluding that using a structured real options approach in construction management can increase returns through improved project planning and management. Potential impacts of the use of real options are discussed, and challenges in valuing real options in construction projects are identified as the basis for future research.

Keywords: Project Planning; Strategy; Risk Management; Real Options; Project Management (search for similar items in EconPapers)
Date: 2002
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Citations: View citations in EconPapers (20)

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DOI: 10.1080/01446190210125572

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