Modelling completion risk using stochastic critical path-envelope method: a BOT highway project application

Nakhon Kokkaew and Nicola Chiara

Construction Management and Economics, 2010, vol. 28, issue 12, 1239-1254

Abstract: In integrated project delivery methods such as build-operate-transfer (BOT), a thorough financial risk analysis model should incorporate completion risk analysis into operation risk analysis as the timing of financial events such as refinancing and debt servicing depend on the construction completion date. During construction, project managers always have opportunities to react to negative events and to take corrective actions whenever possible to recover late-running schedules. These opportunities to react are 'real options' embedded in the construction process. However, current models of completion risk analysis ignore this feature of project managers. A reliable construction completion risk model for project feasibility studies should capture a manager's option to react to unforeseen, negative events. A novel approach for modelling construction completion risk analysis is developed by combining stochastic critical path method with the envelope method (SCP-EM). The SCP-EM approach can model the option-like feature of management feedback reactions in a straightforward fashion. The proposed approach, if applied correctly during the project feasibility study stage, enhances the project finance risk model by helping analysts properly evaluate financial risk arising from completion delay.

Keywords: Monte Carlo simulation; build-operate-transfer; risk analysis; project scheduling; envelope method (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (1)

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DOI: 10.1080/01446193.2010.521755

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