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

João Adelino Ribeiro, Paulo Jorge Pereira and Elisio Moreira Brandão

Managerial and Decision Economics, 2020, vol. 41, issue 4, 631-640

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.

Date: 2020
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Handle: RePEc:wly:mgtdec:v:41:y:2020:i:4:p:631-640