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

Author

Listed:
  • João Adelino Ribeiro
  • Paulo Jorge Pereira
  • Elisio Moreira Brandão

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.

Suggested Citation

  • João Adelino Ribeiro & Paulo Jorge Pereira & Elisio Moreira Brandão, 2020. "A real options approach to optimal bidding in construction projects considering volume uncertainty," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 41(4), pages 631-640, June.
    • Handle: RePEc:wly:mgtdec:v:41:y:2020:i:4:p:631-640
    DOI: 10.1002/mde.3126
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    References listed on IDEAS

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    Cited by:

    1. Gorupec Natalia & Brehmer Nataliia & Tiberius Victor & Kraus Sascha, 2022. "Tackling uncertain future scenarios with real options: A review and research framework," The Irish Journal of Management, Sciendo, vol. 41(1), pages 69-88, July.

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