Essays on the use of real options approach in construction projects and build-own-transfer projects

The present thesis aims to contribute to the existent body of research dedicated to the use of the real options approach in construction projects and Build-Own-Transfer (BOT) projects. Even though these types of project have a different nature than the majority of the other investment projects, we believe that they share the same characteristics of irreversibility, un- certainty and flexibility. In Chapters II e III, we suggest two theoretical support decision models that may be applied by construction managers in the context of bidding competitions. In Chapter II, we pro- pose a model whose outcome is the optimal price for the execution of a construction project awarded through an appropriate bidding process. The model is based on the valuation of a specific real option, previously identified, and which can only be exercised by the selected bidder. In Chapter III, we study the effects of a particular type of uncertainty that surrounds construction projects, and which we designate as “volume uncertainty”. Applying the numerical solution presented in the previous Chapter, we suggest a model that addresses the expected impact of this type of uncertainty on the project value and on the optimal bid price, through the definition of a stochastic variable, designated as “additional value”, i.e., the profit that may be generated through the execution of additional work. The model’s outcome is the threshold value for the incremental investment in human capital and technology construction managers may undertake with the purpose of quantifying the expected impact that this type of uncertainty will produce on the project value. In Chapter IV, we suggest a theoretical model to be applied by governments and other public entities, in the context of Build-Own-Transfer projects, based on a two-factor uncertainty approach in continuous-time, aiming to determine the optimal value for the legal penalty to be included in the contract form, in the case the selected bidder does not implement the project immediately. The model considers the existence of social costs and assumes that the private entity is more efficient than the public entity in executing the project facility.