Impacts of project management on real option values

Abstract

The cost of construction projects depends on their size, complexity, and duration. Construction management applies effective management techniques to the planning, design, and construction of a project from conception to completion for the purpose of controlling time, cost and quality. A real options approach in construction projects, improves strategic thinking by helping planners recognize, design and use flexible alternatives to manage dynamic uncertainty. In order to manage uncertainty using this approach, it is necessary to value the real options. Real option models assume independence of option holder and the impacts of underlying uncertainties on performance and value. The current work proposes and initially tests whether project management reduces the value of real options. The example of resource allocation is used to test this hypothesis. Based on the results, it is concluded that project management reduces the value of real options by reducing variance of the exercise signal and the difference between exercise conditions and the mean exercise signal.