Price risk management in BOT railroad construction projects using financial derivatives

2018 ◽  
Vol 23 (3) ◽  
pp. 349-362 ◽  
Author(s):  
Mohammad Vahdatmanesh ◽  
Afshin Firouzi
Keyword(s):  
Risk Management ◽  
Construction Projects ◽  
Financial Derivatives ◽  
Price Risk ◽  
European Options ◽  
Financial Industry ◽  
Content Type ◽  
Construction Company ◽  
Construction Companies ◽  
Valuation Model

Purpose Railroad transit infrastructures are amongst major capital-intensive projects worldwide, which impose significant risks to the contractors of build-operate-transfer projects because of the fluctuations in steel price fluctuation. The purpose of this paper is to introduce a methodology for hedging steel price risk using financial derivatives. Design/methodology/approach Cox–Ross valuation lattice has been used as an option valuation model for determining option’s price for the construction companies involved in fixed-price railroad projects. A sensitivity analysis has been conducted using the financial option Greeks to evaluate the impacts of option’s pricing factors in the total price of option. Findings The result of valuation shows that European options cost to safeguard against the effects of price risk is only a fraction in contrast to the total cost of steel procurement for a typical railroad construction company. This confirms that using this kind of financial derivative is a beneficial yet effective approach for hedging steel price risk for railroad construction companies. Practical implications The applicability of the financial derivatives, both exchange-traded and over-the-counter instruments, is evident in broad financial industry. This paper shows how European options can be readily used for risk management of a typical railroad project, and explains the methodology in a step-by-step procedure. Originality/value Although the financial engineering literature is rife of theory and application of derivatives in various contexts, to the best knowledge of authors there is only few papers on the application of these well-developed financial instruments for risk management in construction industry. This study intends to illustrate how financial derivatives can add value to risky construction projects and shed new light in this important application area.

Addressing the knowledge management “nightmare” for construction companies

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Paulo Vaz-Serra ◽  
Peter Edwards
Keyword(s):  
Knowledge Management ◽  
Construction Projects ◽  
Information And Communications Technology ◽  
Content Type ◽  
Construction Company ◽  
Construction Companies ◽  
Management Consultants ◽  
Knowledge Requirements ◽  
Internal Procedures ◽  
Aec Industry

Purpose Knowledge management presents a problem for the architecture, engineering and construction (AEC) industry, largely because of the industry’s fragmented structure and project-driven nature. Construction companies may be involved in a variety of projects in different locations, each having its own knowledge requirements. Companies are also expected to be competitive, flexible and innovative, but introducing new knowledge management systems (KMSs) may represent a change that is beyond the organisation’s capacity to undergo successfully, and thus becomes a “nightmare”. The purpose of this paper is to propose and test a KMS solution that can help to facilitate the capture and application of important knowledge without introducing unnecessary changes in internal procedures for the organisation. Design/methodology/approach Following a review of existing systems, and an interview survey of 22 managers in the Portuguese AEC industry (contractors, design consultants and project management consultants) a new IT-based construction KMS called ConstruKnowledge was developed. The KMS was tested, verified and validated in two Portuguese construction projects and assessed by 12 managers in the construction company undertaking those projects. Findings The results of two pilot tests using ConstruKnowledge in two Portuguese construction projects demonstrate that its use can raise the levels of confidence in decision-making, and retaining knowledge; and that it serves to add value to the company. Practical implications The Construknowledge KMS is an innovative contribution to the greater acceptance of KMSs in the construction industry. The system facilitates the effective and efficient development of an organisational KMS using basic Information and Communications Technology (ICT)-based collaboration tools. While undertaken in the context of the Portuguese industry, the KMS has a wider global potential for implementation and further development. Originality/value The originality and value of this research are that it demonstrates how a KMS can be developed and then used in a construction company to capture and share knowledge without introducing additional constraints.

Construction material supply risk management using Asian option contracts: the case of a pipeline project

2020 ◽  
Vol 27 (10) ◽  
pp. 3395-3414
Author(s):  
Mohammad Vahdatmanesh ◽  
Afshin Firouzi
Keyword(s):  
Risk Management ◽  
Scenario Analysis ◽  
Price Risk ◽  
Asian Option ◽  
Steel Pipeline ◽  
Content Type ◽  
Price Fluctuations ◽  
Option Contracts ◽  
Pipeline Project ◽  
Total Price

PurposeSteel price uncertainty exposes pipeline projects that are inherently capital intensive to the risk of cost overruns. The current study proposes a hedging methodology for tackling steel pipeline price risk by deploying Asian option contracts that address the shortcomings of current risk mitigation strategies.Design/methodology/approachA stepwise methodology is introduced, which uses a closed-form formula as an Asian option valuation method for calculating this total expenditure. The scenario analysis of three price trends examines whether or not the approach is beneficial to users. The sensitivity analysis then has been conducted using the financial option Greeks to assess the effects of changes in volatility in the total price of the option contracts. The total price of the Asian options was then compared with those of the European and American options.FindingsThe results demonstrate that the Asian option expenditure was about 1.87% of the total cost of the case study project. The scenario analysis revealed that, except for when the price followed a continuous downward pattern, the use of this type of financial instrument is a practical approach for steel pipeline price risk management.Practical implicationsThis approach is founded on a well-established financial options theory and elucidates how pipeline project participants can deploy Asian option contracts to safeguard against steel price fluctuations in practice.Originality/valueAlthough the literature exists about the theory and application of financial derivative instruments for risk management in other sectors, their application to the construction industry is infrequent. In the proposed methodology, all participants involved in fixed price pipeline projects readily surmount the risk of exposure to material price fluctuations.

Achieving sustainability through integrating risk management into the architectural design process

2018 ◽  
Vol 16 (1) ◽  
pp. 25-43 ◽  
Author(s):  
Ayman Ahmed Ezzat Othman ◽  
Nermeen Mohamed Amin Abdelwahab
Keyword(s):  
Risk Management ◽  
Literature Review ◽  
Field Study ◽  
Design Process ◽  
Construction Projects ◽  
Architectural Design ◽  
Sustainable Construction ◽  
Content Type ◽  
Scant Attention ◽  
Design Firms

Purpose The purpose of this paper is to develop a framework integrating risk management (RM) into the architectural design process (ADP) as an approach for delivering sustainable construction projects. Design/methodology/approach A research methodology, which consisted of literature review and field study, is designed to accomplish four objectives. First, to provide a comprehensive literature review of the concepts of sustainability, ADP and RM. Second, to present and synthesis the results of two relevant studies focused on identifying, quantifying and classifying the risks associated with ADP; and investigating the perception and application of Egyptian architectural design firms (ADFs) towards integrating RM into ADP as an approach for delivering sustainable construction projects. Third, to develop a framework that integrates RM into ADP towards delivering sustainable construction projects. Finally, to draw conclusions and recommendations to improve the practice of delivering sustainable construction projects among ADFs, construction professionals and governmental authorities. Findings ADP is a fundamental phase of the construction process because the decisions adopted during this phase affect the project performance throughout its life cycle. While RM is widely applied in different sectors of the construction industry, its application in ADP received scant attention in construction literature. The research identified 18 key risks that affect the sustainable delivery of construction projects during ADP. The architect, the client and the project manager are the highest ranked responsible parties for the occurrence of these key risks. The field study highlighted the need to develop a framework to facilitate integrating RM into ADP. Research limitations/implications This paper focused only on the integration of RM into ADP. Originality/value The conducted literature review and field study provided an in-depth understanding of the key risks that affect the sustainable delivery of construction projects during ADP. Through its five stages, the proposed framework is expected to serve as a foundation for integrating RM into ADP as an approach for delivering sustainable projects. This ideology has received scant attention in construction literature. The developed framework represents a synthesis that is novel and creative in thought and adds value to the knowledge in a manner that has not previously occurred.

scholarly journals Measuring the performance of project risk management: a preliminary model

2019 ◽  
Vol 11 (1) ◽  
pp. 1984-1991
Author(s):  
Alfredo Federico Serpell ◽  
Ximena Ferrada ◽  
Larissa Rubio
Keyword(s):  
Risk Management ◽  
Construction Projects ◽  
Research Literature ◽  
Lessons Learned ◽  
Project Risk Management ◽  
Project Risk ◽  
Know How ◽  
Construction Companies ◽  
Important Concern ◽  
Preliminary Model

Abstract The function of project risk management (PRM) is to understand the uncertainty that surrounds a project and to identify the potential threats than can affect it as well as to know how to handle these risks in an appropriate way. Then, the measurement of the performance of PRM becomes an important concern, an issue that has not yet been addressed in the research literature. It is necessary to know how successful the application of the PRM process is and how capable is the process within the organization. Regarding construction projects, it is essential to know whether the selected responses to mitigate or eliminate identified risks were suitable and well implemented after the execution of the project. This paper presents a critical analysis of the relevance of measuring the performance of PRM and the benefits of doing so. Additionally, it presents a preliminary and pioneering methodology to measure the performance of PRM through the evaluation of the adequacy of responses applied to mitigate risks as well as to evaluate the resulting impacts as indicators of the effectiveness of these actions at the end of the project. This knowledge will allow construction companies to incorporate good practices, generate lessons learned, and thereby to promote a continuous improvement of the whole PRM process.

Exploring the use of financial capacity as a predictor of construction company corporate performance

2015 ◽  
Vol 13 (4) ◽  
pp. 596-611 ◽  
Author(s):  
George Cyril Tucker ◽  
Abimbola Windapo ◽  
Keith Stone Cattell
Keyword(s):  
Financial Performance ◽  
Construction Industry ◽  
South African ◽  
Corporate Performance ◽  
Financial Capital ◽  
Content Type ◽  
Financial Capacity ◽  
Construction Company ◽  
Construction Companies ◽  
Operational Variables

Purpose – The purpose of this paper is to examine the resilient operational variables that impact the corporate performance of construction companies in the South African construction industry and to explore whether financial capacity can be used as a predictor of construction company performance in the context of the South African construction industry. Design/methodology/approach – The operational variables of construction companies that impact their corporate performance were identified through an in-depth review of the extant literature. A combination of convenience and snowball sampling techniques were used in identifying 185 building and civil engineering construction companies based in four provinces of South Africa and registered in Grades 2-6 of the Construction Industry Development Board (CIDB) contractor grading register. The data used in the study were collected from this cohort of respondents through the use of structured questionnaires. At the end of the study period, 62 valid responses representing a response rate of 33.5 per cent were received. Data collected were analyzed using descriptive and inferential statistics. Findings – The findings of this study indicate that there is a significant positive relationship between the financial capital and net assets of construction companies and their corporate performance in terms of turnover. The data collected did not support any significant relationship between other operating financial variables, such as Return on Capital Employed and profitability and financial performance. Research limitations/implications – A predictive model for predicting the financial performance of firms was developed from the data collected. The implication of this is that the more financial capital possessed by a construction company, the more the company’s financial performance in terms of turnover. The CIDB can use financial capacity as a measure when grading contractors, as a good number of contractors are not performing. The predictive model developed could be adopted by the CIDB as an instrument for predicting the corporate financial performance of construction companies that seek to be listed on their contractor grading register. Originality/value – This research will be of significance to researchers and members of the research community in providing new knowledge as well as to contractors in enabling them to understand the importance of having financial capital. It is also of importance to the CIDB in their quest for contractor and construction industry development. Further research to validate the results obtained in this study using a larger sample size across more provinces of South Africa will form the basis of future studies.

Application level of lean construction techniques in reducing accidents in construction projects

2019 ◽  
Vol 24 (3) ◽  
pp. 274-293
Author(s):  
Adnan Enshassi ◽  
Nour Saleh ◽  
Sherif Mohamed
Keyword(s):  
Middle East ◽  
Construction Projects ◽  
Gaza Strip ◽  
Descriptive Analysis ◽  
Lean Construction ◽  
Current Status ◽  
Future Research ◽  
Accident Investigation ◽  
Content Type ◽  
Construction Companies

Purpose This paper aims to investigate the application of lean construction (LC) techniques in reducing accidents in construction projects. Design/methodology/approach A quantitative approach was used to collect the required data using a questionnaire survey and descriptive analysis was used to analyse the collected data. The LC techniques that were investigated in this paper are related to the tools of the last planner system (LPS), increased visualisation (IV), 5S, error-proofing, daily huddle meetings (DHMs), first-run studies (FRS), continuous improvement (Kaizen) and accident investigation (5Whys). Findings The overall results indicated that LC techniques are poorly implemented in construction projects in the Gaza Strip. The top three LC tools used to reduce the causes of accidents in the Gaza construction projects were 5Whys, 5S and LPS, while the highest three LC techniques applied to reduce the causes of accidents that were applicable were cleaning the workplace and removing materials and machines that are not required; conducting accident investigation and root cause analysis programmes; and using safety signs and labels on site. Research limitations/implications There is a lack of information and published studies regarding the links between LC and safety, especially in the Middle East. This paper is limited to the perceptions and geographical boundaries; therefore, it cannot be generalised. However, it could form the basis for useful comparison in the future. Triangulation research method could also be used in future research to minimise the bias and validate the conclusions. Practical implications The findings of this paper will stress professionals and construction companies in Gaza to reconsider their behaviour towards using LC techniques. The findings of this paper will aid them to shift their attention and resources towards including LC techniques in their plans to reduce the causes of accidents on construction sites. Social implications The findings of this paper will encourage professionals and construction companies in Gaza to reconsider their behaviour towards using LC techniques. The findings will also aid them to shift their attention and resources towards including LC techniques in their plans to reduce and/or avoid the causes of accidents on construction. Originality/value Because of the lack of published works that are specific to the Middle East, the authors believe that the originality lies in the paper’s serious attempt to explore the application level of the LC concept to safety in this part of the world. This paper contributes to a better understanding of the applicability of LC techniques in terms of accidents reduction. Findings from this paper provide a clear picture of the current status of using LC techniques to reduce accidents in the Gazan construction projects which drive them to investigate the main barriers and try to overcome them.

A stakeholder-based risk assessment and intervention framework for international construction projects

2019 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Tao Wang ◽  
Shangde Gao ◽  
Pinchao Liao ◽  
Tsenguun Ganbat ◽  
Junhua Chen
Keyword(s):  
Risk Factors ◽  
Risk Assessment ◽  
Risk Management ◽  
Construction Projects ◽  
Management Practices ◽  
Intervention Strategies ◽  
The Body ◽  
Content Type ◽  
International Construction ◽  
Project Objectives

Purpose The purpose of this paper is to construct a two-stage risk management framework for international construction projects based on the meta-network analysis (MNA) approach. A plethora of international construction studies seems to assume risks as independent and therefore, risk intervention strategies are usually critiqued as ineffective. Design/methodology/approach In the risk assessment stage, a multi-tiered risk network structure was developed with the project objectives, risk events, risk factors and stakeholders, and critical risk factors were selected based on a series of calculations. In the risk intervention stage, targeted risk intervention strategies were proposed for stakeholders based on the results of the first stage. A highway construction project in Eastern Europe was selected as a case study. Findings The results showed that 17 risk factors in three categories – external, stakeholder-related and internal – are critical, and the project manager, construction management department, supplier and contract department are the most critical stakeholders that affect the entire project performance. Based on the critical risk factors and project stakeholders, targeted risk intervention strategies were proposed. The risk assessment results of MNA were found to be more reliable and consistent with the project conditions than the risk matrix method; the risk intervention strategies of MNA can effectively address project objectives. Originality/value This study modeled risk priorities based on risk associations and put forward a new method for risk management, supplementing the body of knowledge of international construction. The results of this study are of critical importance in management practices.

Reducing waste to landfill in the UK: identifying impediments and critical solutions

2013 ◽  
Vol 10 (2) ◽  
pp. 131-142 ◽  
Author(s):  
Lukumon O. Oyedele ◽  
Martin Regan ◽  
Jason von Meding ◽  
Ashraf Ahmed ◽  
Obas John Ebohon ◽  
...  
Keyword(s):  
Construction Industry ◽  
Construction Projects ◽  
Methodological Approach ◽  
Cost Savings ◽  
Content Type ◽  
Construction Companies ◽  
Early Communication ◽  
Design Changes ◽  
Critical Solutions ◽  
The Uk

PurposeThe UK construction industry produces up to one third of all waste to landfill. This study aims to identify specific project practices impeding the reduction of waste in construction projects as well as uncovering potential waste solutions throughout the project delivery process. The rationale being that for such a drastic reduction in waste to landfill, holistic and extensive measures would be required.Design/methodology/approachA two‐way methodological approach was used. This comprised qualitative unstructured interviews and a quantitative questionnaire survey of three major stakeholders in the UK construction industry: clients, architects and contractors.FindingsDesign factors remain the major cause of impediments to waste reduction to landfill. Critical impediments include clients making waste prevention a top priority in projects, overly complex designs, waste taking a low priority compared to project time and costs, lack of concerns by designers for buildability, among others. Critical solutions include early supply chain involvement in design process, choosing materials for their durability, early communication of design changes to all parties, longer project programmes and better lead times, among others.Practical implicationsIn all, the target of halving construction waste to landfill based on the 2008 benchmark is achievable but would require construction companies to take it upon themselves to implement the proposed solutions suggested by this study.Originality/valueThe value of this research is to provide UK construction companies with solutions to reduce waste and aid the reaching of the landfill target, as landfill is decreasing as a solution to waste. In addition the cost savings on reducing waste could be crucial for companies in this current economic climate.

A study on how to improve the throughput time of Lean Six Sigma projects in a construction company

2014 ◽  
Vol 5 (2) ◽  
pp. 212-226 ◽  
Author(s):  
Aat van den Bos ◽  
Benjamin Kemper ◽  
Vincent de Waal
Keyword(s):  
Six Sigma ◽  
Selection Process ◽  
Lean Six Sigma ◽  
Throughput Time ◽  
Content Type ◽  
Construction Company ◽  
Construction Companies ◽  
Project Completion ◽  
Depth Analysis ◽  
Improvement Programs

Purpose – The purpose of this paper is to study the use of the Lean Six Sigma (LSS) methodology in a construction company. Design/methodology/approach – In our study we analyze 62 LSS improvement projects carried out within a Dutch company. In our analysis we focus on both speed, in terms of throughput time (THT), and impact, in terms of project completion, of each project. Findings – From the analysis we conclude that the current THT of a project is about a year and we identify important factors that cause large project's THTs These factors are then translated into recommendations for an efficient execution of LSS improvement projects. Research limitations/implications – The analysis is based on a sample from one company of the Dutch construction industry. The scope should be broadened as more companies adopt quality and process improvement programs, such as LSS. Originality/value – The narrowed scope, only one company and focused mostly on the speed of projects, helped to do an in-depth analysis. Therefore, we are able to present concrete and useful recommendations that relate to practical issues in the execution of improvement projects. These recommendations offer a checklist for construction companies in the project selection process, in situations of starting or improving an LSS program

Managing renewal in fragmented business networks

IMP Journal ◽  
2016 ◽  
Vol 10 (1) ◽  
pp. 81-106 ◽  
Author(s):  
Malena Ingemansson Havenvid ◽  
Håkan Håkansson ◽  
Åse Linné
Keyword(s):  
Business Environment ◽  
Business Networks ◽  
Business Relationships ◽  
Core Network ◽  
Content Type ◽  
Internal Resources ◽  
Business Context ◽  
Construction Company ◽  
Construction Companies

Purpose – The authors argue that the construction industry is characterised by a fragmented business context with three main features: the project-based character, the strong focus on price in all parts of the supply chain along with the great importance of suppliers. This fragmentation has been identified as problematic for the industry’s ability to innovate and engage in renewal. The purpose of this paper is to investigate this further by focusing on how construction companies manage renewal in a fragmented business context. Design/methodology/approach – The authors use an in-depth case study of a housing project in Sweden to discuss how firms manage renewal in a fragmented type of business environment. The authors identify the challenge of achieving renewal in an individual construction company as an issue of handling intra- and inter-organisational issues in both intra- and inter-project environments. Findings – The case study indicates that renewal can be partly handled and managed through long-term business relationships and partly through opening up to new business relationships. Moreover, innovations and learning developed in other projects can be used in the focal project, and due to a repetitive task it is possible for the construction company to use a core network of individuals and organisations to enhance overall renewal among actors. Research limitations/implications – The study needs to be supported by further empirical observations. The paper encourages IMP scholars to further investigate projects from an industrial network approach. Practical implications – The study shows that the internal resources of firms can be used systematically to create continuity in a multi-project organisation, and that relationships can be used to bridge learning and innovation among actors across projects. Originality/value – The paper addresses why firms in fragmented (project-based) businesses might struggle with achieving renewal in a novel way by outlining and investigating four organisational challenges they must handle.

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