An Option Pricing Approach to Optimal Bidding in Construction Projects

• Type: Article in International Scientific Journal
• Date: 2018-03

Authors

Ribeiro, João Adelino (Author) Other; Paulo Jorge Pereira (Author) FEP; Elísio Brandão (Author) FEP

Journal

Title: Managerial and Decision Economics

Vol. 39 No. 2

Pages: 115-265

ISSN: 0143-6570

Publisher: Wiley-Blackwell

Indexing

ISI Web of Knowledge - 2 Citations

ISI Web of Science

Scopus - 3 Citations

Other information

Authenticus ID: P-00N-JWY

DOI: 10.1002/mde.2878

Resumo (PT): Reaching an optimal mark-up value in the context of construction projects' bidding competitions has been a research topic for more than 40 years. This paper aims to contribute to this debate by applying a real options approach. The proposed model has a pure theoretical nature and is based on a maximization problem, whose outcome is the optimal price, that is, the price that should be included in the bid proposal. The model is later extended to accommodate the existence of penalty costs if the selected bidder refuses to enter into contract. Results reached using a numerical example demonstrate that the optimal price is higher when penalty costs are considered.

Abstract (EN): Reaching an optimal mark-up value in the context of construction projects' bidding competitions has been a research topic for more than 40 years. This paper aims to contribute to this debate by applying a real options approach. The proposed model has a pure theoretical nature and is based on a maximization problem, whose outcome is the optimal price, that is, the price that should be included in the bid proposal. The model is later extended to accommodate the existence of penalty costs if the selected bidder refuses to enter into contract. Results reached using a numerical example demonstrate that the optimal price is higher when penalty costs are considered.

Type (Professor's evaluation): Scientific

Notes: http://onlinelibrary.wiley.com/doi/10.1002/mde.2878/full