Valuing Flexibility in Architecture, Engineering, and Construction Information Technology Investments
Publication: Journal of Construction Engineering and Management
Volume 131, Issue 4
Abstract
When investing in information technology (IT) applications, construction managers implicitly account for the value of adding future applications to the original investment as the business and technical environment changes. A real option model links uncertainty to the value of an underlying traded asset, providing an objective measure of this managerial flexibility. A case study that investigated the value of options to extend a general contractor’s software platform showed that it is possible to construct a real option model which measures the value of this flexibility, since the major risk (the architect’s adoption rate) is external to the investing organization. In another case study, a contractor evaluated the value of the pilot project in view of the information it is expected to generate. Since the risks are internal, a decision analysis model is used instead of a binary option model. The results show that it is possible to quantify the value of managerial flexibility for IT investments in the architecture, engineering, and construction industry, but that the proper method to use is contingent on the nature of the investment project.
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Information & Authors
Information
Published In
Journal of Construction Engineering and Management
Volume 131 • Issue 4 • April 2005
Pages: 431 - 438
Copyright
© 2005 ASCE.
History
Received: Dec 16, 2002
Accepted: Jun 30, 2004
Published online: Apr 1, 2005
Published in print: Apr 2005
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