Flexible Infrastructure Design: A Real Options Reasoning Approach to Navigating Uncertainty in Large-Scale Projects
Publication: Journal of Management in Engineering
Volume 40, Issue 3
Abstract
This study addresses the imperative of enhancing design flexibility in large-scale infrastructure projects to effectively navigate emerging uncertainties. Current appraisal methods often prioritize risk mitigation over uncertainty management, which hinders the implementation of flexible designs. Instead, this research explores the integration of design flexibility through real options reasoning (ROR) to create flexible infrastructures. As a result, a conceptual framework is proposed that draws from contemporary industrial practices such as modularization and project safeguards. Modularization, grounded in the alignment of functions and components, bolsters flexibility. Project safeguards, operationalized as passive or active measures, embed options in project outcomes. A proposed method emerges that synthesizes real options, modularization, and project safeguards into four guiding steps and nine helpful heuristics. These steps, enriched by heuristics, offer a structured approach to grasp, strategize, and implement design flexibility, transforming it from theory to impactful project management. Case-based and numerical validation was conducted to validate the proposed method. The proposed approach is illustrated through a case study of Heathrow Airport’s £14 billion expansion. The research implications include the exploration of improved appraisal methods for large infrastructure projects, the advancement of ROR and application of heuristics in engineering management, and additional investigation into the integration of modularization and safeguards to enhance design flexibility in uncertain environments.
Practical Applications
This study presents a new methodological approach that offers a structured framework for effectively communicating the advantages of design flexibility in managing uncertainty during the appraisal process of large-scale infrastructure projects. The approach empowers project leaders to tackle uncertainties intrinsic to large-scale projects. It fosters design flexibility’s benefits, guides project selection aligned with growth goals, and manages uncertainties by conceptualizing projects as sequenced steps. This method comprises four sequential steps, each pivotal for enhancing design flexibility. It begins by translating strategic needs into tangible options, enhancing adaptive decision-making. The subsequent step involves selecting optimal product types and modularization options to fortify flexibility. Operationalizing risk, modularization, and safeguards in the third step cements flexibility into project architecture. The final step involves cost–benefit analysis, aiding informed investment decisions. These steps, enriched by simple heuristics, offer a structured approach to grasp, strategize, and implement design flexibility, transforming it to impactful project management. Ultimately, this approach guides projects toward a more adaptive future. The proposed approach is ideal for intuitive executive decision-making through practical shortcuts, particularly when analytical modeling faces limitations.
Get full access to this article
View all available purchase options and get full access to this article.
Data Availability Statement
All data, models, and code generated or used during the study appear in the published article.
Acknowledgments
The authors thank the Editor, Associate Editor, and two anonymous reviewers for their constructive comments.
References
Abdul Nabi, M., and I. H. El-adaway. 2020. “Modular construction: Determining decision-making factors and future research needs.” J. Manage. Eng. 36 (6): 04020085. https://doi.org/10.1061/(ASCE)ME.1943-5479.0000859.
Abdul Nabi, M., and I. H. El-adaway. 2021. “Understanding the key risks affecting cost and schedule performance of modular construction projects.” J. Manage. Eng. 37 (4): 04021023. https://doi.org/10.1061/(ASCE)ME.1943-5479.0000917.
Abdul Nabi, M., A. Elsayegh, and I. H. El-adaway. 2023. “Understanding collaboration requirements for modular construction and their cascading failure impact on project performance.” J. Manage. Eng. 39 (6): 04023043. https://doi.org/10.1061/JMENEA.MEENG-5440.
Ahmed, M. O., and I. H. El-adaway. 2023. “Data-driven analysis of construction bidding stage–related causes of disputes.” J. Manage. Eng. 39 (5): 04023026. https://doi.org/10.1061/JMENEA.MEENG-5426.
Al-Mazrouie, J. R., U. Ojiako, T. Williams, M. Chipulu, and A. Marshall. 2021. “An operations readiness typology for mitigating against transitional ‘disastrous openings’ of airport infrastructure projects.” Prod. Plann. Control 32 (4): 283–302. https://doi.org/10.1080/09537287.2020.1730997.
Andringa, L., Ö. Ökmen, M. Leijten, M. Bosch-Rekveldt, and H. Bakker. 2022. “Incorporating project complexities in risk assessment: Case of an airport expansion construction project.” J. Manage. Eng. 38 (6): 05022015. https://doi.org/10.1061/(ASCE)ME.1943-5479.0001099.
Assaad, R. H., I. H. El-adaway, M. Hastak, and K. LaScola Needy. 2022. “Quantification of the state of practice of offsite construction and related technologies: Current trends and future prospects.” J. Constr. Eng. Manage. 148 (7): 04022055. https://doi.org/10.1061/(ASCE)CO.1943-7862.0002302.
Assaad, R. H., I. H. El-adaway, M. Hastak, and K. LaScola Needy. 2023. “Key factors affecting labor productivity in offsite construction projects.” J. Constr. Eng. Manage. 149 (1): 04022158. https://doi.org/10.1061/JCEMD4.COENG-12654.
Baldwin, C. Y., and K. B. Clark. 2000. Design rules: The power of modularity. London: MIT Press.
Bertram, N., S. Fuchs, J. Mischke, R. Palter, G. Strube, and J. Woetzel. 2019. Modular construction: From projects to products, 1–34. Chicago: McKinsey & Company.
Cardin, M.-A. 2014. “Enabling flexibility in engineering systems: A taxonomy of procedures and a design framework.” J. Mech. Des. 136 (1): 011005. https://doi.org/10.1115/1.4025704.
Cardin, M.-A., M. Ranjbar-Bourani, and R. de Neufville. 2015. “Improving the lifecycle performance of engineering projects with flexible strategies: Example of on-shore LNG production design.” Syst. Eng. 18 (3): 253–268. https://doi.org/10.1002/sys.21301.
Chen, G., M. Liu, H. Li, S. M. Hsiang, and A. Jarvamard. 2023. “Motivating reliable collaboration for modular construction: Shapley value–based smart contract.” J. Manage. Eng. 39 (6): 04023042. https://doi.org/10.1061/JMENEA.MEENG-5428.
Choi, J. O., J. T. O’Connor, Y. H. Kwak, and B. K. Shrestha. 2019. “Modularization business case analysis model for industrial projects.” J. Manage. Eng. 35 (3): 04019004. https://doi.org/10.1061/(ASCE)ME.1943-5479.0000683.
Choi, J. O., B. K. Shrestha, Y. H. Kwak, and J. S. Shane. 2020. “Innovative technologies and management approaches for facility design standardization and modularization of capital projects.” J. Manage. Eng. 36 (5): 04020042. https://doi.org/10.1061/(ASCE)ME.1943-5479.0000805.
Delhi, V. S. K., and A. Mahalingam. 2020. “Relating institutions and governance strategies to project outcomes: Study on public–private partnerships in infrastructure projects in India.” J. Manage. Eng. 36 (6): 04020076. https://doi.org/10.1061/(ASCE)ME.1943-5479.0000840.
De Meyer, A., C. Loch, and M. T. Pich. 2002. “Managing project uncertainty: From variation to chaos.” MIT Sloan Manage. Rev. 43 (2): 60–67.
de Neufville, R., O. de Weck, J. Lin, and S. Scholtes. 2009. “Identifying real options to improve the design of engineering systems.” In Real options in engineering design, operations, and management, 75–98. Boca Raton, FL: CRC Press.
de Neufville, R., and S. Scholtes. 2011. Flexibility in engineering design. Cambridge, MA: MIT Press.
Denicol, J., A. Davies, and I. Krystallis. 2020. “What are the causes and cures of poor megaproject performance? A systematic literature review and research agenda.” Project Manage. J. 51 (3): 328–345. https://doi.org/10.1177/8756972819896113.
Department for Transport. 2016. Heathrow Airport expansion. London: Crown.
Di Maddaloni, F., G. Favato, and R. Vecchiato. 2022. “Whether and when to invest in transportation projects: Combining scenarios and real options to manage the uncertainty of costs and benefits.” IEEE Trans. Eng. Manage. 71 (Feb): 1023–1037. https://doi.org/10.1109/TEM.2022.3142130.
Efatmaneshnik, M., S. Shoval, and L. Qiao. 2018. “A standard description of the terms module and modularity for systems engineering.” IEEE Trans. Eng. Manage. 67 (2): 365–375. https://doi.org/10.1109/TEM.2018.2878589.
Ethiraj, S. K., and D. Levinthal. 2004. “Modularity and innovation in complex systems.” Manage. Sci. 50 (2): 159–173. https://doi.org/10.1287/mnsc.1030.0145.
Ghannad, P., and Y.-C. Lee. 2022. “Automated modular housing design using a module configuration algorithm and a coupled generative adversarial network (CoGAN).” Autom. Constr. 139 (Jul): 104234. https://doi.org/10.1016/j.autcon.2022.104234.
Gil, N. 2007. “On the value of project safeguards: Embedding real options in complex products and systems.” Res. Policy 36 (7): 980–999. https://doi.org/10.1016/j.respol.2007.03.004.
Gil, N. 2009. “Project safeguards: Operationalizing option-like strategic thinking in infrastructure development.” IEEE Trans. Eng. Manage. 56 (2): 257–270. https://doi.org/10.1109/TEM.2009.2016063.
Gil, N., and S. Beckman. 2009. “Introduction: Infrastructure meets business: Building new bridges, mending old ones.” Calif. Manage. Rev. 51 (2): 6–29. https://doi.org/10.2307/41166478.
Gil, N., and B. S. Tether. 2011. “Project risk management and design flexibility: Analysing a case and conditions of complementarity.” Res. Policy 40 (3): 415–428. https://doi.org/10.1016/j.respol.2010.10.011.
Gil, N. A., G. Biesek, and J. Freeman. 2015. “Interorganizational development of flexible capital designs: The case of future-proofing infrastructure.” IEEE Trans. Eng. Manage. 62 (3): 335–350. https://doi.org/10.1109/TEM.2015.2412456.
Habraken, N. J. 2008. “Design for flexibility.” Build. Res. Inf. 36 (3): 290–296. https://doi.org/10.1080/09613210801995882.
Heathrow. 2019. Heathrow airport expansion—Consultation document, 109. London: Heathrow.
Hoseini, E., M. Bosch-Rekveldt, and M. Hertogh. 2020. “Cost contingency and cost evolvement of construction projects in the preconstruction phase.” J. Constr. Eng. Manage. 146 (6): 05020006. https://doi.org/10.1061/(ASCE)CO.1943-7862.0001842.
Jalali Sohi, A., M. Bosch-Rekveldt, and M. Hertogh. 2021. “Practitioners’ perspectives on flexible project management.” IEEE Trans. Eng. Manage. 68 (4): 911–925. https://doi.org/10.1109/TEM.2019.2914833.
Kluck, M., and J. O. Choi. 2023. Modularization: The fine art of offsite preassembly for capital projects. New York: Wiley.
Krystallis, I., P. Demian, and A. D. F. Price. 2015. “Using BIM to integrate and achieve holistic future-proofing objectives in healthcare projects.” Construct. Manage. Econ. 33 (11–12): 890–906. https://doi.org/10.1080/01446193.2016.1164326.
Krystallis, I., and G. Locatelli. 2022. “Normalizing white-collar wrongdoing in professional service firms.” J. Manage. Eng. 38 (5): 04022049. https://doi.org/10.1061/(ASCE)ME.1943-5479.0001079.
Krystallis, I., G. Locatelli, and N. Murtagh. 2021. “Futureproofing complex infrastructure projects using real options.” IEEE Eng. Manage. Rev. 49 (1): 127–132. https://doi.org/10.1109/EMR.2020.3036446.
Krystallis, I., G. Locatelli, and N. Murtagh. 2022. “Talking about futureproofing: Real options reasoning in complex infrastructure projects.” IEEE Trans. Eng. Manage. 69 (6): 3009–3022. https://doi.org/10.1109/TEM.2020.3026454.
Krystallis, I., G. Locatelli, and E. Papadonikolaki. 2023. “Captain and conscript or companions in operational reconfiguration? The case of an infrastructure owner with projects and asset management units.” Prod. Plann. Control 1–18. https://doi.org/10.1080/09537287.2023.2249438.
Krystallis, I., V. Vernikos, S. El-Jouzi, and P. Burchill. 2016. “Future-proofing governance and BIM for owner operators in the UK.” Infrastruct. Asset Manage. 3 (1): 12–20. https://doi.org/10.1680/jinam.15.00015.
Lessing, J., and S. Brege. 2018. “Industrialized building companies’ business models: Multiple case study of Swedish and North American companies.” J. Constr. Eng. Manage. 144 (2): 05017019. https://doi.org/10.1061/(ASCE)CO.1943-7862.0001368.
Love, P. E. D., L. A. Ika, J. Matthews, and W. Fang. 2022a. “Risk and uncertainty in the cost contingency of transport projects: Accommodating bias or heuristics, or both?” IEEE Trans. Eng. Manage. 71: 1–15. https://doi.org/10.1109/TEM.2021.3119064.
Love, P. E. D., L. A. Ika, and J. K. Pinto. 2022b. “Homo heuristicus: From risk management to managing uncertainty in large-scale infrastructure projects.” IEEE Trans. Eng. Manage. 71: 1–10. https://doi.org/10.1109/TEM.2022.3170474.
McDonald, R. 2000. “Real options and rules of thumb in capital budgeting.” In Project flexibility, agency, and competition: New developments in the theory and application of real options, 13–33. New York: Oxford University Press.
McGrath, R. G. 1997. “A real options logic for initiating technology positioning investments.” Acad. Manage. Rev. 22 (4): 974–996. https://doi.org/10.2307/259251.
McGrath, R. G., W. J. Ferrier, and A. L. Mendelow. 2004. “Response: Real options as engines of choice and heterogeneity.” Acad. Manage. Rev. 29 (1): 86. https://doi.org/10.2307/20159011.
Miller, K. D., and H. G. Waller. 2003. “Scenarios, real options and integrated risk management.” Long Range Plann. 36 (1): 93–107. https://doi.org/10.1016/S0024-6301(02)00205-4.
Multi-Hazard Mitigation Council. 2019. Natural hazard mitigation saves: 2019 Report. Washington, DC: National Institute of Building Sciences.
Paliwal, S., J. O. Choi, J. Bristow, H. K. Chatfield, and S. Lee. 2021. “Construction stakeholders’ perceived benefits and barriers for environment-friendly modular construction in a hospitality centric environment.” Int. J. Industrialized Constr. 2 (1): 15–29. https://doi.org/10.29173/ijic252.
Pan, W., and C. K. Hon. 2020. “Briefing: Modular integrated construction for high-rise buildings.” Proc. Inst. Civ. Eng. Munic. Eng. 173 (2): 64–68. https://doi.org/10.1680/jmuen.18.00028.
Pan, W., D. Parker, and M. Pan. 2023. “Problematic interfaces and prevention strategies in modular construction.” J. Manage. Eng. 39 (2): 05023001. https://doi.org/10.1061/JMENEA.MEENG-5083.
Pan, W., and Z. Zhang. 2022. “Evaluating modular healthcare facilities for COVID-19 emergency response—A case of Hong Kong.” Buildings 12 (9): 1430. https://doi.org/10.3390/buildings12091430.
Pan, W., and Z. Zhang. 2023. “Benchmarking the sustainability of concrete and steel modular construction for buildings in urban development.” Sustainable Cities Soc. 90 (Mar): 104400. https://doi.org/10.1016/j.scs.2023.104400.
Ramasesh, R. V., and T. R. Browning. 2014. “A conceptual framework for tackling knowable unknown unknowns in project management.” J. Oper. Manage. 32 (4): 190–204. https://doi.org/10.1016/j.jom.2014.03.003.
Robinson, M. 2019. “London Heathrow Airport reveals expansion ‘masterplan’.” Accessed August 31, 2023. https://www.cnn.com/travel/article/heathrow-airport-expansion-plans-revealed-intl-scli-gbr/index.html.
Saleh, J. H., G. Mark, and N. C. Jordan. 2009. “Flexibility: A multi-disciplinary literature review and a research agenda for designing flexible engineering systems.” J. Eng. Des. 20 (3): 307–323. https://doi.org/10.1080/09544820701870813.
Seo, W., Y. H. Kwak, and Y. Kang. 2021. “Relationship between consistency and performance in the claim management process for construction projects.” J. Manage. Eng. 37 (6): 04021068. https://doi.org/10.1061/(ASCE)ME.1943-5479.0000973.
Simon, H. A. 1962. “The architecture of complexity.” Proc. Am. Philos. Soc. 106 (6): 467–482.
Svejvig, P. 2021. “A Meta-theoretical framework for theory building in project management.” Int. J. Project Manage. 39 (8): 849–872. https://doi.org/10.1016/j.ijproman.2021.09.006.
Swanson, R., and V. Sakhrani. 2020. “Appropriating the value of flexibility in PPP megaproject design.” J. Manage. Eng. 36 (5): 05020010. https://doi.org/10.1061/(ASCE)ME.1943-5479.0000770.
Taleb, N. N. 2007. “Black swans and the domains of statistics.” Am. Stat. 61 (3): 198–200. https://doi.org/10.1198/000313007X219996.
Taleb, N. N. 2016. Antifragile: Things that gain from disorder. New York: Random House.
Thai, H.-T., T. Ngo, and B. Uy. 2020. “A review on modular construction for high-rise buildings.” Structures 28 (Dec): 1265–1290. https://doi.org/10.1016/j.istruc.2020.09.070.
Triantis, A. 2005. “Realizing the potential of real options: Does theory meet practice?” J. Appl. Corporate Finance 17 (2): 8–16. https://doi.org/10.1111/j.1745-6622.2005.00028.x.
Trigeorgis, L., and J. J. Reuer. 2017. “Real options theory in strategic management.” Strategic Manage. J. 38 (1): 42–63. https://doi.org/10.1002/smj.2593.
Ulrich, K. 1995. “The role of product architecture in the manufacturing firm.” Res. Policy 24 (3): 419–440. https://doi.org/10.1016/0048-7333(94)00775-3.
Whyte, J., and T. Nussbaum. 2020. “Transition and temporalities: Spanning temporal boundaries as projects end and operations begin.” J. Project Manage. 51 (5): 505–521. https://doi.org/10.1177/8756972820919002.
Wu, L., W. Lu, R. Zhao, J. Xu, X. Li, and F. Xue. 2022. “Using blockchain to improve information sharing accuracy in the onsite assembly of modular construction.” J. Manage. Eng. 38 (3): 04022014. https://doi.org/10.1061/(ASCE)ME.1943-5479.0001029.
Yilmaz, S., S. R. Daly, C. M. Seifert, and R. Gonzalez. 2016. “Evidence-based design heuristics for idea generation.” Des. Stud. 46 (Sep): 95–124. https://doi.org/10.1016/j.destud.2016.05.001.
Zhou, S. A., L. Mosca, and J. Whyte. 2023. “How the reliability of external competences shapes the modularization strategies of industrialized construction firms.” Construct. Manage. Econ. 41 (7): 608–619. https://doi.org/10.1080/01446193.2023.2187071.
Information & Authors
Information
Published In
Copyright
© 2024 American Society of Civil Engineers.
History
Received: May 22, 2023
Accepted: Dec 12, 2023
Published online: Feb 27, 2024
Published in print: May 1, 2024
Discussion open until: Jul 27, 2024
ASCE Technical Topics:
- Algorithms
- Business management
- Case studies
- Construction engineering
- Construction management
- Continuum mechanics
- Dynamics (solid mechanics)
- Engineering fundamentals
- Engineering mechanics
- Infrastructure
- Management methods
- Mathematics
- Methodology (by type)
- Motion (dynamics)
- Numerical methods
- Practice and Profession
- Project management
- Public administration
- Public health and safety
- Research methods (by type)
- Safety
- Solid mechanics
- Uncertainty principles
Authors
Metrics & Citations
Metrics
Citations
Download citation
If you have the appropriate software installed, you can download article citation data to the citation manager of your choice. Simply select your manager software from the list below and click Download.