Collar Option Model for Managing the Cost Overrun Caused by Change Orders
Effective change order management is very important in maintaining the financial sustainability of various stakeholders related to construction projects by minimizing cost overruns. In this study, we propose a zero-cost risk management approach based on the collar option model in order to control fo...
Main Authors: | , |
---|---|
Format: | Article |
Language: | English |
Published: |
MDPI AG
2015-08-01
|
Series: | Sustainability |
Subjects: | |
Online Access: | http://www.mdpi.com/2071-1050/7/8/10649 |
id |
doaj-bf83e98de55a4c4c9594c6df0b9c79b6 |
---|---|
record_format |
Article |
spelling |
doaj-bf83e98de55a4c4c9594c6df0b9c79b62020-11-24T22:44:28ZengMDPI AGSustainability2071-10502015-08-0178106491066310.3390/su70810649su70810649Collar Option Model for Managing the Cost Overrun Caused by Change OrdersSanghyo Lee0Kyunghwan Kim1Sustainable Building Research Center, Hanyang University, 55 Hanyangdaehak-ro, Sangrok-gu, Ansan-si, Gyeonggi-do 426-791, KoreaDepartment of Architectural Engineering, Konkuk University, 120 Neungdong-ro, Gwangjin-gu, Seoul 143-701, KoreaEffective change order management is very important in maintaining the financial sustainability of various stakeholders related to construction projects by minimizing cost overruns. In this study, we propose a zero-cost risk management approach based on the collar option model in order to control for the loss caused by change orders, the main cause of cost overruns in construction projects. We apply this model to actual projects for empirical analysis. The analysis, based on 237 projects, indicates that insurance buyers benefit from the collar option model in 46% of the cases, while insurance sellers do so in 53% of the cases. In most cases, the insurance buyer is the owner. According to the model, the owner experiences a loss when the cost overrun caused by change orders is lower than what was expected. In such cases, it is appropriate to conclude that the loss is not caused by the collar option model, but by the absence of additional revenue. However, the insurance seller suffers a loss if the cost overrun is higher than the strike price of the call option. Thus, the insurance seller needs to have expertise in construction management.http://www.mdpi.com/2071-1050/7/8/10649insurancechange orderscost overruncollar option modeloption theoryfinancial sustainability |
collection |
DOAJ |
language |
English |
format |
Article |
sources |
DOAJ |
author |
Sanghyo Lee Kyunghwan Kim |
spellingShingle |
Sanghyo Lee Kyunghwan Kim Collar Option Model for Managing the Cost Overrun Caused by Change Orders Sustainability insurance change orders cost overrun collar option model option theory financial sustainability |
author_facet |
Sanghyo Lee Kyunghwan Kim |
author_sort |
Sanghyo Lee |
title |
Collar Option Model for Managing the Cost Overrun Caused by Change Orders |
title_short |
Collar Option Model for Managing the Cost Overrun Caused by Change Orders |
title_full |
Collar Option Model for Managing the Cost Overrun Caused by Change Orders |
title_fullStr |
Collar Option Model for Managing the Cost Overrun Caused by Change Orders |
title_full_unstemmed |
Collar Option Model for Managing the Cost Overrun Caused by Change Orders |
title_sort |
collar option model for managing the cost overrun caused by change orders |
publisher |
MDPI AG |
series |
Sustainability |
issn |
2071-1050 |
publishDate |
2015-08-01 |
description |
Effective change order management is very important in maintaining the financial sustainability of various stakeholders related to construction projects by minimizing cost overruns. In this study, we propose a zero-cost risk management approach based on the collar option model in order to control for the loss caused by change orders, the main cause of cost overruns in construction projects. We apply this model to actual projects for empirical analysis. The analysis, based on 237 projects, indicates that insurance buyers benefit from the collar option model in 46% of the cases, while insurance sellers do so in 53% of the cases. In most cases, the insurance buyer is the owner. According to the model, the owner experiences a loss when the cost overrun caused by change orders is lower than what was expected. In such cases, it is appropriate to conclude that the loss is not caused by the collar option model, but by the absence of additional revenue. However, the insurance seller suffers a loss if the cost overrun is higher than the strike price of the call option. Thus, the insurance seller needs to have expertise in construction management. |
topic |
insurance change orders cost overrun collar option model option theory financial sustainability |
url |
http://www.mdpi.com/2071-1050/7/8/10649 |
work_keys_str_mv |
AT sanghyolee collaroptionmodelformanagingthecostoverruncausedbychangeorders AT kyunghwankim collaroptionmodelformanagingthecostoverruncausedbychangeorders |
_version_ |
1725691674282164224 |