Title: Major projects optimal capacity and timing with time-to-build and investment cost dependency on capacity
Authors: Skander Ben Abdallah; Alexandre Croutzet; Janosch Ortmann
Addresses: Département de Management et Technologie, École des Sciences de la Gestion, Université du Québec à Montréal, 320 rue Ste-Catherine Est, Bureau DS-3829, Montréal (Québec) – H2X 1L7, Canada ' École des Sciences de l'Administration, Université TÉLUQ, 5800 Rue Saint-Denis, Bureau 1105, Montréal, H2S 3L5, Québec, Canada ' Département de Management et Technologie, École des Sciences de la Gestion, Université du Québec à Montréal, 320 rue Ste-Catherine Est, Bureau DS-3719, Montréal (Québec) – H2X 1L7, Canada
Abstract: This paper acknowledges the dependency of the project schedule, known also as the time-to-build, on the project capacity and proposes a real options model to determine the project optimal capacity, timing and value. In particular, we show that the dependency of the time-to-build on the capacity implies that the optimal capacity depends on the project time-to-build even in the waiting region. We also show that a greater sensitivity of the time-to-build to project capacity leads to a lower optimal capacity. Moreover, as the underperformance of major projects in terms of costs and schedule is frequent, we quantify the loss associated with the late completion of a major project. By doing so, we provide practitioners with a tool to evaluate the expected losses associated with project underperformance consistent with the reality of major projects.
Keywords: major projects; real options; delays; cost overruns; optimal timing; optimal capacity; investment cost dependency on capacity; time-to-build dependency on capacity; major projects underperformance.
International Journal of Applied Decision Sciences, 2020 Vol.13 No.4, pp.435 - 447
Received: 07 Jun 2019
Accepted: 07 Sep 2019
Published online: 12 Aug 2020 *