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Sustainability 2015, 7(8), 10649-10663; doi:10.3390/su70810649

Collar Option Model for Managing the Cost Overrun Caused by Change Orders

1
Institute of Occupational Medicine, Social Medicine and Environmental Medicine, Goethe-University, Theodor-Stern-Kai 7, Haus 9b, Frankfurt am Main 60590, Germany
1
Sustainable Building Research Center, Hanyang University, 55 Hanyangdaehak-ro, Sangrok-gu, Ansan-si, Gyeonggi-do 426-791, Korea
2
Department of Architectural Engineering, Konkuk University, 120 Neungdong-ro, Gwangjin-gu, Seoul 143-701, Korea
*
Author to whom correspondence should be addressed.
Academic Editor: Rachel J. C. Chen
Received: 24 June 2015 / Revised: 29 July 2015 / Accepted: 4 August 2015 / Published: 7 August 2015
(This article belongs to the Special Issue Sustainable Business and Development)
View Full-Text   |   Download PDF [1364 KB, uploaded 7 August 2015]   |  

Abstract

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. View Full-Text
Keywords: insurance; change orders; cost overrun; collar option model; option theory; financial sustainability insurance; change orders; cost overrun; collar option model; option theory; financial sustainability
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This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. (CC BY 4.0).

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Lee, S.; Kim, K. Collar Option Model for Managing the Cost Overrun Caused by Change Orders. Sustainability 2015, 7, 10649-10663.

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