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ERIC Number: ED526034
Record Type: Non-Journal
Publication Date: 2009
Pages: 260
Abstractor: As Provided
ISBN: ISBN-978-1-1095-8423-3
Quantitative Framework to Evaluate Alternative Dispute Resolution Investments in Architecture Engineering and Construction Projects Using Option and Real Option Theory
Menassa, Carol Chukri
ProQuest LLC, Ph.D. Dissertation, University of Illinois at Urbana-Champaign
A project-specific dispute resolution ladder (DRL) typically consists of multiple alternative dispute resolution (ADR) techniques that are chosen to assist in mitigating the impact of change orders and claims (CCO) occurring during the project construction phase, and avoid their escalation to protracted disputes that adversely affect a construction project's budget, schedule and quality. The choice of which ADR techniques need to be included in the project-specific DRL depends on the construction project characteristics and the ADR properties. The project characteristics can be divided into organizational issues which include structure, process and people; as well as uncertainty issues that might be either internal or external in nature. These project characteristics have been found to be the direct sources of CCO's in construction projects, and to directly affect: (1) the total number of CCO's occurring during the construction phase of the project; (2) the severity of these CCO's in term of additional cost and time; and (3) the time of occurrence of these CCO's during the project construction phase. On the other hand, the ADR characteristics include the time required to achieve resolution of a given CCO, the effectiveness of the ADR in helping the parties achieve resolution, and finally the costs associated with implementing a single or multiple ADR from the project-specific DRL to achieve resolution. These costs vary depending on whether the CCO is negotiated between the owner and the contractor or whether a third party is asked to assist with the settlement in case negotiation efforts fail to achieve an agreeable resolution. It is typical for the construction project participants to decide on which ADR techniques to include in a project-specific DRL during the project planning phase prior to start of construction when information about any expected CCO's and the effectiveness of the ADR in resolving them cannot be assessed with certainty. Thus, the objective of this research is to develop a decision tool that guides the choice of the most effective and economic ADR techniques to be incorporated in a project-specific DRL based on the project characteristics as well as the ADR properties. In this sense, the current research focuses on integrating construction engineering and management concepts with financial engineering theories to develop a hybrid and dynamic system that evaluates the economic feasibility of implementing a project-specific DRL. An economic feasibility model that incorporates two main concepts from financial engineering to account for the uncertainty in the initial estimates of the project characteristics and ADR properties is developed. The first concept involves drawing an analogy from financial and real market options to account for the uncertainty in estimating the different cash flows generated from the DRL implementation during the construction phase of a project. The second concept correlates the effect of CCO's on the expected cost savings in a project from a given DRL implementation with exogenous competitive entry and its effect on the gross value of a capital project being evaluated using real option theory. In this case, the occurrence of a CCO during the construction phase of the project reduces the owner's expectations of the cost savings associated with the chosen DRL. If the DRL is successfully initiated at CCO occurrence, then part of the reduction in the expected cost savings might be recovered depending on the effectiveness of the ADR techniques implemented to resolve the issue. In addition to the theoretical contribution of this research, a system to evaluate cost-benefit tradeoffs of a given DRL implementation in a construction project is developed. This system allows project participants to develop a project-specific DRL from a built in library of ADR techniques available for implementation at the different levels of escalation of a CCO. Based on the chosen project-specific DRL, an investment plan that will allow the owner and the contractor to monitor deviations in the expected costs when the DRL is implemented as CCO's arise during the construction phase of a project is determined by the system. This plan will also allow both parties to decide how far they want to go in the dispute based on the projected costs of resolution. [The dissertation citations contained here are published with the permission of ProQuest LLC. Further reproduction is prohibited without permission. Copies of dissertations may be obtained by Telephone (800) 1-800-521-0600. Web page:]
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Publication Type: Dissertations/Theses - Doctoral Dissertations
Education Level: N/A
Audience: N/A
Language: English
Sponsor: N/A
Authoring Institution: N/A