Abstract
Operation and maintenance (O&M) service contracts for water and sewer systems have increased considerably in the United States over the last 20 years. Successful O&M contract establishment requires a reasonable estimation of the O&M service contract coupled with a reliable risk-hedging mechanism, such as a ceiling agreement. Because the accurate valuation of an O&M contract is substantially influenced by the future O&M cost, which is subject to the future performance of the system, it is crucial that contracting parties develop realistic O&M cost scenarios based on a sound deterioration model. This study provides a real option-based methodology for the valuation of O&M contracts by modeling future O&M cost scenarios using deterioration models. Using sensitivity analyses, this study also investigates how surrounding conditions and negotiation options could affect the valuation of O&M contracts. The proposed methodology is expected to assist contracting parties in developing a fair and attractive O&M service contract.
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This work was supported by National Research Foundation of Korea grants funded by the Ministry of Education, Science, and Technology of Korea (2010-0014365 and 2011-0030841).
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Park, T., Kim, B. & Kim, H. Impact of Deterioration and Negotiation on Sewer System O&M Contracts from the Real Option Perspective. Water Resour Manage 26, 2973–2989 (2012). https://doi.org/10.1007/s11269-012-0059-4
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DOI: https://doi.org/10.1007/s11269-012-0059-4