Skip to content Skip to navigation

Evaluating IT Investments in Construction: Accounting for Strategic Flexibility

TitleEvaluating IT Investments in Construction: Accounting for Strategic Flexibility
Publication TypeTechnical Report
Year of Publication2003
AuthorsEkström, MA, Björnsson, HC
Date Published03/2003
Publication Languageeng
KeywordsCenter for Integrated Facility Engineering, CIFE, Decision Analysis, Information Technology, Investment Evaluation, Real Option, Stanford University
AbstractWhen investing in IT applications, Architecture/Engineering/Construction (AEC) managers do not only obtain direct benefits, such as immediate cost and time savings, but also the option of adding future applications to the original investment as the business and technical environment changes. Traditional discounted cash flow models do not account for managerial flexibility, whereas qualitative evaluation models require decision makers to agree upon an abstract measurement scale. Probabilistic models, such as real options and decision-analysis, explicitly model risks and therefore quantify the value of flexibility in monetary terms. A real option model links uncertainty to the value of an underlying traded asset and therefore produce an objective measure of the value of flexibility. The major limitation of this methodology is that its applicability is restricted to model risks that are external to the investing organization. We conducted a case study that investigated he value of adding a request for information (RFI) automation tool to a general contractor's enterprise resource planning (ERP) tool. The study showed the major risk to be the adoption rate of architects; and that there exists publicly traded software companies the stock prices of which can be to estimate this risk. As a result, it is possible to construct a real option model to measure the value of this flexibility. In another case study, a contractor considered investing in a pilot project to investigate the feasibility of company wide wireless inspection system. Since the risks are internal, a simpler decision analysis model is used instead of a real option model to evaluate the value of the pilot project in view of the information it is expected to generate. The results show that it is possible to quantify the value of managerial flexibility for IT investments in the AEC industry but that the proper method to use is contingent on the nature of the investment project.
PDF Link
Citation Key872