Hybrid Model Incorporating Real Options with Process Centric and System Dynamics Modeling to Assess Value of Investments in Alternative Dispute Resolution Techniques

Abstract

Project-specific dispute resolution ladders (DRLs) are typically implemented in construction projects to resolve issues arising between the project participants. The DRL typically consists of single or multiple alternative dispute resolution (ADR) techniques to address construction issues at the three levels of escalation: conflicts; disputes; and claims. However, a DRL requires significant investments to cover the direct costs incurred in-house by the project participants or, externally, if construction specialists and lawyers are recruited to assist in the resolution. Thus, the benefits of the DRL implementation in a construction project must outweigh its costs for the implementation to be worthwhile. This paper presents a methodology to study the effect of different resolution strategies on the value of the investment in a DRL using option/real option theories from financial engineering, process centric modeling, and system dynamics methodology. Of particular interest in this paper is the integration o...