Probabilistic approaches in the analysis of financial risk and uncertainty associated with capital project contracts

An application of Probabilistic methods based on Generating Functions, Monte Carlo and other related techniques to the study of Financial Risk and Uncertainty associated with contracts for major projects

Abstract

The main objective of the present thesis is the development of techniques for use in management planning and control of large projects such as conventional and nuclear power plants. The study carried out in close collaboration with industry gives special attention to the consideration of financial risk and uncertainty associated with major projects arising in large contracting operations. It is also of particular interest to those companies who handle a relatively few projects, where the projects are of relatively high monetary value. In broader context the techniques developed and surveyed fall into three classifications, namely: (i) Prediction techniques for Project Management; (ii) Risk Quantification; (iii) Global Business Volume Forecasting. Under (i), a mathematical model for the build up of activity and costs during the course of a project is first developed and its applications are described. The theory of Prediction analysis by least-squares is then developed and applied to the prediction of likely trend of the expenditure or effort associated with a project. Extensions to 'build up of activity and costs' model are then given which enable the quantification of the extra effort required to meet the completion date when the progress of the project is running late. The concept of 'point of no return' is developed as the critical time beyond which a project that is running late, cannot be brought back to the originally planned completion date by deploying additional effort subject to a company global constraint. The problem is then considered of the scheduling of an organisation which has the responsibility for several large projects. 0ptimal policy algorithm subject to company financial resources is presented. Under (ii), a comprehensive survey of the existing literature in risk quantification is given. The advantages and limitations of these methods the limitations arising particularly as the methods are of particular application to the capital investment problem rather than project management and control - are discussed. A detailed analysis of the effects of uncertainties which are represented by a variety of probability distributions on Present Value Profile' of a contract is carried. An empirical relationship between the parameters of the distributions and rate of cash flow to-date is assumed and discussed. Under (iii), techniques for forecasting the total volume of business for an organisation are developed, applied and discussed. The process of tendering is examined and discussed. Particular attention is given to examining the methods used both objective and subjective, to obtain values for the probabilities of success in obtaining contracts. The Probabilistic technique is developed for Global Business Volume forecasting, using probability generating functions; the computation is carried out with the application of combinatorial theory. Results from an approximate method based on the Central limit theorem are compared with those obtained using the Probabilistic technique. Validation and implementation of the developed techniques is examined with the help of hypothetical case studies. General conclusions arising out of the research along with recommendations for further research and study are given.

URI

https://bradscholars.brad.ac.uk/handle/10454/20468

Type

Thesis

Qualification name

PhD