Automated Approach to Negotiations of BOT Contracts with the Consideration of Project Risk

• Published in: Journal of construction engineering and management Vol. 134; no. 1; pp. 18 - 24
• Main Authors: Liou, Fen-May, Huang, Chih-Pin
• Format: Journal Article
• Language: English
• Published: Reston, VA American Society of Civil Engineers 01.01.2008
• Subjects: Applied sciences; Building economics. Cost; Buildings. Public works; Exact sciences and technology; Nuclear polyhedrosis virus; Project management. Process of design; TECHNICAL PAPERS; Asia; Taiwan; Project evaluation; Monte Carlo method; Automation; Project management; Tariff; Risk analysis; Build/operate/transfer; Multiple regression; Construction industry; Case study; Regression models; Regression model; Contract; Contracts
• ISSN: 0733-9364; 1943-7862
• DOI: 10.1061/(ASCE)0733-9364(2008)134:1(18)

The terms of concession including tariff and concession period are often discussed intensively during negotiations of build-operate-transfer (BOT) contracts. Based on prior studies on negotiation terms and risk of BOT contracts, this paper incorporates risk attributes of the BOT project into the formulation of a contractual-negotiation model. The proposed model allows the government and the sponsor to reach a consensus on the terms should the financial return as well as the risk of the project be determined. The pro forma cash flow of a BOT project is developed and used to generate the probability distribution of net present values (NPV) from the owner’s viewpoint by using Monte Carlo simulation. High- and low-risk scenarios are obtained to determine whether the contractual-negotiation models vary in accordance with risk levels. Results show that, given the expected NPV, the sponsor should be offered more favorable concessional terms for projects with high risk than that with low risk. We suggest that the government and industry practitioners embody the risk attributes of the project in the automated contractual-negotiation model.