Impact of Deterioration and Negotiation on Sewer System O&M Contracts from the Real Option Perspective

Taeil Park, Byungil Kim, Hyoungkwan Kim

Research output: Contribution to journalArticlepeer-review

7 Citations (Scopus)


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.

Original languageEnglish
Pages (from-to)2973-2989
Number of pages17
JournalWater Resources Management
Issue number10
Publication statusPublished - 2012 Aug

All Science Journal Classification (ASJC) codes

  • Civil and Structural Engineering
  • Water Science and Technology


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