Real-option valuation of build-operate-transfer infrastructure projects under performance bonding

Yu-Lin Huang, Chia Chi Pi*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

23 Scopus citations


This study assesses the effect of performance bonding on the valuation of a build-operate-transfer (BOT) project by extending the classical Black-Scholes-Merton (BSM) call option model. As common features in BOT contracts, a performance bond is a penalty imposed on concessionaires who exercise contractual rights to terminate participation in a project. In the real-option context, termination rights grant concessionaires the flexibility in managing market uncertainties that can increase the valuation of an infrastructure project, but the penalty impairs this flexibility and reduces valuations. A case study numerically illustrates the BSM model and indicates that performance bonding can destroy the flexibility and project valuations inherent in termination rights even when the penalty is moderate. Balancing performance bonds and termination rights is necessary because both are important in establishing and maintaining long-term contractual relationships in privatized BOT infrastructure projects.

Original languageEnglish
Article number04013068
JournalJournal of Construction Engineering and Management
Issue number5
StatePublished - 1 May 2014


  • Build-operate-transfer
  • Concession contract
  • Infrastructure privatization
  • Performance bond
  • Real option
  • Valuation


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