Guideline to apply hedging to mitigate the risk of construction materials price escalation Al-Zarrad, Mohammad Ammar; Moynihan, Gary P.; Vereen, Stephanie C.
Accurately forecasting cost is vital to the success of any construction project. Cost estimation encompasses uncertainty, since construction projects are exposed to many forms and degrees of risk. Materials price volatility and shocks constitute one aspect. Most current approaches for material risk assessment are deterministic and do not take into consideration material price fluctuation. The application of hedging, to mitigate the risk of construction material price fluctuations, is proposed in this research. Although it is known that using hedging as a risk management tool adds value to a financial firm, limited knowledge has been established about using hedging for construction material price risk mitigation. Hedging has also been a practice applied in the airline industry for a long time, and substantive research has been completed in the field of airline fuel hedging. The objective of this research is to identify best practices in the area of airline fuel hedging to provide an outline for implementation in the construction industry, and to develop a step-by-step guideline to applying materials hedging in the construction industry. This is considered to be the first attempt to match construction material hedging with the airline fuel hedging application. The guideline presented herein helps construction companies to apply hedging to mitigate the risk of construction material price fluctuations. This guideline improves construction companies’ ability to submit a very competitive bid on a specific project.
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