Dhahran Roads (B)
2 Pages Posted: 21 Oct 2008 Last revised: 25 May 2018
This case complements the A case by providing the decision maker's view on the key sources of risk and his probability assessment of the uncertainties that give rise to them. The case can be used as an introduction to simulation modeling.
DHAHRAN ROADS (B)
Although the base-case analysis indicated that the Dhahran Roads contract would generate substantial value to SADE, Hassan Malik recognized that such a favorable result would require that all facets of the project proceed smoothly. Even though the task was unpleasant, he turned his thoughts to those aspects of the project that could go wrong.
As he thought about the risks associated with the Dhahran Roads project, he decided that there were two key areas in which former projects of a similar nature had run into trouble.
1.Delayed payments by the client
SADE had occasionally experienced problems with a client failing to pay in accordance with an agreed billing schedule. SADE was not the only contractor who faced such problems; in fact, several informal discussions had taken place among contractors to share their experiences in this area. During those conversations, a pattern of customer behavior seemed to emerge. If problems in honoring the billing schedule occurred, the delay usually appeared in the third year of long-term contracts, but occasionally in the second year. A delay usually lasted a year and pushed back all subsequent payments by a year. Many contractors believed that clients purposely delayed payments at a point when the project had gone so far that the contractor could not afford to abandon it. Delays had occurred in about 30% of the recent projects, and they were often justified by the client on the basis of the slightest of deviations from the performance specifications or the invoicing procedures of the contract. About 80% of the delays began in the third year of the project and 20% of delays began in the second year.
Even though SADE prided itself on its ability to control costs, it occasionally experienced overruns—sometimes substantial ones. Malik reviewed the files of the following 10 completed projects, each of which was the size of the Dhahran Roads project:
. . .
Keywords: capital budgeting, diverse protagonist/middle eastern/african, international case, diversity case, international
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