Acquiring Technical Data With Renewable Real Options

Report Number: SYM-AM-16-021

Series: Acquisition Management

Category: Real Options Theory

Report Series: Symposium Proceedings

Authors: Michael McGrath, Chris Prather

Title: Acquiring Technical Data With Renewable Real Options

Published: 2016-05-01

Sponsored By: Acquisition Research Program

Status: Published--Unlimited Distribution

Research Type: Other Research Faculty

Full Text URL: http://www.acquisitionresearch.net/files/FY2016/SYM-AM-16-021.pdf

Keywords: Real options, contract, data, options-based

Abstract:

This paper investigates the use of real options as a strategy to hedge risks in situations where the need for contract deliverables is uncertain over a long life cycle. It focuses on the case of contracting for technical data to support competitive spares procurement, and it proposes a data maintenance contract with renewable options to deliver technical data at a pre-negotiated price at the time of need and the required level of data rights. A business case analysis tool is developed using dynamic programming to calculate the value of the technical data options to the government. This tool is applied in an example using available cost data to support a series of annual decisions on whether to continue the option, and to determine the optimal timing to exercise the option to rent or buy the technical data based on the expected cost avoidance to the government. This options-based approach helps the government avoid the costly acquisition of technical data that may never be used while ensuring data are available when a need arises. Industry also benefits from the data maintenance contract as a business opportunity that provides more accurate data for system support and better insight into government uses of the data.