Chang, Chen-Yu; (2002) An economic interpretation of construction procurement behaviour for the commercial and industrial buildings. Doctoral thesis (Ph.D), UCL (University College London).

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Abstract

This study applies the rationale of transaction cost economics to develop a positive theory for interpreting and predicting construction procurement behaviour. The client is assumed to be a decision-maker who chooses the optimal procurement method so as to maximise his/her profit function, i.e. (discounted expected) revenue minus the sum of transaction costs and production costs. Three stereotypical and most popularly used forms of procurement methods are reviewed: traditional method (TM), design and build (DB) and management system (MS). By way of transaction cost reasoning, this study discovers that, with the assumption of fixed production costs across routes, revenue from the project, transaction costs from process specificity and from measurement difficulties constitute three pillars for comparing procurement methods. Moreover it is further claimed that it is to the presence of quasi rent, quality rent and design rent that we can ascribe the reasons why there are differentials in transaction costs between procurement routes. From the theoretical view, this study puts forth the principle of an inconsistent trinity, according to which, to determine the most efficient procurement method, the client will inevitably face the trade-off between (1) fast delivery of the project, (2) single point of responsibility for design and construction (lower measurement costs) as well as (3) high flexibility in accommodating variations (lower transaction costs arising from process specificity). Empirically, six variables are pointed out as relevant in affecting the client's decision: (1) the client's opportunity cost of time; (2) uncertainty of requirements; (3) costs of switching supplier; (4) the use of partnering or not; (5) the scale of the client; (6) degree of specialisation. With the help of a Logit model, six hypotheses relating to these variables are tested, as predictions regarding relative frequency of selection of procurement routes for projects of given sets of attributes. The analysis of this study aims to provide a new way of thinking about the nature of the project coalition, risk management and the development of tools for aiding the client in selecting the right procurement route.

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