Communication risk in contruction Projects: Application of principal-agent theory

Abstract

the impact of a multiple principal-agent problem on communication risk in construction projects is addressed. the focus here is on communication issues between the project owner, the contractor, and their project managers, as well as between the two project managers working for them. These are the key four parties in any construction project. In construction projects, the principal-agent problem is even more pronounced than is usually the case because of their short-term employment relationship. This problem is characterized by three issues concerning the relationship between the principal and the agent: adverse selection, moral hazard, and hold-up. Asymmetric information is common to all three. An exploratory survey was conducted in order to establish an understanding of the relative importance of the relationships between the key project parties in terms of the above communication risks. The respondents were project managers with considerable experience in the construction field. They agree that the main relationship in a construction project before the contract is signed is that between the project owner and contractor. However, they suggest that the main relationship after the contract is signed is that between the project owner’s and contractor’s project managers, both of whom are agents, which points to new and promising areas for further research.