Factors Influencing Transaction Costs in Construction Projects: A Critical Review

Abstract

The management of large-scale construction projects involves the efficient and effective management of financial resources. The physical cost of a construction project governs the estimation of construction budgets and forecasts. However the Transaction cost economics theory in the construction industry aims to promote the relationship and impact of transaction related costs in construction projects. These costs are related to the economic exchange of a product or service and differ from the actual physical production costs of a construction project. Previous academic studies have identified transaction costs and the factors of influence. However a significant gap in the research area is the analyses of the influence procurement methods have on transaction costs in construction projects. Procurement methods dictate the contractual obligations of the parties and the method in which the project is delivered and essentially represent different types of transactions, thus it is assumed that procurement methods influence transaction costs in construction projects. In this paper, transaction costs are categorized into pre and post contract. The identified factors that are expected to influence transaction costs are associated with predictability of owner’s behavior, predictability of contractor’s behavior, project management efficiency, and uncertainty in the transaction Environment. It is also expected that different procurement systems have various levels of impact on transaction costs. Empirical research is proposed to further test the prepositions in this paper.