Transaction costs in construction projects under uncertainty

Abstract

Purpose – The purpose of this paper is to find how those uncertainty factors influence transaction costs generated and to identify ways to minimize the transaction costs borne by the construction owner. Design/methodology/approach – The literature indicates that there is no consensus on a standard definition of transaction costs in the construction industry. A detailed literature review of research work on transaction costs in construction is conducted in order to identify the determinants of transaction costs in construction projects. A structural equation model is tested on data collected by means of a survey administered to construction owners. Findings – The findings indicate that the transaction costs borne by the owner can be minimized if the owner minimizes the uncertainties inherent in the construction project by making sure the engineering design is as complete as possible before bids are sought from contractors; harmonious relationships between project participants; fair risk allocation; have experience in similar type projects; and contractor selection practices that routinely detect irregular behavior. Research limitations/implications – The data used in this research are primarily based on the experiences of public owners and the markets in which they operate; a larger representation of private owners could make the conclusions more general. Another limitation of the study is that it relies on a survey of opinions rather than actual records of costs and other hard data. Practical implications – No empirical study has ever been conducted of transaction-related issues in the construction industry because of the lack of a common understanding of transaction cost. This paper provides the groundwork for such a study. Originality/value – This paper attempts to reconcile the many determinants of transaction costs in construction projects under uncertainty considered by different researchers in a multitude of research studies.