Transaction Cost Economics in Construction Industry

2299 Words Nov 17th, 2010 10 Pages
TCE asserts that transactions have distinct characteristics that explain how firm’s boundaries are drawn and when determine whether “market or hierarchy” will have the lower transaction costs in various circumstances. Asset specificity, uncertainty and frequency are the three variables of TCE that are used to characterise transactions.

Williamson (1979) suggested four main forms of asset specificity, namely site specificity, physical asset specificity, dedicated assets and human asset specificity. Asset specificity refers to the degree to which the investments for a transaction are specific to that particular transaction. In other words it refers to the extent to which the resources required are available from a large number of sources
…show more content…
Construction industry’s workload is highly diversified. It involves numerous parties, various processes, different phases and stages of work, and many inputs from both the trades and specialists. Such workload and labour can be divided into two phases (Bajari and Tadelis, 2001). First, the design phase for the appearance, layout and function of buildings which involve consultants of various disciplines. Second, the actual construction process that directly produce the end product.

Let’s discuss the second phase first. Upon approval of architecture and engineering plans by respective authorities, actual construction works begin. Construction firm would then need to decide whether to carry out the work on its own or engage market construction players. In view of the uniqueness and the need of wide range of technologies characteristic of construction industry, Costantino (1996) assert that economies of scale (i.e. faster construction time, reduce construction cost, reduce liability exposure and greater flexibility) can only be met by using a variety of resources that are generally not entirely available within a firm.

In construction material and equipment context, market governance transaction prevail on the basis that the availability of many possible sources for construction firm to compare and choose from an array of suppliers on the basis of the best quality and price combination. The existence of many suppliers
Open Document