Factors That Affect Transaction Costs in Construction Projects

The actual cost of a construction project is comprised of not only production costs, but also transaction costs. Transaction costs include but are not limited to the costs of preparing the bidding package, estimating, drawing up a contract, administering the contract, and dealing with any deviations from contract conditions. Transaction costs constitute an important part of the construction owner’s budget. However, understanding transaction costs is difficult because of the inconsistency and ambiguity in defining transaction costs in the literature. The objective of this paper is to identify methods to minimize the transaction costs borne by the construction owner. A structural equation model is tested on data collected by means of a survey administered to construction owners. The findings indicate that the transaction costs borne by the owner can be minimized if the owner minimizes the uncertainties inherent in the transaction environment by (1) ensuring the engineering design is as complete as possible before bids are sought from contractors, (2) exploring the possibility of adopting integrated project delivery methods that would allow the owner to engage the services of a contractor early in the design phase, (3) agreeing to share some of the risks with the contractors, (4) understanding well the behavior of contractors, and (5) paying close attention to project management efficiency.