Transaction Cost Economics in Construction Industry
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 which can be bought from competitive market; or only a few sources and the market is oligopolistic. In the later case, the investment would be less valuable in some second best use if the transaction fail.
Such situations are rare in construction, and are probably limited to the more demanding civil engineering projects (Reve and Levitt, 1984) and high performance specifications in areas such as building services. For instance, most large infrastructure contractor would invest in batching plant/ on-site concrete mixer, which allow specialty concrete mixtures to be developed and implemented on respective construction sites, instead of buy from ready mix concrete manufacturing company. The reasons being (1) concrete has limited timespan of approximately 90 minutes between mixing and going-off; (2) most batching plants are mobile and relocating them is relatively inexpensive; (3) the contractor can easily locate a potential buyer in the market should he decided to dispose it.
There is uncertainty in life. Harold S. Geneen quotes “Uncertainty will always be part of the taking charge process”; John Allen Paulos quotes “Uncertainty is the only certainty there is….”. The issue in transaction uncertainty is that how hard is it to
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 which can be bought from competitive market; or only a few sources and the market is oligopolistic. In the later case, the investment would be less valuable in some second best use if the transaction fail.
Such situations are rare in construction, and are probably limited to the more demanding civil engineering projects (Reve and Levitt, 1984) and high performance specifications in areas such as building services. For instance, most large infrastructure contractor would invest in batching plant/ on-site concrete mixer, which allow specialty concrete mixtures to be developed and implemented on respective construction sites, instead of buy from ready mix concrete manufacturing company. The reasons being (1) concrete has limited timespan of approximately 90 minutes between mixing and going-off; (2) most batching plants are mobile and relocating them is relatively inexpensive; (3) the contractor can easily locate a potential buyer in the market should he decided to dispose it.
There is uncertainty in life. Harold S. Geneen quotes “Uncertainty will always be part of the taking charge process”; John Allen Paulos quotes “Uncertainty is the only certainty there is….”. The issue in transaction uncertainty is that how hard is it to