C Chang

Rethinking the multi-attribute utility approach based procurement route selection technique

The multi-attribute utility approach (MAUA) provides a possibility of transforming subjective perception or evaluation into objective decision principles. However, as applied to procurement system selection, the advice derived from this approach can be problematical, if the nature of the procurement systems has not been examined carefully. The major weaknesses of the MAUA as applied in this field lie in its selection of priority variables and in some association of procurement routes with priority variables. This paper uses a transac2 tion cost perspective, in a setting of incomplete contracting, to develop these comments.

Reversal of bargaining power in construction projects: meaning, existence and implications

Reversal of bargaining power arising from asset specificity is important for the understanding of hold‐up problems. Various types of asset specificity have been identified in different transaction contexts, but a previously unidentified or unnamed type is developed here: process specificity. Numerous widely used financial and contractual preventive measures in construction practice can be justified as responses to this problem of process specificity. These include bonds and retentions. However, these measures have limitations. Specifically, the client‐led change orders cannot be completely averted and when they occur, the pricing of additional work largely relies on negotiation, implying that bargaining power determines the result. Consequently, the hold‐up problem remains a managerial issue. To mitigate this problem, clients should choose a procurement system by aligning project attributes with the procurement system characteristics.

The principle of inconsistent trinity in the selection of procurement systems

This paper examines the economic characteristics of construction procurement systems partially in terms of transaction cost economics and partly those of project management. It proposes the theoretical principle of an inconsistent trinity, according to which, in selecting a procurement system, the client will inevitably face a trade‐off between the procurement system best able to deliver: (1) fastest completion of the project (and therefore higher discounted present value of revenue from the project); (2) least vulnerability when making changes (lower transaction hold‐up costs arising from temporal or process specificity); as well as (3) least vulnerability to non‐performance (lower transaction measurement costs from greater visibility to third parties for ordering of disputes). The model provides a potentially testable contribution to a transaction cost theory of construction procurement. It also has two implications: (1) the three main family types of procurement systems are held to be intrinsically different in economic terms, so selection of procurement system does matter; (2) no system can enjoy absolute advantage over others, so the proposed strategy of procurement system selection is to align the characteristics of procurement systems with attributes of projects.

Principal-Agent Model of Risk Allocation in Construction Contracts and Its Critique

Incentives are widely used in construction procurement to motivate the contractor to make cost-reduction efforts. How to choose the right incentive intensity is a critical decision in construction procurement. In this regard, the principal-agent theory has been highly influential in theory and practice alike. However, this research argues that this theoretical model may lead to a biased decision. To demonstrate this point, this research draws on its modeling technique to analyze a standard pain-gain sharing arrangement in construction contracts, finding that taking no account of contract breakup hazards will result in underuse of incentives. When the outturn cost also depends on the contractor’s effort, high-powered incentives can better tap into the contractor’s efficiency improvement potential. The additional profit resulting from efficiency savings can serve as a buffer for downside cost shocks with the effect of reducing the likelihood of contract breakup. This benefit will make it desirable to use incentives more intensively than what is suggested by the principal-agent theory.

A critical review of the application of TCE in the interpretation of risk allocation in PPP contracts

Along with the rise of public–private partnerships (PPPs) as a mainstream procurement system, we have seen a growing interest in studies of risk allocation in these projects. One of the serious academic endeavours is to apply both transaction cost economics (TCE) and the resource-based view (RBV) to explain risk allocation patterns found in PPP projects. The existing literature along these lines is deficient in three aspects: inappropriate choice of unit of analysis; poor specification of governance structure; and misinterpretation of asset specificity. A way for improvement is to analyse risk allocation in the context of PPP procurement in its entirety.

Characterizing the corporate governance of UK listed construction companies

In response to the emergence of scandals involving many high‐profile companies during the 1990s, corporate governance is considered as an area requiring immediate reform. The government of the United Kingdom has conducted a series of reviews on corporate governance and incorporated the recommendations of these reports into regulatory codes. Compliance with these codes can be considered to indicate the implementation of best corporate practice. A question of interest is how UK construction companies perform in corporate governance. The answer can be revealed by comparing construction companies with the top 50 companies listed in the UK, based on the provisions of corporate governance codes. Construction companies are found to (1) disclose less corporate governance information; (2) display lower levels of structural board independence in terms of separate roles of chairman and chief executive officer (CEO) and percentage of independent directors; (3) rely less on external consultant advice in assisting the decision making of three board committees. Research thus should be conducted on whether these disparities cause adverse effects on construction company performance.

Critiques of the existing techniques for the evaluation of renewable energy projects

Renewable energy investment is an integral part of sustainable economic development agenda. Whereas some important advances have been made in recent years to assist project investors in evaluating real options embedded in renewable energy projects and making better use of financial risk management instruments, this research asserts that, owing to failure to consider both behavioral uncertainty and the limit of risk transfer, these approaches may still lead to a biased evaluation result. Drawing on a novel concept of “risk-bearing capacity”, investors can coherently incorporate the choice of financial protection into investment evaluation.

When might a project company break up? The perspective of risk-bearing capacity

Public-private partnerships (PPPs) have developed into a mainstream alternative procurement solution for the provision of public services. The aim is to explore a crucial but hitherto ignored issue in the study of PPPs: at what point a project company might break up. The project company’s two-stage break-up in the National Physical Laboratory PFI project inspired this research in which a formal model is developed to demonstrate that contract break-up decisions can be plausibly explained through quasi-rent changes. This finding brings to the foreground the importance of taking into account risk-bearing capability in the design of project governance. How to achieve a level of risk-bearing capacity through the optimal use of financial, organizational and contractual means is a research area worthy of future exploration.

An Econometric Analysis of Holdup Problems in Construction Projects

AbstractThe holdup problem plays a central role in explaining governance choices in general and project delivery system selection in particular. This problem arises because of the asymmetrical distribution of quasi-rents between two trading parties. To put this theoretical proposition to a direct test, this research first uses the Nash bargaining model to derive a hypothesis that links quasi-rent differences to the excess profit margin that the contractor can achieve in ex post negotiations, and then collates a data set of 62 change-order cases to enable the hypothesis to be tested econometrically. The corroboration of the hypothesis lends empirical support to the core argument used in the analysis of construction holdup problems. This finding brings to the foreground the significance of recognizing that change orders might be attributed to the owner’s strategic choice. Ignorance of this factor would bias the coefficient estimation in the empirical analysis of change orders.

Transaction-Cost Approach to the Comparative Analysis of User-Pay and Government-Pay Public-Private Partnership Systems

AbstractGovernment-pay and user-pay public-private partnership (P3) systems have been employed as the main conduits for channelling private capital to finance the provision of public services throughout the world. In efficiency terms, they are suited to different types of projects. This paper develops a model to illuminate the condition under which one route would perform better than the other. If both of them are instituted into law, governance alignment should emerge in the long run. However, in Taiwan government-pay P3 systems are not a lawful route, forcing the government to employ user-pay P3 systems regardless of project types. This gives researchers an unusual opportunity to examine what would happen as a result of an inappropriate choice of P3 models. This paper makes a theoretical innovation in the identification of a conflict of interest indicator as an attribute for differentiating the relative efficacy of two types of P3 systems. This result sheds light on the way value for money assessment sh...