Civil Engineering Reference
In-Depth Information
Table 3.1
Transaction costs which affect construction
The cost of having to find out what is on offer
Search costs
To clarify precisely what is required to assure the desired
quantity and quality
Specification costs
The cost of finding or creating conditions of contract to
clarify what is expected and cover contingencies
Contract costs
Selection costs
The cost of choosing the best tender
To measure and control price, timing and quality
Monitoring costs
Enforcement costs
The legal bills relating to breached contracts
Source:
Adapted from Gruneberg and Ive (2000: 123-4)
A belief in the importance of market signals dates back to the classical
economists. They emphasised how prices and wages continually adjust to keep the
general levels of supply and demand in balance. In fact, their belief in market forces
was so strong that for a significant historical period economists recommended that
the management of an economy could simply follow a laissez faire approach. Milton
Friedman, a modern exponent of the market mechanism, strongly argued that the
need for government intervention is minimal - as governments are only needed to
provide a forum for determining the rules of the game and to act as an umpire to
assure the rules are enforced. Interestingly, when this classical approach was first
challenged, during the depression of the 1930s, construction was one of the first
sectors that governments chose to manipulate.
Key Points 3.1
❍
The price mechanism is synonymous with the market mechanism.
❍
The forces of supply and demand in factor and product markets are
reconciled by price (see
Figure 3.1
).
❍
Price movements provide the signals that freely responding individuals
interpret, determining what is produced, how it is produced and for whom
it is produced.
❍
Transaction costs are costs associated with exchange.
❍
Transaction costs are significant within the construction industry, and
this reflects the fragmented and adversarial nature of firms involved in
the process.
❍
Recognition of the importance of the market mechanism dates back to the
classical economists.
