To Collaborate or Not to Collaborate: A Transaction Cost Economics Approach to Construction Contracts in Public-Private Partnerships

Abstract

Public-Private Partnerships (PPPs) are often seen as a costeffective way of providing public infrastructure. However,
mega-construction projects involve many hidden costs that
arise during the project life cycle. These costs are known as
transaction costs. This article investigates how a construction
contract under a PPP can reduce transaction costs. Using
Transaction Cost Economics (TCE), the article draws on
empirical studies from six countries to identify four factors that
affect transaction costs in construction contracts namely: (i)
Concessionaire predictability, (ii) Contractor predictability,
(iii) Project Management Efficiency, and (iv) Project
Environment Uncertainty. Different types of construction
contracts were comparatively analysed against the
aforementioned four factors. The findings indicate that
collaborative contracts are more likely to favourably address
these four factors by lowering transaction costs compared to
non-colloborative contracts. The article concludes that using collaborative contracts can make infrastructure PPPs more
affordable than other public procurement methods.