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 cost-effective 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.