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Ancell, D (2005) Reducing costs: a practical application of performance-based specification and transaction cost theories. In: Khosrowshahi, F (Ed.), Proceedings 21st Annual ARCOM Conference, 7-9 September 2005, London, UK. Association of Researchers in Construction Management, Vol. 2, 721–9.

  • Type: Conference Proceedings
  • Keywords: asymmetrical information; hierarchy; market; performance based specifications (PBS); transaction costs
  • ISBN/ISSN: 0 902896 93 8
  • URL: http://www.arcom.ac.uk/-docs/proceedings/ar2005-0721-0729_Ancell.pdf
  • Abstract:
    Companies rarely examine the hidden costs of transactions. However, testing the appropriate transaction cost and performance-based specification (PBS) theories in a commercial environment can show real cost savings which could be delivered from appropriate process changes. The documentation from two completed projects was counted and grouped with a view to using them as a proxy for the volume of transactions in the projects, to examine the efficiency of the existing procurement route and to allocate a cost to the "administration" documentation. Analysis of the documentation using three different groupings showed that "administration" transactions were approximately 35% higher than the client anticipated - and that some ex ante and ex post costs (including enforcement) were not included. The client insisted that the outsourced Project Manager (PM) used the client's prescriptive-based suppliers. Consequently, the PM had less information on the sub-contractors than the client which gave rise to "asymmetrical information". This challenged the rationale of only partially-outsourcing the project management functions and also the client's muddled approach to the issue of using "market or hierarchy" for non-core commercial functions. Had PBS been used for these projects; there would have been a saving of approximately 114k of a total of 200k spend.