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Long-run relationship, Vertical Integration and International Competition:: Can they contribute to explaining regional construction cost differences?
KTH, School of Architecture and the Built Environment (ABE), Real Estate and Construction Management, Building and Real Estate Economics.ORCID iD: 0000-0002-1729-3933
(English)Manuscript (preprint) (Other academic)
Abstract [en]

The existence of opportunistic behavior by contractors or sub-contractors in the bidding process encouraged by the governance structure of construction companies as well as the kind of relationship that exist between contractors and clients is thought to have some bearing on the rising construction cost observed in some regions of Sweden. Three hypotheses were formulated concerning the impact that long run relationship between contractors and developers, vertically integrated firms, and the increase of international competition could have on the construction cost increase. The hypotheses were tested by collecting data from a number of projects from six cities in different regions. The semi-structured survey produced inconclusive results. Long run and collaborative relationship was prevalent in small region though respondents in this region did not see a strong connection between construction costs increase levels and the kind of observed relationship. In the Stockholm region short-term relationships were mostly prevalent. Vertical integration and foreign competition impacts on construction costs were not significant in either region.

Keyword [en]
Construction costs, vertical integration, long run relationship, competition
National Category
Construction Management
URN: urn:nbn:se:kth:diva-47672OAI: diva2:455952
Doctoral Thesis: Performance of Construction Projects
QS 2012Available from: 2011-11-11 Created: 2011-11-11 Last updated: 2014-01-21Bibliographically approved
In thesis
1. Performamce of Construction Projects: Essays on Supplier Structure, Construction Costs and Quality Improvement
Open this publication in new window or tab >>Performamce of Construction Projects: Essays on Supplier Structure, Construction Costs and Quality Improvement
2011 (English)Doctoral thesis, comprehensive summary (Other academic)
Abstract [en]

The performance of the construction industry and its contribution to the welfare of society in comparison to other industries such as the manufacturing industry has lately been the focus of many commissioned reports and academic research publications. The so-called “iron triangle” of time, cost and quality have been the most important metrics of construction project performance, especially for the selection of appropriate procurement methods. The perceived inefficiencies emanate from, among other things, increasing construction costs, conflicts and client dissatisfaction, the fragmented nature of the industry, low competition, cost overruns and delays, and lack of quality improvement. There is observed disparity in increases in housing construction costs and an apparent lack of quality improvement of infrastructure transport projects. In Sweden, metropolitan regions experienced higher construction cost increases, while small regions showed less costs increases during economic booms. In order to address these perceived inefficiencies, numerous strategic and project level decisions that influenced the way that publicly owned properties and projects are procured, constructed, operated, and maintained have been made. The decision to transfer quality-related activities and quality assurance responsibilities from client to contractor approximately 25 years ago is one of the decisions that could have an impact on current quality of infrastructure transport projects. The disparity in increases in construction costs and quality improvement concerns could not only influence the performance of construction projects, but also can affect the way different actors in the sector interact with each other and achieve their divergent objectives.

The aim of this study is twofold. First, it tries to explain the observed disparity increases in construction costs between big (metropolitan) and medium/small regions. Second, it attempts to ascertain the extent of quality problems in infrastructure transport projects after the transfer of quality assurance responsibilities, and suggests measures that could improve the quality of infrastructure transport projects. Surveys and interviews were used as a means to collect data concerning both supplier structure in relation to housing construction costs and quality of construction projects. Other empirical data from a secondary source were also used.

The first part of the research offers an understanding of the behavior of contractors in specific economic situations, specifically by taking into consideration the long-run relationship between contractors and owners/developers. It ascertains that if contractors/subcontractors display opportunistic behavior during the economic boom, the result will be increased higher construction costs. We utilized transaction cost theory in exploring construction sector structures in an attempt to understand changes in the sector from an efficiency perspective. The analysis can also enrich the current understanding of the governance structure of Swedish construction firms and how they could influence construction costs.

As the response from the survey suggests, quality of infrastructure projects has not decreased after the transfer of quality assurance from client to contractor. However, the high number of respondents that indicated quality is the same as before the transfer raises a concern of lack of quality improvement. Respondents have overwhelmingly indicated that the lack of public client competence was one of the contributing factors of quality problems. It is argued that with client competence it is important to build-up through proper knowledge management, incentive systems, and training. Further, the retention of new skilled and experienced workers is an essential element for continuous quality improvement goals and objectives. A second opinion practice from independent experts and committees that focuses on the quality aspect of the projects can be introduced in the provision of infrastructure transport projects. Finally, it is argued that without client competence and a company culture that creates the right incentives, no procurement method can guarantee high quality.

Place, publisher, year, edition, pages
Stockholm: KTH Royal Institute of Technology, 2011. v, 34 p.
TRITA-FOB, 2011:3
National Category
Social Sciences
urn:nbn:se:kth:diva-47448 (URN)978-91-978692-9-4 (ISBN)
Public defence
2011-11-22, F3, Lindstedtsvägen 26, KTH, Stockholm, 13:00 (English)
QC 20111111Available from: 2011-11-11 Created: 2011-11-09 Last updated: 2014-01-21Bibliographically approved

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