Impact of procurement systems on transaction costs: a structural equation modelling methodology
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Within construction procurement, Transaction cost economics (TCE) offers a mechanism to understand ‘unseen’ costs associated with the pre and post-contract work. Pre-contract, these include costs related to information gathering and procurement. Post-contract they include activities of contract administration and enforcement. This paper aims to estimate transaction costs (TCs) for different delivery systems used in construction projects in New Zealand, specifically the Traditional and Design-Build. This study develops a conceptual model for the relationship between project delivery systems and TCs. The model was operationalized and developed into a questionnaire. A crosssectional sample approach was deployed, involving pilot and survey questionnaires. Data was sought from construction professionals in management, design and operations. TCs were measured using professionals’ time-spent in procurement as a surrogate for cost. Using using a Likert-Scale 1-5 in evaluation, comparing the Traditional and Design-Build systems. Data was triangulated with ‘real world’ cases to test and explain the developed model. The test included Validity and Reliability, Path Analysis, Regression Analysis, Factor Analysis, and Structural Equation Modelling (SEM). The primary analytical technique used was SEM to yield information on Goodness-of-Fit, model development and comparison, and confirmatory strategies. SPSS Amos 21 was used for data analysis and model development. The results suggest that project delivery systems have indirect effect on TCs. This effect is fully mediated by the costs of information, procurement, administration, and enforcement. Applying the developed models to ‘real world’ cases, it was found that TCs in the Traditional systems amounts to 18.5% of the annual salary cost of a project manager, while in the Design-Build systems, it amounts to 14.5% of the annual salary cost of a project manager. The findings have practical implications on construction business practice due to their robust empirical nature and theoretical framework, which might enhance the performance of the construction industry.