A labor market model to manage costs risk in construction project management

The purpose of this dissertation is to develop a framework, or strategy, for assessing productivity risk and uncertainty on large construction projects in the the western United States. Labor market theory is developed to demonstrate the relationship between construction project costs and labor productivity. Marginal productivity theory, specifically, is shown to provide a useful link between labor demand and supply. A productivity risk model is developed to analyze productivity issues encountered during the construction of two natural gas processing plants in Evanston, Wyoming. The model and the case study are developed to test the hypothesis that a firm will manage risk and uncertainty in the labor market to the point where the marginal costs and marginal benefits of doing so are equal. The hypothesis incorporates transactions costs into the firm’s search for equilibrium in its product and factor markets. The hypothesis test provides results which are not definitive. Decision makers for the client-contractor teams on the Whitney Canyon and Carter Creek projects behaved rationally in an economic sense, fulfilling the necessary condition of the hypothesis test. With the need to base decisions on imperfect information, their actions were designed to achieve the goal of maximizing project value. The sufficient condition, whether their actions maximized project Net Present Value, is more difficult to assess. On both projects, productivity risk mitigation measures were taken, yet cost overruns occurred which are partly attributable to productivity risks encountered. The hypothesis test incorporates alternative courses of action into the NPV framework, and these results are examined in both a qualitative and quantitative manner. The dissertation concludes that the hypothesis is not disproven in both cases, although the results are significant for the Whitney Canyon project and more marginal for the Carter Creek project.