An economic analysis of the standard construction contract

The focal point of the research is the efficiency of the construction contract. The objective is to produce criteria for the improvement of the traditional form of contract currently used in construction. A contract is required to enable exchange in the market by providing enforcement against defaulters. Without enforcement as a safeguard, market exchange between people would be discouraged. In defining the liability for default the contract also apportions risk between the parties. What is not so obvious is that contracts also allocate and manage resources. In considering that economics is the human science for the allocation of resources then the connection between economics and contract law becomes clearer. The first part of the literature review defines the problem regarding construction contracts and refers to government reports and other relevant text. The final part of the literature review examines the application of economics to law. The development of law and economics is reviewed together with the two approaches to the subject. The transaction cost of comparative institutions is chosen as the most appropriate form of analysis. A review of the present construction contract terms is made in the light of the attributes that are relevant to transaction cost. Accordingly, it is possible to develop the hypothesis that the transaction cost of using traditional construction contracts is likely to be high, particularly with regard to the cost of ascertaining of the final price paid for the work. A relationship is developed between this high cost and the terms of the contract. This relationship depends on the attributes of transaction cost which produce prolonged bargaining and informational problems. Data has been collected from actual construction projects in order to define the cost of ascertaining the final price paid for the work. Further data was collected from construction disputes that give evidence of the informational difficulties and the terms of contracts which give most problems. The data collected not only gave support to the hypothesis but also indicate the sources in the construction contract that produce most problems. Recommendations are then given in the conclusions with regard to contract terms particularly where it is necessary to improve the efficiency of the construction contract. An indication is also given as to further possible research.