Transaction-Cost-Based Selection of Appropriate General Contractor-Subcontractor Relationship Type

Abstract

Relationships between general contractors and subcontractors are generally formed on a project-by-project basis. However, because of the competitive nature of the construction industry, this traditional arrangement can result in adversarial relationships between general contractors and subcontractors, which can jeopardize potential or ongoing collaborative construction plans. To avoid this problem, close, long-term relationships between general contractors and subcontractors, as in strategic partnerships, must be established. Unfortunately, forming and sustaining such relationships can be time-consuming and cost-intensive. Furthermore, this type of relationship does not necessarily enhance cooperation or work performance. For contractors to successfully establish effective partnerships with their subcontractors, they must select the appropriate relationship by considering the different characteristics of the subcontracted work involved. Based on transaction cost theory, the findings of this study show that transaction costs incurred by general contractors and subcontractors vary according to the type of relationship established. Therefore, for the purpose of comparing transaction costs incurred in both competitive and partnership relationships, transaction-cost-based profit models for both general contractors and subcontractors are developed, respectively, for each relationship type. As well, by applying different strategies to maximize profits in each relationship, and by simulating the parameters affecting the nature of the subcontracted work, the conditions and relationships under which general contractors’ profits are optimized have been determined. Finally, based on simulation, practical guidelines for choosing the most appropriate relationship type are proposed.