Cost management in project alliances: a framework based on interorganizational settings

This research aims to study the economics of alliancing and to explore management controls in alliances by drawing upon Transaction Cost Economics and interorganizational management control theories. To attain the objectives, information was collected from the senior alliancing professionals in the Australian construction industry by means of a questionnaire survey and interviews. The collected data were analysed quantitatively and qualitatively. The results indicate that the impact of transaction attributes on transaction costs varies according to the particular attributes dimension examined. Uncertainty has a positive impact on all the three transaction cost elements (i.e. set-up costs, monitoring costs and enforcement costs). Frequency and some dimensions of asset specificity are positively associated with set-up costs and monitoring costs. However, such a positive effect on enforcement costs does not exist. It was found that the governance efficiency of alliancing becomes stronger as contracting parties’ investments in specific assets, uncertainty and frequency increase. The findings demonstrate that the real strength of alliancing lies in it being an effective approach to reduce transaction costs where there is high asset specificity, high uncertainty and high frequency. Among the control mechanisms of alliances, some social controls were found to have the greatest effectiveness on reducing both set-up costs and monitoring costs, whereas behaviour controls are more effective in reducing enforcement costs. In comparison, outcome controls are less effective in reducing all the three forms of transaction costs. The results suggest that social and behaviour controls are particular relevant mechanisms when projects are complex and the outputs are difficult to be measured. In addition, each mechanism presents differential type and strength of effectiveness on different transaction cost elements, suggesting the effectiveness of one particular control mechanism varies in different alliance process. Regarding the cost management in alliances, it was found that alliances employ the value-based target costing process to design projects, and set cost and non-cost targets, and adopt continuous improvement as the primary costing methodology to undertake cost management activities in a collaborative manner. The commercial incentive drives alliance participants to devote to cost-reduction activities. It was also found that cost management in alliances leads to added value to the clients since the improved functionality and non-cost performance is achieved without increasing costs, or costs are reduced without compromising the functionality or performance requirements. An interorganizational cost management framework is developed based on the findings. This research extends Transaction Cost Economics and interorganizational management control perspective to construction management. The findings provide practitioners with efficiency considerations in choosing the appropriate procurement strategies, and can guide practitioners’ efforts to craft appropriate governance and control mechanisms when procuring projects or engaging in transaction relationships.<br>