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Vertical governance of construction projects: an information cost perspective

A research framework is developed to analyse the vertical governance, or transaction relationships between the client and its first-tier suppliers of construction projects in terms of project procurement route and payment terms. Starting from the particularity of the construction industry, reduced treatments that Williamson used in governance structure analysis are revised, and an assumption of ‘second-order transformation’ is proposed: as the information gap reaches a given level, and the proportion of specialized knowledge to deal with uncertainty exceeds a certain degree, the approach of selecting the governance structure of construction projects might deviate from the path anticipated by canonical theories. Both uncertainty and information cost are included in the analysis framework, and a principal–agent model is developed to analyse the procurement route and payment terms of construction projects. It is concluded that the information gap and the relative cost coefficient of information are decisive factors that determine the vertical governance structure of construction projects. They determine not only the time when ‘second-order transformation’ occurs, but also the distribution of ‘weak incentive regions’.