Cost Management in Project Alliances

313 Pages·2014·3.99 MB·English

Cost Management in Project Alliances:
A Framework Based on Interorganizational Settings

A thesis submitted in fulfilment of the requirements for the degree of
Doctor of Philosophy

Gang Chen
B. Mgt.

School of Civil, Environmental and Chemical Engineering
RMIT University
June 2013
Declaration
I certify that except where due acknowledgement has been made, the work is that of
the author alone; the work has not been submitted previously, in whole or in part, to
qualify for any other academic award; the content of the thesis is the result of work
which has been carried out since the official commencement date of the approved
research program; any editorial work, paid or unpaid, carried out by a third party is
acknowledged; and, ethics procedures and guidelines have been followed.

Signature:
Name: Gang Chen
Date: 6th June 2013

i
Acknowledgements
I would like to express my first and foremost appreciation to my supervisor, Associate
Prof. Kevin (Guomin) Zhang for the guidance, support, patience and encouragement
that he has shown over the course of this research. Associate Prof. Kevin Zhang is
truly an exceptional supervisor with the perfect balance of inspirational encouragement
and kindness. I am very grateful to him for the time and effort he has dedicated and for
the research skills that he has enriched me with. I would also like to thank my
secondary supervisor, Prof. Mike Xie for his guidance and support.
I also sincerely thank many administrative staff in the School of Civil, Environmental
and Chemical Engineering, and School of Graduate Research who provide me with
nice and patient assistance in the same course.
Last but not least, I would also thanks to my family for their love, encouragement and
belief in me. Especial appreciation is due to my wife, Lu, who is the source of
inspiration and impetus for me to pursue this study and finalize the thesis.

ii
Table of Contents
Declaration ....................................................................................................................... i
Acknowledgements ......................................................................................................... ii
List of Figures .............................................................................................................. viii
List of Tables ...................................................................................................................x
Abstract ......................................................................................................................... xii
Thesis Related Outcomes .............................................................................................. xv
Chapter 1 Introduction ...................................................................................................1
1.1 Background and Motivation ........................................................................................1
1.1.1 Economics of Project Alliancing ............................................................................................ 1
1.1.2 Management Controls in Project Alliances ........................................................................... 3
1.2 Research Questions and Objectives .............................................................................4
1.3 Overview of the Research ...........................................................................................5
1.4 Structure of the Thesis .................................................................................................7
Chapter 2 Overview of Alliancing Research and Practice in the Construction
Industry .......................................................................................................................... 10
2.1 Introduction ............................................................................................................... 10
2.2 Definitions of Alliancing ........................................................................................... 11
2.2.1 Alliances in the Construction Industry ................................................................................. 11
2.2.2 Alliancing and Partnering ..................................................................................................... 12
2.3 Methodology for Retrieving Alliancing Literature .................................................... 13
2.4 Alliancing Research and Practice: From Emergence to Flourish ............................... 14
2.4.1 Alliancing - Introduction and Advocacy .............................................................................. 16
2.4.2 Improvement of Alliancing Practice .................................................................................... 20
2.4.3 Alliancing in Different Organizational Context................................................................... 27
2.4.4 Alliancing and Other Established Practices ......................................................................... 29
2.4.5 The Diffusion of Alliancing ................................................................................................. 32
2.5 Implications for Future Research ............................................................................... 33
2.5.1 Debates and Limitations in Alliancing Research ................................................................. 33
2.5.2 Significant Changes Associated with Alliancing ................................................................. 35
iii
2.5.3 Future Research Directions .................................................................................................. 36
2.6 Summary ................................................................................................................... 38
Chapter 3 Transaction Cost Economics and Interorganizational Management
Control ........................................................................................................................... 39
3.1 Introduction ............................................................................................................... 39
3.2 Transaction Cost Economics ..................................................................................... 40
3.2.1 Two Key Assumptions of Human Behaviours .................................................................... 40
3.2.2 Transaction Attributes .......................................................................................................... 41
3.2.3 Transaction Costs .................................................................................................................. 43
3.2.4 Governance Forms ................................................................................................................ 44
3.2.5 Contracts and Governance Forms in Construction Transactions ........................................ 45
3.2.6 The Application of TCE in the Construction Management Discipline ............................... 48
3.3 Interorganizational Management Controls................................................................. 51
3.3.1 Control Problems in Interorganizational Relationships ....................................................... 51
3.3.2 Control Mechanisms in Interorganizational Relationships.................................................. 53
3.4 Cost Management in Interorganizational Relationships ............................................ 57
3.5 The Refinement of Research Questions ..................................................................... 59
3.5.1 The Antecedents of Transaction Costs in Alliances ............................................................ 60
3.5.2 The Governance Performance and Efficiency of Alliancing............................................... 61
3.5.3 The Attenuation of Transaction Risks in Alliances ............................................................. 61
3.5.4 Supporting Cost Management Tools and Techniques in Alliances .................................... 62
3.6 Summary ................................................................................................................... 63
Chapter 4 Theoretical Framework .............................................................................. 65
4.1 Introduction ............................................................................................................... 65
4.2 Governance Forms of Project Alliancing .................................................................. 66
4.3 Transaction Costs in Project Alliances: A Conceptualization .................................... 67
4.3.1 Set-up Costs .......................................................................................................................... 69
4.3.2 Monitoring Costs .................................................................................................................. 69
4.3.3 Enforcement Costs ................................................................................................................ 70
4.4 Transaction Attributes in Project Alliances ............................................................... 70
4.4.1 Asset Specificity in Project Alliances .................................................................................. 71
4.4.2 Uncertainty in Project Alliances ........................................................................................... 72
4.4.3 Transaction Frequency in Project Alliances ........................................................................ 73
4.5 The Efficiency of Project Alliancing ......................................................................... 75
4.5.1 The Efficiency of Project Alliancing under Conditions of High Asset Specificity ............ 75
iv
4.5.2 The Efficiency of Project Alliancing under Conditions of High Uncertainty .................... 77
4.5.3 The Efficiency of Project Alliancing under Conditions of High Frequency ...................... 79
4.6 Management Controls in Project Alliances ............................................................... 80
4.6.1 Outcome Controls in Project Alliances ................................................................................ 82
4.6.2 Behaviour Controls in Project Alliances .............................................................................. 85
4.6.3 Social Controls in Project Alliances ..................................................................................... 87
4.7 Cost Management in Project Alliances ...................................................................... 91
4.7.1 Cost Management in Interorganizational Settings ............................................................... 92
4.7.2 The Alliances Processes where Interorganizational Cost Management might be Relevant 93
4.8 Summary ................................................................................................................... 98
Chapter 5 Research Methodology .............................................................................. 101
5.1 Introduction ............................................................................................................. 101
5.2 Research Task Establishment .................................................................................. 102
5.3 Theoretical Framework Development ..................................................................... 103
5.4 Data Collection ........................................................................................................ 105
5.4.1 Data Required for the Research .......................................................................................... 105
5.4.2 Questionnaire Survey .......................................................................................................... 107
5.4.3 Interviews ............................................................................................................................ 108
5.5 The Measurement of Variables ................................................................................ 110
5.5.1 Measurement of Transaction Attributes ............................................................................. 110
5.5.2 Measurement of Transaction Costs .................................................................................... 115
5.5.3 Measurement of Reducing Effect of Project Alliancing on Transaction Costs ................ 115
5.6 The Design and Administration of Questionnaire Survey ....................................... 116
5.6.1 Questionnaire Development ............................................................................................... 116
5.6.2 Sampling and Recruitment of Survey Participants ............................................................ 121
5.6.3 The Administration of the Survey ...................................................................................... 123
5.7 Data Analysis and Results Report ........................................................................... 126
5.8 Summary ................................................................................................................. 127
Chapter 6 Data Analysis and Results ......................................................................... 129
6.1 Introduction ............................................................................................................. 129
6.2 Sample Characteristics ............................................................................................ 130
6.2.1 Respondent Profile .............................................................................................................. 130
6.2.2 Profile of Typical Alliancing Projects ................................................................................ 132
6.3 Test of Significance of Variance between Groups of Respondents.......................... 139
v
6.4 Factor Analysis ........................................................................................................ 141
6.4.1 Factor Analysis: Owner’s Asset Specificity ...................................................................... 142
6.4.2 Factor Analysis: NOPs’ Asset Specificity and Uncertainty .............................................. 150
6.4.3 Validity and Reliability ....................................................................................................... 154
6.5 Multiple Regression Analysis .................................................................................. 155
6.5.1 Design of the Regression Analysis ..................................................................................... 155
6.5.2 Set-up Costs as the Dependent Variable ............................................................................ 158
6.5.3 Monitoring Costs as the Dependent Variable .................................................................... 163
6.5.3 Enforcement Costs as the Dependent Variable .................................................................. 165
6.5.4 Reducing Effect of Alliancing on Transaction Costs as the Dependent Variable ............ 166
6.6 Rank Order of Control Mechanisms Affecting Transaction Costs ........................... 167
6.6.1 Mechanisms Affecting Set-up Costs .................................................................................. 167
6.6.2 Mechanisms Affecting Monitoring Costs .......................................................................... 171
6.6.3 Mechanisms Affecting Enforcement Costs........................................................................ 174
6.7 The Use of Interorganizational Cost Management in Project Alliances ................... 174
6.8 Summary ................................................................................................................. 177
Chapter 7 Empirical Findings from the Questionnaire Survey ............................... 179
7.1 Introduction ............................................................................................................. 179
7.2 General Findings Regarding Transaction Attributes and Transaction Costs ............ 179
7.3 The Impact of Transaction Attributes on Transaction Costs in Alliances ................ 182
7.4 The Reducing Effect of Project Alliancing on Transaction Costs ............................ 184
7.5 Control Mechanisms Contributing to Reducing Transaction Costs ......................... 186
7.6 Cost Management Practices in Project Alliance ...................................................... 189
7.7 Summary ................................................................................................................. 194
Chapter 8 Interorganizational Cost Management in Project Alliances: Interviews
with Alliance Managers .............................................................................................. 196
8.1 Introduction ............................................................................................................. 196
8.2 Data Collection ........................................................................................................ 196
8.3 Data Analysis .......................................................................................................... 197
8.4 Life Cycle Consideration in Project Alliances ......................................................... 198
8.5 The Establishment of Target Cost: A Value Based Target Costing System ............. 202
8.6 Cost Management during the Project Delivery Phase .............................................. 206
vi
8.6.1 Commercial Incentive as the Primary Driver for Cost Reduction .................................... 206
8.6.2 Continuous Improvement and Collaboration as the Primary Costing Methodology........ 207
8.6.3 Information Sharing and Open-Book Accounting ............................................................. 210
8.6.4 Multi-Party Value Engineering .......................................................................................... 212
8.6.5 Reducing Cost and Enhancing Value Simultaneously ...................................................... 212
8.7 Scope Change in Project Alliances .......................................................................... 214
8.8 Summary ................................................................................................................. 216
Chapter 9 Conclusions ................................................................................................ 221
9.1 Introduction ............................................................................................................. 221
9.2 Conclusions ............................................................................................................. 221
9.2.1 Objective 1: The Impact of Transaction Attributes of Alliances on Transaction Costs ... 222
9.2.2 Objective 2: The Governance Performance and Efficiency of Alliancing........................ 224
9.2.3 Objective 3: The Effects of Control Mechanisms of Alliances on Transaction Costs ..... 227
9.2.4 Objective 4: Interorganizational Cost Management in Alliances ...................................... 231
9.3 Contributions to the Academic Knowledge Base .................................................... 236
9.4 Managerial Implications: A Framework to Reduce Transaction Costs ........................ 238
9.4.1 The Choice of Governance Mode in Organizing Construction Transactions ................... 239
9.4.2 The Design of Control Mechanisms in Delivering Projects .............................................. 241
9.5 Methodological Implications ................................................................................... 243
9.6 Limitations and Further Research ............................................................................ 244
References .................................................................................................................... 246
Appendix A: Survey Questionnaire ........................................................................... 266
Appendix B: Homogeneity Tests Results ................................................................... 280
Appendix C: Paired-samples T Test Results ............................................................. 292
Appendix D: Major Questions Asked in Interviews ................................................. 296

vii
List of Figures

Figure 2.1 Classification of Literature by Year of Publication ....................................... 15
Figure 4.1 Typical Process and Major Activities in Project Alliances ............................ 68
Figure 4.2 A Representation of the Relationships between Transaction Attributes and
Transaction Costs in Alliances ....................................................................................... 74
Figure 4.3 A Representation of the Main Predictions of Efficiency of Alliancing .......... 80
Figure 4.4 Unique Features of Control Mechanisms in Project Alliances ...................... 81
Figure 4.5 Theoretical Framework for the Research ..................................................... 100
Figure 6.1 Sampling Distribution of Respondents by Experience ................................ 131
Figure 6. 2 Sampling Distribution of Respondents by the Number of Alliancing Projects
Experienced .................................................................................................................. 131
Figure 6.3 Sampling Distribution of Respondents by Position in Project Alliances ..... 132
Figure 6.4 Sampling Distribution by Project Location ................................................. 133
Figure 6.5 Sampling Distribution by Project Type ....................................................... 134
Figure 6.6 Respondents’ Organizational Role .............................................................. 134
Figure 6.7 Selection Method Used in Typical Alliancing Projects ............................... 135
Figure 6.8 Sampling Distribution by Project Value Range ........................................... 136
Figure 6.9 Sampling Distribution by Project Duration ................................................. 136
Figure 6.10 Scree Test .................................................................................................. 146
Figure 6.11 Component Plot in Rotated Space ............................................................. 149
Figure 6.12 Normal P-P Plot of Regression Standardized Residual ............................. 162
Figure 6.13 Scatterplot Figure ...................................................................................... 162
Figure 6.14 Partial Regression Plots ............................................................................. 163
Figure 6.15 Using Frequency of Cost Management Practices in Alliances .................. 176
Figure 7.1 A Basic Cost Management Workflow in Project Alliances ......................... 192
Figure 9.1 The Impact of Transaction Attributes on Transaction Costs in Alliances .... 224
Figure 9.2 An Illustration for the Governance Efficiency of Alliancing ....................... 226
viii
Figure 9.3 Effectiveness of Control Mechanisms in Reducing Set-up Costs ................ 228
Figure 9.4 Effectiveness of Control Mechanisms in Reducing Monitoring Costs ........ 229
Figure 9.5 Effectiveness of Control Mechanisms in Reducing Enforcement Costs ...... 229
Figure 9.6 An Interorganizational Cost Management Framework in Alliances ............ 235
Figure 9.7 A Framework to Reduce Transaction Costs ................................................ 238

ix