Construction Contracts (or: "How to Get the Right Building at the Right Price?")

Surajeet Chakravarty () and W. Bentley Macleod ()
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Surajeet Chakravarty: University of Exeter

No 2125, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: Most contracts that individuals enter into are not written from scratch; rather, they depend upon forms and terms that have been successful in the past. In this paper, we study the structure of form construction contracts published by the American Institute of Architects (AIA). We show that these contracts are an efficient solution to the problem of procuring large, complex projects when unforeseen contingencies are inevitable. This is achieved by carefully structuring the ex post bargaining game between the Principal and the Agent. The optimal mechanism corresponding to the AIA construction form is consistent with decisions of the courts in several prominent but controversial cases, and hence it provides an economic foundation for a number of the common-law excuses from performance. Finally, the case of form contracts for construction is an example of how markets, as opposed to private negotiations, can be used to determine efficient contract terms.

Keywords: law and economics; incomplete contracts; construction; agency theory; industry studies; outsourcing; procurement (search for similar items in EconPapers)
JEL-codes: D8 K2 L7 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2006-05
New Economics Papers: this item is included in nep-bec and nep-law
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Working Paper: Construction Contracts (or “How to Get the Right Building at the Right Price?”) (2006)
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