Reversal of bargaining power in construction projects: meaning, existence and implications

Abstract

Reversal of bargaining power arising from asset specificity is important for the understanding of hold‐up problems. Various types of asset specificity have been identified in different transaction contexts, but a previously unidentified or unnamed type is developed here: process specificity. Numerous widely used financial and contractual preventive measures in construction practice can be justified as responses to this problem of process specificity. These include bonds and retentions. However, these measures have limitations. Specifically, the client‐led change orders cannot be completely averted and when they occur, the pricing of additional work largely relies on negotiation, implying that bargaining power determines the result. Consequently, the hold‐up problem remains a managerial issue. To mitigate this problem, clients should choose a procurement system by aligning project attributes with the procurement system characteristics.