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

43 Pages Posted: 17 May 2006

See all articles by Surajeet Chakravarty

Surajeet Chakravarty

University of Exeter Business School

W. Bentley MacLeod

Columbia University - Department of Economics; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Date Written: May 2006

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

JEL Classification: D8, K2, L7

Suggested Citation

Chakravarty, Surajeet and MacLeod, William Bentley, Construction Contracts (or: How to Get the Right Building at the Right Price?) (May 2006). IZA Discussion Paper No. 2125; CESifo Working Paper Series No. 1714. Available at SSRN: https://ssrn.com/abstract=902820 or http://dx.doi.org/10.2139/ssrn.902820

Surajeet Chakravarty

University of Exeter Business School ( email )

Xfi Building, Rennes Dr.
Exeter, EX4 4JH
United Kingdom

William Bentley MacLeod (Contact Author)

Columbia University - Department of Economics ( email )

420 W. 118th Street
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

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