Construction price formation: full‐cost pricing or neoclassical microeconomic theory?

Abstract

Neo‐classical microeconomic theory has been suggested to offer (1) an appropriate analytical tool for construction price determination while, at the same time, (2) full‐cost pricing is most commonly accepted pricing policy of construction firms. Paradoxically, however, both are mutually exclusive theories. Only one, if any, can be correct. This paper examines both (1) and (2) by analysis of the evidence available in literature and concludes in favour of (1). It is only in disequilibrium, however, that the differences in behaviour can be clearly observed. In equilibrium, the difference between the two theories from a practical point of view is not very substantial. In addition, the endemic nature of uncertainty in the industry in general makes the task of estimating costs and prices difficult in practice. Therefore, although neoclassical microeconomic theory provides a useful means of analysis, it offers little for the practice of pricing, which is much more closely related to the marketing discipline than economics.

Keywords:

• Construction
• contracts
• pricing
• theory
• policy
• costs
• prices
• neo‐classical microeconomics
• marketing