Pricing construction work: a marketing viewpoint

Abstract

Recent work on pricing has shown that neo-classical microeconomic theory (NCMT) is preferred to tendering theory and that implied by absorption, or full-cost, pricing of construction work because of its explicit treatment of market conditions, competitor behaviour and firm capacity levels. Applying NCMT in practice, however, requires the consideration of pricing from a marketing perspective. This paper examines the challenges involved in terms of the two prevalent marketing paradigms – marketing mix and relationship marketing– to pricing construction work generally, and the traditional contracting (TC), design and construction (D&C) and speculative building (SB) procurement systems in particular.

In general, the marketing mix (MM) approach, having the closest fit with NCMT, is most aligned to current practice. However, conceptual and practical limitations are identified. Relationship marketing (RM) is theoretically more applicable, yet has been largely overlooked in practice due to the transaction costs and investment involved. Nevertheless, some RM tools are increasingly being adopted in response to demand criteria and clients’ needs for continuous improvement, offering a challenge to NCMT related pricing.

In terms of specific procurement arrangements, SB would seem most suited to the MM approach over the long term as it is closest to consumer good markets. D&C on the other hand is considered to be the most price-sensitive to demand factors, with SB the least because of its ability to control resources, specifically land and financial packages, whilst TC is most suited to developing RM practices.