Abstract:
All contracts are inherently incomplete because although principals and agents agree
ex ante to abide by the terms of the contract, their respective investments differ. In
anticipation of performance, both recognise incentives for opportunistic behaviour.
Investigating the perceptions of both parties in the tender process contributes towards
determining what factors can be used by principals and agents to reduce the extent
and impact of incomplete contracts, and to minimise their respective transaction costs.
The aim of this research is therefore two-fold: firstly, to establish the impact of
incomplete contracts and transaction costs on the tendering process, and secondly, to
determine what factors can reduce the impact and minimise transaction costs incurred
by both parties.
The value that both the principal and agent obtain from the tendered work increases in
proportion to the quantity or volume of work, and decreases as the agent’s profit and
the cost to both parties increase. Therefore, the value that can be obtained
subsequent to any contractual transaction reduces as the costs to both parties
increase, which includes their production costs and transaction costs. It is clear that
the total net benefit in the transaction is increased if the transaction costs of one or
both parties can be reduced.
The main transaction costs incurred by both parties due to the cost implication of risk
and uncertainty, can be summarised as moral hazard and asymmetric information,
time delays, search for and disclosure of information, as well as the enforcement and
legal costs that both parties may be subjected to.
