The hold-up problem in the management of construction projects: A case study of the Channel Tunnel

The hold-up problem in the presence of asset specificity poses great transaction hazards. Therefore, having a sound understanding of this problem is an important managerial issue. The purpose of this research is to apply the perspective of transaction cost economics (TCE) to the analysis of three major disputes that arose in the Channel Tunnel project during 1988–94. A special form of asset specificity is identified for construction projects: process specificity. This yields additional insights into the root causes of the hold-up problem. Three parameters, including ungovernable uncertainty, degree of lock-in and amount of money under dispute, are identified. It is shown that the observed connection between bargaining power as specified by this TCE model and the outcomes of dispute resolution is in line with the theoretical predictions. The lesson learnt from this project is that clients should not stretch the protective strength of a lump-sum contract too far and that the hold-up problem can indeed in some circumstances be regarded as both serious and unsolved by existing administrative structures and governance.