Construction Price Formation: Full cost Pricing or Neo-Classical Microeconomic Theory

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