The Application of Transaction Cost Economics to UK Defence Acquisition

  • Ermias Kebede

Student thesis: Phd


Major defence projects have a reputation of cost increases, time delays and in some cases not meeting user requirements. The aim of this study was to discover the factors which create the difficulties in UK defence acquisition projects. The dataset used in this research are seventeen, National Audit Office: Value for Money reports of major defence projects. Qualitative Software NVivo 8 was used to organise passages from the reports into categories of factors representing the defence acquisition process. A content analysis method was applied to the categories in order to highlight their quantitative and qualitative significance. A Transaction Cost Economics approach was taken to formulate the research propositions, which were tested using the qualitative content analysis.The fundamental transformation in defence procurement leads to post-contract asset specificity. There is a lack of substitute suppliers in defence procurement due to the high switching costs. There are three reasons given for this development in defence: (1) a legacy of the privatisation policy in the defence industry; (2) ownership transfers of specialised assets under the prime contracting approach and; (3) the transaction-specific investments by the MoD. The prime is able to take advantage of transaction-specific and relation-specific investments in the transaction for future contract tenders, due to the pre-contract asset specificity which results. This sequence of events is identified as the cause of the bilateral dependency condition in defence acquisition.Uncertainty and asset specificity, to a lesser extent, were identified as the major causes of transaction-costs in defence acquisition. These transaction-costs were given as the causes of failures in meeting the value for money criteria of defence projects. The MoD has responded, in recent time, to project failure through a governance trade-off from a traditional market-based transaction towards a bilateral governance approach. A focus of this bilateral governance approach is the application of Smart Acquisition principles and the IPT mechanism (joint MoD-Industry teams). In order to strengthen and support the IPT mechanism it is argued that a relational contracting approach should be taken. Traditional contracting approaches weaken the joint team working, whereas relational contracting applies partnership principles of better communication, cooperation and collaboration.
Date of Award31 Dec 2011
Original languageEnglish
Awarding Institution
  • The University of Manchester
SupervisorGraham Winch (Supervisor) & David Lowe (Supervisor)


  • Procurement
  • Content Analysis
  • Transaction Cost Economics
  • Defence

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