Abstract: Conventional explanations for the widespread use of subcontracting in the construction industry tend to focus on product and demand characteristics. In recent years, attention has turned to considerations of transaction costs as a possible, if not major, reason for the use of subcontractors. Both approaches paid relatively little attention to supply conditions. Using Singapore as an example, this paper argues that supply characteristics such as employment relations also play an important role in the decision whether to use subcontractors.

Keywords: Subcontracting, transaction costs, employment relations.

The purpose of this paper is to examine, in the context of the Singapore construction industry, whether employment relations play a role in the widespread use of subcontracting. This issue is interesting for two main reasons, one practical and the other theoretical. On the practical side, multi-layered subcontracting involving many small firms has been alleged to be a cause of low productivity in Singapore. According to the Construction 21 Steering Committee (1999), these small firms, consisting of about 91 % of the 13,800 construction firms in Singapore in 1999, are generally poorly managed and unable to reap economies of scale. Small firms also tend not to have the capability to invest in training and new technology to enhance productivity. Consequently, the industry relies heavily on unskilled foreign workers and productivity suffers. Between 1981 and 1996, the contribution of total factor productivity growth to real output in the Singapore construction industry was 33.2% (Tan, forthcoming). As the editors of The Business Times (3 November 1999) put it:

On the theoretical side, the reasons for the widespread use of subcontracting in the construction industry are not well understood. Conventional

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