Efficiency measurement of the construction industry in Taiwan: a stochastic frontier cost function approach

Construction firms require a large cash flow, thereby creating a significant financial leverage. Therefore, identifying a highly effective cost efficiency model is essential for construction firms, especially under the pressure of competition in today’s global market. This research used stochastic frontier analysis (SFA) to model and measure the cost efficiency of construction firms in Taiwan, and to investigate the relationships between input resources and cost efficiency. The main findings include: (1) subcontracting reduces labour capacity; (2) larger firms can be more cost efficient; (3) appropriate financial leverage increases cost efficiency and capital; and (4) reducing equipment costs increases cost efficiency. These findings can help construction firms to strategically adjust the management of their firm and improve cost efficiency.