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Broken building: forever over budget, forever overdue.

Build anything anywhere in America, or pretty much anywhere else, and caveat emptor.

In construction, we don't seem to have a choice. It always costs more and it always takes longer than owners thought. And almost always, if they want their building finished, owners put up and pay up. That hurts productivity, and these slowdowns, in turn, hurt the overall economy.

In absolute terms, construction is the largest industry in the world and is an enormously important part of most economies. In the U.S., it accounts for at least five percent of GDR Since 1998, the industry has employed between 5.8 and 6.6 million Americans annually. That adds up to big bucks. The construction industry is now a trillion-dollar-per-year enterprise. Realistic projections now anticipate that our nation's population will, by 2025, grow an additional 70 million people. According to reports of the Brookings Institution, we are entering a $2 trillion building boom that will transform every section of the country.

Higher construction productivity would mean more, better, or less costly construction projects. Lower prices would stimulate demand for higher quantities. In turn, there would be more construction work to go around. Thus, the question of productivity is, at its heart, an economic one.

The construction industry in the United States is, and has long been, characterized by many small firms. In 1985, the industry boasted 1.2 million firms and 5.5 million workers. By 1993, the number of construction firms had shrunk to about 600,000, 83 percent of which employed fewer than ten people. Only 59 firms employed more than 1,000 people and not even 900 companies employed more than 250.

The industry continues to be extremely fragmented. Though the average construction firm today is larger than it has been in the past, consolidation within the industry has proceeded much more slowly than in the manufacturing and financial services sectors. Habitat for Humanity, for example, was actually the 17th-largest homebuilder in the country in 2003 with its production of about 4,500 homes.

Construction projects, even small ones, are complex affairs--too complex to be left to the vagaries of the market. According to one recent study, at least 2,855 specific problems can arise on any given construction site, almost all related, directly or indirectly, to conflicts between disparate firms.

The solution, consolidation, will occur as soon as the construction market becomes truly competitive, and as soon as the contracts between general contractors and owners become a truly fixed cost.

The reality of today's construction world is that a "lump sum" or "fixed price" or "guaranteed maximum price" contract is rarely what it is appears to be.

Few, if any, contractors are willing to take the full risk of such contracts, and so carefully orchestrated exclusions or "carve outs" open the doors widely to costly "extras" change orders that add five, ten or at times 25 percent to the cost of the original contract.

This keeps the construction industry from ever being really competitive. Owners put plans out to bid. Contractors bid, and the lowest bidder (usually) wins. If the winning contractor bid too low, he or she often is faced with the need to do shoddy work, or charge the owner for every change in the plans. And due to architects' frequent preference for design vision over nitty gritty details, there are always changes in plans.

Owners cannot easily complain because they know so little about the cost of building materials and labor. Moreover, it is extremely difficult and costly to stop a construction project in midstream in order to iron everything out. Once they have begun work, contractors are monopolists in practical terms.

So, what to do?

Previous attempts to reform the industry have failed because they have not addressed key problems, most notably the lack of knowledgeable representatives on the owner side and the lack of true fixed-cost contracts.

Owners would benefit by retaining project representatives who would knowledgeably assess construction budgets, help establish precise completion schedules and enforce well-drafted agreements for all members of the design/construction process.

Such an intermediary might guarantee the price stated in a bid in exchange for a premium paid by the contractor. In other words, construction companies would begin to compete. This would likely drive consolidation, which in turn would bring better management, more R&D, more use of technology and the like.

Second, widespread adoption of truly fixed-cost contracts would enhance industry competition, and hence performance, even without the introduction of intermediaries. And it certainly would help owners save money. Very few owners or contractors spend much time with contracts, even ones for many millions of dollars. But following a few sensible rules can go a long way towards keeping the work moving on time and on budget.

This article is excerpted from the forthcoming book "Broken Building" by Barry B. LePatner, Esq.

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Title Annotation:Higher construction productivity
Author:Lepatner, Barry
Publication:Real Estate Weekly
Geographic Code:1USA
Date:Feb 1, 2006
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