Vedder on LePatner, _Broken Buildings, Busted Budgets: How to Fix America's Trillion-Dollar Construction Industry _

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Published by EH.NET (September 2007)

Barry B. LePatner, _Broken Buildings, Busted Budgets: How to Fix 
America's Trillion-Dollar Construction Industry _. Chicago: 
University of Chicago Press, 2007. x + 215 pp. $25 (cloth), ISBN: 
978-0-226-47267-6.

Reviewed for EH.NET by Richard Vedder, Department of Economics, Ohio 
University.


Barry LePatner, a veteran attorney specializing in construction 
industry affairs, argues that the American construction industry is 
an archaic, mom and pop enterprise with stagnant productivity and 
high and unpredictable costs, all of which is needlessly raising the 
cost of needed infrastructure improvements to our economy.

The three expressions most used by LePatner to explain the problem 
are: "monopoly," "asymmetric information," and "mutable cost 
contracts." We are told that until we reform the way the construction 
industry contracts with customers, the industry is unlikely to reform 
or modernize. The monopoly dimension arises because after firms sign 
contracts with a customer to construct a building, they are the sole 
provider of the product. Because of change orders, the final price 
paid is often significantly above the contracted amount, making costs 
"mutable."

To be sure, these are not the sole cause of inefficiencies and 
near-Luddite behavior in the industry. Labor unions have often been 
successful in preventing cost saving innovation, and government 
regulations, especially building codes, often border on the inane. 
But LePatner feels these are "minor blemishes," almost trivial in 
importance compared with the problems that arise from the process 
where comparatively ignorant customers select a single contractor 
through competitive bidding, and then are naively taken to the 
cleaners, driving up costs, sometimes because of costly mistakes for 
which the contractor is largely responsible.

The whole argument proceeds from a huge assumption: namely, that the 
industry is in fact a stagnating, relatively inefficient and 
non-innovative sector of the economy. On page 33, a graph is 
presented showing rising productivity from 1947 to about 1968, and 
sharply falling productivity from 1968 to 1978. A bit later (p. 37), 
he presents another graph whose source is allegedly the "U.S. 
Department of Commerce, Bureau of Labor Statistics" that purports to 
show that labor productivity in 2003 in the construction industry was 
over 20 percent lower than in 1964.

I am not so sure. First of all, the BLS (which is in the Labor 
Department) does _not_ directly estimate productivity in 
construction. A quick review of the literature that I did revealed 
one study showing significant productivity decline (consistent with 
LePatner), one study showing productivity gains (albeit somewhat less 
than in the economy overall), and two studies that said productivity 
is virtually impossible to measure for a variety of technical reasons 
relating to construction price indices, starting with the customized 
nature of construction, the difficulty in measuring quality changes, 
etc. Thus the underlying premise of the book - construction is a 
traditional industry that has not modernized or innovated - is not as 
clear to me as it is to LePatner.

Another assumption of LePatner is that massive potential economies of 
scale are not being realized. Again, I am not so sure. Economies of 
scale often come from making multiple units of a standardized 
product, and that has happened to some extent in housing, where large 
corporations are emerging. But much construction is customized units. 
Moreover, because of the inefficiencies created by varying local 
building codes, localized knowledge of the parameters of allowable 
production techniques and materials is needed, actually giving an 
advantage to smaller regional (as opposed to national) firms. 
Government failures (e.g., a multiplicity of building codes) rather 
than market failures (monopolies, inadequate information) may be much 
of the problem.

While the book has some nice historical discussion, such as about the 
growth of mass production housing after World War II, deeper analysis 
of historical trends is limited and superficial. Why, for example, 
has unionized construction undertaken a big decline - is it for the 
same reasons that unions have declined elsewhere? Have there been 
successful moves to repeal outmoded Depression-era regulations, such 
as "little Davis-Bacon Acts" (prevailing wage laws) introduced in 
dozens of states?

LePatner advocates that the construction industry move to more fixed 
bid (non-mutable) contracts. He argues persuasively that much of the 
inefficient and sometimes corrupt change order process could be 
eliminated. If so, why hasn't it been done? Is not a big part of the 
"problem" that consumers are not content to buy standardized office 
buildings and other facilities, but demand highly customized 
structures, leading to the types of problems LePatner outlines? What 
has happened to construction costs of relatively standardized 
facilities that chains such as Wal-Mart or McDonald's build? If mass 
produced housing is more efficient (as LePatner argues), why do most 
Americans eschew it for more expensive customized housing? Perhaps 
variety is the spice of life, and what LePatner views as inefficient, 
others would view as a rational exercise in individual preferences.

Almost as an aside, LePatner comments on the inefficiencies of higher 
education (which he argues contributes to low quality construction 
engineering training), opining (pp. 97-98) that "U.S. higher 
education is also an inefficient sector, one characterized by high 
barriers to entry, significant market distortions due to high 
government involvement ..., and the use of sub-optimal ownership 
structures." A pretty decent description if you ask me. If his 
characterization of the construction industry is as perceptive as 
that on higher education, this book is probably a must read for those 
interested in this trillion dollar industry. However, the evidence is 
sufficiently murky that I am doubtful.


Richard Vedder is Distinguished Professor of Economics at Ohio 
University and a Visiting Scholar at the American Enterprise 
Institute. His last book is _The Wal-Mart Revolution_ (AEI Press, 
2006) with Wendell Cox. He is now working on a book on economic 
growth and equality in the U.S. for the AEI.

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