Broken Buildings, Busted Budgets: How to Fix America’s Trillion-Dollar Construction Industry

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.