Chapter 1: Overbudget & Overdue
The construction industry's woes are only partly a function of its multiple participants and processes. The central problem is structural. The symptoms of our Broken Buildings and Busted Budgets are low productivity relative to other U.S. industries; the predominance of small firms fragmented across the industry; risk-averse and short-sighted management; an uncompetitive market; and most problematic, a lack of fixed-price contracts. These symptoms are caused by the twin root problems of asymmetric information and the lack of real intermediaries.
Contractors have every incentive to bid low on a project to get the job. Because the business is highly competitive at the bid stage, most firms (which are small to begin with and enjoy little financial safety net to absorb cost overruns) know that their low bid will not return an adequate profit. But after a contractor is awarded a contract, the situation changes radically. The contractor then becomes a monopolist, who will attempt to recoup through change orders the profits denied it by the bid process. This explains the pervasiveness of mutable-cost (open-ended) contracts. Owners realize that, even with a seemingly straightforward fixed-price contract, once they are embroiled in construction, they have few good options but to pay up in order to keep the project moving ahead so as not to incur even greater delays and costs. The industry is caught in this unvirtuous cycle.
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