Chapter 6: Fixing the Construction Industry: Consolidation, Intermediaries, and Innovation

The construction industry will rapidly consolidate once it becomes less expensive for construction firms to internalize competitors, suppliers, and distributors than to treat with them through the market. In other words, problems of fragmentation will be addressed when it becomes cheaper to make rather than to buy. That will happen when owners, especially governments, insist on true fixed-rate contracts. By weighing true risk against higher profitability, smaller firms will no longer remain the norm. When contractors can no longer wiggle out of bid terms after all credible threat of competition has ended, construction firms will finally feel the full brunt of market competition. This will occur whether the projects are traditionally bid, fast-tracked or negotiated as a design-build contract. The key is putting the contractor (or its surety) at risk, not taking what may turn out to be purely nominal bids.

How will an Intermediary Arise?

Another step forward will be the emergence of a true intermediary to fully represent the interests of the owner. Such representatives would be charged with negotiating fixed price contracts and utilizing their own experience in the construction market to bring greater efficiencies to the building process.

Contracts: Ensuring That Prices Stay Fixed

At the heart of the design and construction process are the contractual agreements between owners, contractors, and designers. Given that construction is a trillion dollar-a-year industry, it would be easy to imagine that those in the business spend a great deal of time and money negotiating and drafting construction contracts. In fact, relative to most fields in the business world, construction contracts are inadequate. More often than not, work begins well before finalization of the critical contractual documentation.

Standardized AIA contracts make broad and potentially dangerous assumptions regarding the scope of work and other crucial variables. Worse, they look after the interests of contractors first, then architects, with owners' interests coming in a distant third. Moreover, they are sadly out of touch with most of the more complex projects and are totally inapplicable for many projects where they do not define adequately the particular processes of highly technical projects. Though ubiquitous, they are quite simply inadequate to the task because they do not pay enough heed to Solon's reminder: Men keep agreements when it is to the advantage of neither of them to break them.

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