On Building Blocks
The Commercial Observer: You’ve said that $120 billion is wasted on unnecessary overruns every year. Where are those costs coming from and why is it happening?
Mr. LePatner: As I laid out in Broken Buildings, Busted Budgets, the little-known fact in our nation’s business economy is that the construction industry is the most inefficient in our nation. It is a hugely low-profit industry where contractors of any size are happy to make 3 percent or 4 percent a year, taking great risk. It is comprised almost exclusively of mom-and-pop shops. There are no national construction firms who operate in every state and are like the Gap, Starbucks or another national company.
Why is that?
Because historically, the construction industry is the last industry that operates like a guild. It’s small, it’s localized, and except for the trash industry—which only became nationalized when waste management bought up all of them—it’s the last industry that’s totally local. Today, the private-equity world doesn’t look at the construction industry as having long-term viability. I have predicted in my book that that will change in the years ahead, and we will start to see consolidation, but only when contractors understand the benefits of efficiency.
Is it that they don’t understand how to be efficient, or that it’s not profitable for them?
There’s no one company that does the work on a project of any scale. If you take a school project or you take a major residential tower or you take a complex project like an airport, you’ll have anywhere from 10 to 20 to 50 or more subcontractors who actually do the work. These literally are mom-and-pop companies. The work is every day pulling up in vans. They have no equity.
Why so many different subcontractors?
Essentially, where many years ago, maybe 50, 60, 70 years ago, the predominant way to build a large project was with a general contractor who worked regularly with masons, people who did the steel, people who poured the concrete, people who put the roofs on, and they were like a family working on a few projects. The expansion of construction in this country, to where it’s a $1 trillion-a-year industry, exploded that single unit of construction into something called construction management, and the general contractor who really was a hands-on contractor became a concert master. That fracturalization has created uncertainty because the contractors know they are inefficient. They know that even if one or more are efficient, other subcontractors working on the job will not complete on time, and therefore the model became one of shifting risk to the owner, who has for the last 40 or more years been paying the price for that inefficiency.