On Building Blocks

barrylepatner 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.

You’ve been called the ‘guru of construction industry reform.’ What does that mean?
What everyone in the industry would do when I would ask them a question about why the construction industry works the way it does, invariably people threw their palms up in the air and said, ‘Barry, that’s the way it’s always been.’ And it bothered me that nobody knew the answer. People knew their particular slice of how things were designed and built and financed. They understood their perspective, but had no clue on the larger scale. So mine was a personal exploration, and as I developed more and more of the information, we quickly understood that this was about a dysfunctional industry that operated unlike any other in the United States, and that gave me a perspective to speak out.

Tell me about the overruns at the World Trade Center.

Well, the World Trade Center at ground zero is a tragedy that was written from day one, when the belief was that we were going to have a revival down there that would make all of us in New York, the United States and the world proud.

When was day one?
Day one was when there was an announcement that they were going to have a whole series of public forums and hearings, where they wanted to hear from the public and invited world-class architects and engineers to come and talk about master plans. There was a belief that something new and exciting was going to come about, and it masked the realities of what New York City and New York State politics are really all about, and they’re about power and real estate development. And I was very early in pointing out that they never give up power.

Have you spoken to Larry Silverstein or the Port Authority about these issues?
I’m aware of the positions taken by the Silverstein Properties team. I’m aware [of], and have avidly read, a lot of the reports from the Port Authority, and I think that I’m on safe ground to say that both sides come to the issue with divided interests that will never be reconciled without someone—a ground zero czar—taking control; stopping the construction until they truly know what they’re going to build; and then doing it on a true fixed-price basis that protects the public’s dollars.

Why are owners and developers so often unfamiliar with the construction process?
The construction managers, the big construction managers—and the medium-sized ones—whisper in an owner’s ear that if you get started four months early, you’ll be able to finish the project four months early. That is as phony as a $16 bill, and to the thousands of people who I’ve spoken to and asked this question, they’ve all laughed hysterically when I say, ‘Did you ever hear of a project that started four months early and finished four months early?’ And depending on the size of the audience I’m speaking to, it’s gales of laughter, because that is a true fiction. And every $100 million loan that takes an extra month to complete adds $1 million approximately in cost to that owner or developer.

Do people have a view of you as anti-union?
Oh, no! In fact, if you read the book, one of the major inquiries I made was, I wanted to know if work performed by union forces is prohibitively more expensive than nonunion. And one of the fascinating statistical researches I came across was, if there is a difference between the pricings, union and nonunion, for the workers it is minimal, because from an efficiency standpoint, the unions have apprenticeship programs which train young workers how to do the jobs more efficiently. So I dispel that very clearly and said this is a nonissue.


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