Architecture Notes

Barry LePatner is an attorney to architects and other parties involved in building construction.  In his book, Broken Buildings, Busted Budgets, LePatner offers an explanation of how building construction has become a broken industry.  In comparison to the technological advancements and productivity increases in any other industries, construction has been left behind.  The descriptions in this book are discouraging, but  promising that the market will inevitably demand reform.  LePatner makes it clear that the discussion of construction reform has been around much longer than I have been an architect.  It’s easy to say ‘this is the way it’s always been done’, but if current news on our economy is any indicator, it seems advisable to be prepared for change in the way business is done in any industry.  LePatner discusses several issues and historic cases, but here is a brief summary of his writing:

Budget overruns are commonplace

• LePatner suggests that monitoring a Google News alert for ‘construction cost overrun’ is just one illustration of how accepted budget overruns have become.

Asymmetric information

• The contractor often has information and knowledge that the owner does not.  This asymmetry leads to mutable costs and a lack of true competition.   LePatner encourages strong contract language that allows information to flow freely.

Fixed pricing

• The price of a building is often locked in before bidding documents are complete and/or coordinated.  Once construction begins, should costly change orders occur there is relatively little an owner can do.   Many books and speakers have addressed the comparison of building constructon to automotive or airplane construction. These products are assembled by industrial processes that control costs.  Lepatner believes that one of the key factors that will make the construction industry more efficient is the widespread use of fixed-price contracts.  If an entity can offer a building to an owner for a truly guaranteed price, they will have great market advantage.

Research and Development

• On average, the industry consists of so many small businesses too small to invest in substantial research and development.  The greatest innovations have come from building product manufacturers, changing the pieces and parts, but not the manner in which they are assembled on site.  LePatner predicts frenzied merger activity will provide vertically integrated large firms that will be able to invest in research and development.

Effective intermediaries

• The used car business is one of few industries like construction where you don’t know exactly what you’re getting for the money.  He points our how intermediaries have reduced asymmetric information in this industry (i.e. carfax, vehix).
• Other industries where you don’t know exactly what you’re getting for the money are highly regulated (i.e. medicine, law and professional services)
• The National House Building Council (NHBC) in the UK is a non-governmental agency that inspects homes.  Most builders will work hard to please these inspectors as a builder’s NHBC registration is required by most mortgage lenders.
• LePatner then notes:

“In the 1970s, an attempt to create an American version of NHBC got off to a good start.  The Home Owners Warranty (HOW) monitored 100,000 homes, and oversaw only twenty arbitration cases.  The program faltered, however, because the federal trade commission interpreted the Magnuson-Moss act – which stiffened requirements for “warranties” – in such a way as to render HOW illegal.  That might have been the worst thing to ever happen to the U.S. construction industry.”

In summary, Lepatner’s proposal identifies that effective intermediaries and true fixed price contracts must be in place to inspire real competition and effective change.