Construction Unnecessarily Costly: LePatner
- Mar 19, 2008
Developers and building owners are continually challenged by cost overruns on their projects due to continuing and deep-seated problems in the U.S. construction industry, according to construction attorney Barry LePatner. LePatner, speaking in Manhattan at a forum recently, which was sponsored by the Real Estate Board of New York, called the $1.2 trillion construction industry “dysfunctional.”
He said problems are caused by the fragmented nature of the industry that lacks a firm with a truly national presence. Construction firms typically are plagued by limited cash flow, minimal capitalization, and reluctance on the part of the industry to accept risk. Construction firms, due to their limited capitalization, are consequently unable to invest in employee training and new technology that would improve productivity, he said.
Indeed, the trouble usually starts at the beginning of a project, when contractors enter the auction bid process to win a job, said LePatner, author of the book Broken Buildings, Broken Budgets: How to Fix America’s Trillion Dollar Construction Industry. Contractors make such rock-bottom bids that they are unable to make any profit on the job, and thus must charge developers with change orders and claims. In this scenario, the developer quickly loses control of the job. He says a better route is a contract where a reasonable profit percentage is built in for the construction firm.
The consequences of an inefficient construction industry will likely be more pronounced going forward, LePatner noted, saying that 427 billion square feet, including 100 billion square feet of new residential properties, will be built in the U.S. by 2030. Over this same time period, increased development worldwide will mean that U.S. builders will face stiffer competition to source raw materials, thus raising project costs. Developers can gain control of the construction process, LePatner suggests, by truly allocating the risk of a project; by using an effective intermediary between the developer and the construction firm; and by use of true, fixed-price contracts, based on 100 percent complete and coordinated construction drawings for bidding.