Large Firms Help Stabilize Costs
I recently completed Barry LePatner’s bookBroken Buildings, Busted Budgets, in which he proposes some solutions to one of the struggles healthcare, and the entire U.S. construction industry, is dealing with: unpredictable cost inflation. LePatner poses ideas that touch on multiple pressure points in the building price puzzle. He believes if the United States had several “large, vertically integrated” construction firms, we would be one step closer to price stability.
One of the issues: The majority of construction firms are too small and too impermanent to invest in the activities that would help them grow. Large firms would lead to more price transparency for hospital owners and increased productivity. Some other benefits of larger firms: better contractor control over workers, more investment in worker training and education, technology, actual research and development, and even coordinated lobbying.
For LePatner, large firms would grow out of a market shakeout that occurs when contracts are truly fixed price (his contention is that currently most contracts are “mutable cost”). When poor performing, small contractors are forced to financially eat their mistakes from mismanagement and the purchase of poor quality subcontractors, they would go bankrupt, leaving the strong to grow and buy up the weak. In addition, market fragmentation will be eliminated when it becomes cheaper to make (bring the capabilities in-house) rather than buy (pay a sub to perform).
He offers Levitt & Sons, the prominent post-World War II residential home builder infamous for its monotonous Levittowns, as an example of a model large outfit. At Levitt & Sons, “every operation was meticulously planned in advance, and represented years of thought and experimentation.” Levitt owned its own woodshop, pipe shop, nail factory, construction supply company, and, in effect, its subcontractors. They were lean before lean was hip.
Consolidation is appealing because it seems neat and tidy and follows economic theory; however, the jury might still be out on its success of late considering the plight of industries that have recently tried it out: airlines, banks, and automobile manufacturers. Some of these industries were in trouble before consolidation, while consolidation in banking created the "too big to fail" concept. Will we ever see the day when a construction firm is so essential to the economy it is deemed too big to fail?
LePatner has a point that the current glut of “mom-and-pop” shops are undercapitalized and not positioned for long-term success (this is especially risky in subcontracting work) in complex sectors like healthcare. The average hospital has no way of comparing the product and services of one against another—so hospitals mistakenly decide on price. Medical facilities are lucky because large projects attract large, competent firms, which are more the norm in healthcare. But clients will often have a soft spot for the local guy, which in many cases is a small operation.
How would a national or global builder market and win projects over the long term when, inevitably, many would not be local to their clients, or their efficient operations would not have the capacity to include local or Minority Business Enterprises/Women’s Business Enterprises? My guess is this is where the lobbying comes in.