Confronting Contractors
posted by Frank Pasquale
There’s a nice review of Barry B. Lepatner’s Broken Buildings, Busted Budgets in the WSJ today. Lepatner offers an interesting economic model of traditional business methods here:
Firms aren’t really competing to deliver quality for the lowest possible price. Instead, according to Mr. LePatner, “they compete for the future right to increase the initial cost of their agreement.”. . . “We end up with many firms,” Mr. LePatner writes, “but little head-to-head competition on the big economic variables of time, quality and price.”
Construction firms often make unrealistically low bids to get jobs, Mr. LePatner notes, but they can count on finding plenty of reasons later to jack the price up enough to allow for a profit. When the building is under way, it becomes prohibitively expensive to fire the contractor and start anew. The owner has become a hostage.
Yet another reason to suspect “lock-in” as a business model. On the bright side, LePatner suggests that cyberspace’s enhancement of “reputation nation” should make experiences like our guest Jeff Lipshaw’s less likely in the future:
[LePatner suggests] hiring experts who can monitor builders and who have financial incentives to prevent needless overruns. Tougher contracts should enforce fixed costs or, at least, severely limit the scope for escalation. And thorough background checks — looking for lawsuits, public complaints and financial troubles — may lower the chance of hiring dodgy engineers and construction teams.
Photo Credit: night86mare.
December 5, 2007 at 9:46 pm
Posted in: Contract Law & Beyond
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