When the 2,000th stimulus project was approved last month, the White House was touting the fact that bids from contractors were coming in well below expectations — 15 to 20 percent below on average, and 30 percent or more in some places.
But this kind of steep discount is not necessarily good news, cautions an expert on the construction industry.
“When bids are coming in 25 or 30 percent under a reasonable estimate, one of two things is going to happen,” says construction lawyer Barry Lepatner. “Either the contractor completes the work at prevailing wages and accepts a substantial loss, or the company runs out of money part way through.”
Neither outcome is desireable, he says, but the latter would be especially disruptive. “When the contractor has lost so much that they can’t go on, the government doesn’t have a way to give them more money.” LePatner warns that we could see a raft of partially completed projects going idle as contractors fold.
Trying to stretch an unfeasible budget might also lead to poor workmanship and understaffing–problematic on multiple fronts in a country trying to fix its infrastructure and boost employment.
Why would a firm underbid? It’s a question LePatner explores in his book Broken Buildings, Busted Budgets (U. of Chicago). The industry is dysfunctional and “anti-competitive” in many respects, he argues, and there can sometimes be business advantages in making impossibly low bids.
But many stimulus projects are “fixed price” contracts, meaning that firms will have less leeway in finding ways to eventually eke out a profit.
“We want our construction industry to make a fair profit,” LePatner says. “I’m waiting to see if they can pull this off in some novel way.”
May 26th, 2009 at 2:25 pm
[...] experts say we should be worried about these low bids–that construction firms are likely to start going broke before they finish the projects [...]