Why Construction Is So Expensive?


Mar 01, 2022

Short answer- Inefficiency & lack of competition

Productivity - U.S. Bureau of Labor statistical data shows that construction productivity, and residential construction productivity in particular, did not improve as much as other sectors did. Productivity in other sectors improved partially because other sectors have people specializing in concentrated job functions, and thus, get better at it over the years. Just how you wouldn’t go to your primary care doctor with a toothache, because it’s not their expertise, it makes no sense to call a random general contractor for your bathroom renovation.  That general contractor could be specializing in bathroom renovations or he may not have much experience in bathroom renovations at all! 

Many general contractors bid on a wide range of jobs, using workers to perform a variety of tasks.  For example, the general contractor may require his workers to do drywalling one day, while installing a hot tub the next.  As one can imagine, these workers then need different tools and materials, and spend considerable time loading and unloading tools for different jobs.  Ultimately, many workers don’t get particularly good at specific jobs, and are slowed down.  In contrast, using crews to do just one type of job increases their productivity, reduces waste being generated, allows them to easily source the right materials, shortens the time on each job, and cuts cost and improves quality. 

Bubbles of Demand - Contractors who communicate well, are perceived as trustworthy, and produce good quality work have lots of demand just through word of mouth. Since these contractors only have so much time and capacity, and since booking jobs years in advance makes no sense, they hike up their prices, charging hefty premiums.  Customers who shop around typically get a few referrals, but the contractors who are being referred are usually busy, and thus, charge premium prices. Once customers get bids from a few well-known contractors, customers get the perception that the premium price is the common price, but if these customers had gone outside of their immediate circle and got more bids, they likely would have paid a significantly lower price. If instead, customers were able to work with contractors who possibly aren’t the best marketers or the most well-connected, they’d pay lower prices, while still ensuring a quality job.

Bubble of Trust - When dealing with contractors you are out in the wild. The industry suffers from three major problems: 

1. Contractors hand out their own contracts.  These contracts are usually very vague, with little to no scope of work or materials specified, or it’s very elaborate, with many clauses added to protect the contractor. This leads to unclear expectations and leaves room for disputes.  

2. Most people do massive construction or renovation only once in their lifetime. This means that contractors have the upper hand when it comes to pricing, as they are more knowledgeable about the price and time it will take. The construction industry is very opaque in terms of what different contractors charge for different jobs, as unlike other industries, customers can’t just look up competitors’ prices on their website.

3. If things go poorly and there’s a dispute, litigation is time consuming and expensive, and hiring a new contractor to fix the old contractor's mistakes is difficult.  Furthermore, it’s hard for the new contractor to price the past contractors’ work, adding more complexity to the situation.

For these reasons, people often resort to working with expensive contractors, not allowing market forces and proper competition to come into play.  This keeps construction and home improvement costs high, and leaves customers feeling frustrated and taken advantage of.

Materials - As general contractors bid on different types of jobs daily, they need access to a wide range of building materials. To do so, they work with large chains of home improvement rather than with specialty construction materials warehouses. Large chains are often more expensive for contractors to work with, furthermore, these stores don’t have as many parts as specialty stores do, forcing the contractor to purchase multiple parts instead of just the perfect part.

Daily Workers - Since small-scale contractors’ labor needs frequently vary by project, they often hire workers on a daily basis.  This means that these workers' price per hour is higher than full time construction workers.  Furthermore, this reduces a general contractors’ working capital, as they have to pay their workers daily, and pay higher workers compensation insurance.  Because of this, general contractors have to increase their prices so that they have enough money to make payroll and keep their businesses running.

Down Time – In addition to rainy or snowy days, when many jobs can’t progress, many contractors often have considerable down time because their next job is not lined up, their permit is not yet approved, or they don’t have enough workers or materials. Contractors still have fixed expenses, like liability insurance and leases on machines and trucks, and so, contractors pass these expenses onto the customer by charging more to make up for days they can’t work.

The good new is that it can be done better!

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