Asymmetric Information and Renovating your Kitchen

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In Barry LePatner’s book Broken Buildings, Busted Budgets (originally discussed here) he sites asymmetric information as one of the key contributors to the problems of the construction industry. The basic argument that LePatner makes is that in any construction project, the contractor holds all the cards because construction is his primary business as compared with the owner/developer who builds new buildings much less frequently.

When introducing a prospective owner/developer client to construction verification, I often will ask them if they have ever renovated their kitchen. If you’ve lived through this experience yourself, then you realize exactly what asymmetric information is all about.  After assessing competing bids and selecting a contractor, you as a homeowner feel confidant in your choice and are ready to move ahead with confidence.  Though, as soon as work begins you soon realize that the contractor now holds all the cards.  As your old cabinets come down (and your anticipation goes up) and you begin to discover the many surprises that lay hidden beneath the surface, you soon learn that you must take your contractor at his word for every decision that comes up because your limited experience doesn’t give you the knowledge necessary to challenge anything presented to you. Believe it or not, the same holds true for developers of half billion dollar condo projects (give or take a few hundred million dollars.)

LePatner explains that contractors (and subs) take advantage of asymmetric information to push through an excessive number of change orders during a project, which allows them to turn a money-losing low-bid project into a profitable one. In our experience, we’ve seen many examples of this surreptitious strategy at work. Recently, a plumbing subcontractor bragged to one of our CVT’s that he was able to bill the GC on his last job for 176 additional hours above and beyond his original estimate.

It’s certainly easy to identify with the overt symptoms of asymmetric information that would seem to favor the contractor.  However, I believe that the contractor can suffer for holding all the cards as well.  Granted, we’re all professionals, but none of us are above displaying feelings of suspicion if we feel that someone’s taking advantage of us.  I’m sure most contractors would prefer not to be scrutinized with a suspicious eye ever time they file an RFI. I would argue that an informed owner would make a more willing collaborative partner. If all parties in a project share information equally, it’s the project itself that will ultimately benefit as the walls of doubt come down and productivity goes up.

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