America’s Construction Crisis: Why Projects Go Over Budget – Barry LePatner on RFP 65 Transcript
Gordon Lamphere (00:05): Hi, I’m Gordon Lamphere, and welcome to The Real Finds Podcast, the podcast series where we have real conversations with key entrepreneurs, activists, and researchers shaping the real estate industry and, as a result, our world. On today’s podcast, we’ll be speaking with Barry LePatner. Barry has been featured on CNBC and in The New York Times, and he’s one of the nation’s leading voices in the construction industry. On the podcast, we discuss the state of construction, how to get more out of every construction project, and why America’s roads and bridges are falling apart. If you’re a real estate investor, today’s episode is well worth a listen. Barry, thank you so much for hopping on the podcast today.
Barry LePatner (00:52): Glad to be with you, Gordon.
From the Stock Exchange to Construction Law
Gordon Lamphere (00:55): Going from law to construction isn’t always the most predictable career move. How did you get into the construction industry?
Barry LePatner (01:05): I have a very unique story about that, and it takes a unique story to end up where I am some fifty years later. I started out in the enforcement department of the New York Stock Exchange, at a time when it was undergoing its own technological problems. Stock trades were still recorded manually in those days, which shows you how long ago that was. I then moved to a twenty-person firm that, among its other business, represented architects and engineers in professional liability claims. For the next seven years, during which I became a partner, I traveled all around the country dealing with every type of construction failure and got to work with the best experts in the world.
At a certain point, before everybody could say, “Boy, you’re going to be a name partner in a few years,” I said, “No, I’m leaving to set up my own firm.” Of course, I wasn’t smart enough to realize I was starting a firm to represent architects and engineers during the major recession of 1980 and 1981, when no architect or engineer had much business. But I was out there, and I was very fortunate. Within a few short years, I realized I had started the first law firm in the country that ever held itself out as representing architects and engineers, and we grew amazingly.
By the early nineties, I said, “Wrong business model. I have to represent the owners, because they’re the ones who make all the decisions.” Within a very short time, because I was fairly well known in the field by then, I was representing Goldman Sachs on major buildings and a new company called Starwood Lodging, which was building the W Hotels. Clients I negotiated construction contracts for came to me and said, “We don’t trust those contractors. We want you to manage the project for us.”
Barry LePatner (03:30): So very quickly, I hired architects and other professionals, and we had a project management company. For the next twenty-five or thirty years, we managed projects of all kinds and became very well regarded in the industry as people who set the standards and created new model agreements. It was a niche business. I fell into it precipitously, but I understood it from working with professionals and people who were very serious about building, and I had the opportunity to work all over the country in a field very few lawyers understand.
What People Get Wrong About the Construction Industry
Gordon Lamphere (04:08): When we’re talking about fields that lawyers, and even many businesspeople, don’t understand, construction is right up there. What do you think people get most wrong about the construction industry?
Barry LePatner (04:24): It’s a great question, because most people who go into this industry assume what they’ve heard from others, and most people don’t understand what underlies it. I wrote the industry-standard book, Broken Buildings, Busted Budgets, which was the first industry study, and it showed several things.
First, most of the construction industry is made up of mom-and-pop shops of one to four people, sometimes five to nine. Once you get to more than twenty-five or thirty people, you’re talking about less than one percent of all construction firms in the country. So it’s largely a small-business industry, and it’s highly inefficient. National figures show most contractors make one to four percent a year. That’s not a lot of profit for a tremendous amount of risk, and the concept of risk here is little understood. The ones most at risk are the owners, who get financing for a $10 million, $20 million, or billion-dollar project. But underneath them is a whole category of small contractors, subcontractors, vendors, and suppliers all around the world who depend on everything coming together correctly, on a product that hardly uses technology. The other thing to know is that unlike every other industry in America, technology doesn’t govern construction. It’s the same as it was
Barry LePatner (06:20): fifty and a hundred years ago.
Where the Inefficiency Starts: Incomplete Design Documents
Gordon Lamphere (06:21): There are elements of the real estate industry where that’s true as well, so I can’t hate on them too much. Where do you see the biggest inefficiencies? We’ve certainly gone into many of them in real estate. Where do they exist in construction?
Barry LePatner (06:41): Let me simplify the answer. The first thing you have to understand is that if the design team, the architects and engineers, doesn’t produce what’s called a complete and coordinated set of construction documents for contractors to bid on, contractors cannot give you a fixed price. If there are errors or omissions, or if the drawings aren’t coordinated so that the architect’s drawings match the structural engineer’s, the mechanical engineer’s, the plumbing engineer’s, and those of everyone else involved, including fire inspectors, then the owner is at a huge disadvantage from day one. There will be change orders. There will be delays. The project won’t finish on time. The lenders will end up screaming, and you’ll be saying, “I need more money because the project wasn’t completed.” Those inefficiencies run throughout the whole process, and they start if you, as the owner, don’t know how, and don’t have the right architects and engineers, to produce a complete, coordinated set of design documents for bidding.
The Myth of the Guaranteed Maximum Price
Gordon Lamphere (08:12): Can you speak more about the bidding process and how it plays out? For investors listening, maybe LPs who haven’t done much construction themselves, I think it blows people’s minds that you can have low-bid contracting and then the price changes drastically as the deal moves on. We’ve certainly had projects with unforeseeable changes, which are understandable when you discover something grossly wrong with a property after demolition. But sometimes low-bid contracting is just low-bid contracting. How does that play out in the industry?
Barry LePatner (09:11): Several things. You, and most people who wear the hat of owner or construction lender, know the term guaranteed maximum price, a GMP contract. Everybody hears it. And I make no bones about it: it’s the biggest myth in this country, along with jumbo shrimp. Contractors, who have rarely seen a complete and coordinated set of design documents, always say, “We’ll give you a guaranteed maximum price.” But buried somewhere in the contract, it says, “If we uncover errors, omissions, mistakes, or things that aren’t coordinated, we will stop, advise you, the owner, require your architects and engineers to amend the drawings, and then proceed with the project at an increased price, because we weren’t told about these things.” So first, a GMP contract will always have that clause, and it’s always a red flag for an owner.
Second, if you want a chance at avoiding that problem, an owner needs a sophisticated project manager who knows all the games and knows how to tell architects and engineers, “Make that more detailed, do the coordination, take the necessary time.”
Third, today most architects, engineers, and owners say, “But we have computer-aided design. We use Revit and Autodesk, and we can produce a digital product.” I tell you as a fact that almost all of the digital models architects and engineers produce today go to what’s called Level 300. They’re nice and beautiful, with wonderful things on them, but they’re not Level 400, which is a complete and coordinated set of design documents. So even if the design team is using digital design, Revit, BIM, all the magic words of the last few years,
Barry LePatner (11:35): they’re still mostly not trained to reach that next level. What owners and lenders must also understand is that when you start a project before the plans are complete, because a lender says, “I need you in the ground fast,” the plans are inevitably rushed and never coordinated. The project will be delayed and the cost will certainly go up. Studies show that on big projects there’s a 98 percent certainty the project will go over budget and be delayed by six to eighteen months. So you have to understand the risks. I spend a lot of time with owners, and sometimes with lenders, explaining the risks of deciding to break ground early without a complete and coordinated design.
Why Technology Alone Won’t Fix It
Gordon Lamphere (12:42): When we talk about solutions, many of the solutions I hear in the industry are, “Tech is going to solve this.” Do you think there are technical solutions that can solve some of the people problems in the industry?
Barry LePatner (12:58): The industry is averse to fixed-price contracts. Understand, first of all, that architects and engineers aren’t told how to produce a complete and coordinated set of documents. It only happens when owners insist on it. I can walk into most architecture and engineering firms and get everybody smiling when I ask, “When was the last time you did a complete and coordinated set of drawings?” Some will say, “The last time was when you represented the owner, Barry, and you were the project manager, because that’s how we got a fixed price.”
But most of the time, take a school district with a billion-dollar budget to build eight schools. Four or five years later, they’ve built five, and they’ve spent the billion. Why? Because in no instance was there a fixed price, and every budget had a cost overrun. If you want to test me on that, set up a Google Alert for “construction cost overruns.” Every day, you’ll get a list of projects from around the country that have run over budget. They’re myriad. So we have an industry-wide problem, and it’s a major one.
The construction industry is about one and a half trillion dollars a year, roughly five percent of our GDP, and yet it’s the most inefficient, least technology-driven industry in our economy. We allow this because of how architects and engineers are trained, because contractors are encouraged to bid low so they can make claims and earn more profit on change orders, and because construction lenders allow it. What do they care about an extra six months? It’s an extra six months of interest on a high-priced construction loan.
How Owners Can Protect Themselves
Gordon Lamphere (15:13): So what’s the best way for someone who’s building to protect themselves and prevent these cost overruns and problems?
Barry LePatner (15:28): If someone coming into the industry today wanted to solve that problem, rather than saying, “It went over by $50 million, so I’ll raise the cost of my apartments or charge higher rent to all my tenants,” and they really wanted to build cost-effectively, they have to control the design. They have to ask: Are we complete? Are all the details in here? Architects and engineers can do that if given sufficient time. It may take two, three, or four more months to get everything together and coordinate the drawings, but those are the most valuable four months. Then contractor teams come in, look at the plans and specs, and say, “Wow, these are complete.” And I say, “Yes, because I’m getting a fixed price from you, and the only way you’ll get another dollar is if we decide to add a floor to the building or tell you to build the bookcases out of teak instead of oak.” That’s how the project is run. But very few people in this country, in lending, development, or building, fully understand the balance of those risks and how to make a project work from a budget and schedule standpoint.
America’s Failing Infrastructure
Gordon Lamphere (16:55): I think very few people in this country would disagree about the risks in a broader construction issue: infrastructure. You literally wrote the book on infrastructure problems. What worries you most about infrastructure in the United States?
Barry LePatner (17:19): Infrastructure covers our roads, bridges, national electric grid, dams, and a whole host of the institutional backbone of our society, and it’s critical to our nation. But as I wrote in Too Big to Fall: America’s Failing Infrastructure and the Way Forward, what I found in my research was that our nation took that infrastructure for granted. It was largely built in the fifties, sixties, seventies, and into the eighties. Our roads and bridges were mostly completed under federal highway grants by the eighties and nineties. However, we did not allocate money for maintenance. The states were given that obligation, and although most maintenance on national highways and bridges would be paid with federal funds, they never figured out how to put in the time to monitor and secure the money for maintenance.
As a result, more than a decade after I wrote the book, our infrastructure still gets roughly a C-minus on the American Society of Civil Engineers report card. Why? Because everywhere you go, bridges are cracking and have frozen bearings. Roads and bridges designed forty years ago for much less traffic don’t have enough structural support for today’s traffic. Dams have holes and are leaking, threatening downstream communities. During the Biden administration, roughly a trillion dollars was allocated for infrastructure. A few years later, most roads and bridges still haven’t been addressed, because it takes years for these projects to get through approvals,
Barry LePatner (19:41): environmental reviews and regulations, bidding, and getting the money flowing. Relatively pennies have been spent from that trillion-dollar infrastructure bill compared with the amount sitting there waiting to be allocated to these problems. And we still have over eight thousand bridges that could fall at a moment’s notice.
Repairs Aren’t Sexy: Labor Shortages and the Key Bridge
Gordon Lamphere (20:10): I’ve talked to some lobbyists over the years. As a developer, and someone who works with brokers and developers, we often deal with things like highway exits and the development that comes with them, at both the state and federal level. The lobbyists have always told me there are two problems. First, and we see this in property management too, repairs aren’t sexy. There’s not a lot of political capital in making repairs. You don’t get your name on a repair, so congressmen and state senators don’t have much love for them. Second is the regulatory side. It takes a lot to get a repair done, and with less political capital behind it, it’s even harder. Do you think deregulating the repair process would make it faster and more effective, or are we stuck between a rock and a hard place?
Barry LePatner (21:29): Several issues overlap in response to your question, Gordon. Right now, money has been allocated, though not all that’s necessary. It falls far short of what’s needed to secure our electric grid, dams, roads, and bridges, not to mention Amtrak’s problems.
Issue number one is that we have a shortfall of about 439,000 skilled workers in this country, and it’s going to grow if the roughly 40 percent of workers who are migrants, and critical to projects, aren’t around in the next couple of years. That’s a major problem.
We also have a major problem recognizing the critical need for this work. The best example is the bridge in Baltimore that was hit by a ship. That bridge had long been designated as one that could fall at a moment’s notice. It was structurally deficient shortly after it was built, and it was what’s called fracture critical, meaning if one piece of the bridge was damaged, the whole bridge would go straight down. Those piers were exposed to that kind of traffic from day one. There are dozens and dozens of similar bridges around our nation, just like the Baltimore bridge, that could go down at a moment’s notice right now. That’s been the situation for decades, yet nobody wants to blow the whistle and say we need to put in tens of millions of dollars, or, in the case of a new bridge like this, two billion dollars, to replace a bridge whose collapse brings Baltimore Harbor to a halt. We’re losing tens of millions of dollars every month as shipping has to go to other ports instead of the Port of Baltimore.
Barry LePatner (23:49): We need to understand that this is not an idle threat to our economy. Infrastructure is critical to most states’ economies and to the supply chain that brings goods into our ports and lets American shippers send goods overseas. It’s also critical to national security, because in an emergency, our military uses those roads and bridges to move forces wherever they’re needed.
A Tsunami of Problems: Labor, Supply Chains, Rates, and Materials
Gordon Lamphere (24:19): That’s a tremendous amount of risk in the system. I remember when I lived in New Orleans, there were a couple of bridges crossing the Mississippi rated D, maybe even F. In the back of my mind, I’d hesitate: do I really want to take this risk to go get pho on the other side of the river? But there’s a lot of risk beyond personal risk. There’s larger institutional risk, and many investors see our infrastructure shortfall as an institutional risk. How do you think that plays out for developers and big money underwriting that risk as part of their portfolios?
Barry LePatner (25:09): The best example is what’s happened since COVID. COVID exposed the soft underbelly of the supply chain. Ports and factories around the world closed, supply chains broke, and deliveries in America shut down. Dozens of companies overseas realized they needed to friendshore or reshore their businesses. Only in these last three or four years have we seen tens of billions of dollars of new factories come back to friendly shores, which included not just the US but Mexico and Canada, where cheaper labor was, since it was understood that cheaper labor is no longer available in the United States. We’re never going to see the garment industry restored here, with people in sweatshops sewing buttons and so on. That will never happen in this country again. What we were bringing back were companies creating new factories, many of them robot-driven, high-tech factories properly situated to allow faster, more efficient distribution and lower costs.
What we have now, and I just finished a long article that’s going to be published, is a tsunami of problems affecting the construction industry, but more importantly the real estate industry and our national economy. What I cited in the article is, first, the labor shortage I just mentioned. We need many more skilled workers by the end of this decade, and we already have a shortage of 439,000, according to all the agencies involved. Second, we have continuing problems
Barry LePatner (27:32): from COVID supply chain disruptions that are still reverberating, and they’re going to be exacerbated by the new tariffs. As of this month, 40 percent of container ship capacity between Asia and the United States has been canceled. Then we have persistently high rates, with the federal funds rate still around five and a quarter percent, a 23-year high, and manufacturing startups are pulling the plug on new projects because rates that high make reasonable construction costs prohibitive. We have soaring material costs. Even before the new tariffs, we were seeing 9 percent annualized jumps, and a 34 percent increase since December 2020. That’s huge, and it’s driving up the cost of the housing we need so desperately in this country. The average cost of new single-family home construction has ballooned to $422,000. Layer the new tariffs on top of that, and we’re seeing even greater economic uncertainty in the construction industry, with short- and long-term cost escalation and supply instability that could persist for as long as a decade.
Tariffs on China and the Rise of Allowances
Gordon Lamphere (29:09): We’ve had guests dive into the manufacturing side of tariffs, and we have one of those episodes coming out just before this one, so I won’t get into that. But on the construction side, one question I hear most often is this: some tariffs may get resolved with non-China trading partners in the interim, and you might see reductions with places like Japan and Korea. You’re starting to see little tidbits out of the White House about that. But China is still a huge force in the construction supply chain. Setting all the other tariffs aside, if we don’t see tariffs on China reduced, how do you see that playing out in the construction industry over the next six to twelve months?
Barry LePatner (30:18): Not well. Thirty percent of most products specified for a construction project come from China, or from companies where China ships through Vietnam or India to minimize the tariff before it gets here. Think about air conditioners, generators, and elevators. Many have critical parts that come from dozens of different countries and are assembled through different supply chains, maybe in America, maybe in Mexico and trucked up. But they come from overseas.
Right now, whether we reach an agreement with China or not, contractors and people dealing with the supply chains tell me that uncertainty about near-term prices prevents them from giving a fixed price on a project. So on a $50 million or $100 million project, an owner may find that two, five, ten, or twenty percent of the products going into the project get what are called allowances: “We can give you a ballpark number, but until our suppliers tell us in the next three or four months the actual price when it lands here, or the price of the finished product once they tally up all the pieces from twenty-nine different countries, we can’t give you a price.” That’s what creates fear in the industry. It creates uncertainty about costs and doubt in the minds of business developers, real estate developers, and their lenders, who don’t have assurance they can make a profit. Those three things dominate when you talk to people in this industry today: fear, uncertainty, and doubt.
The Final Four: Where Construction Goes in Ten Years
Gordon Lamphere (32:34): One thing we’re always uncertain about is the future, and this is a great opportunity to get into our Real Finds Final Four. One of the questions I love to ask is where you see the construction industry going ten years out. Are we going to see more technological change, consolidation? What should we watch for?
Barry LePatner (32:58): It depends, first, on how long the tariffs stay in place, and on the other problems I told you are infecting the industry right now. No one can predict where the industry will be ten years from now. But I can say with certainty that if the tariffs continue for six months or more, if the Federal Reserve keeps rates high because of these concerns, if we head toward a recession, if housing costs become prohibitive, and if the research and development projects for everything we expect over the next twenty-five years, which start with federal R&D funding, don’t go forward, then we’re going to have a very insecure real estate, design, and construction industry for the next decade.
Advice for Young Professionals: Patience and Balance
Gordon Lamphere (34:08): One thing we’ve long made a point of asking, and I think you give unique advice on this since you have a website dedicated to it: what advice would you give a young Barry starting out, who maybe doesn’t know much about construction or law and is just trying to get a start?
Barry LePatner (34:41): Aside from telling my young self who wins the Kentucky Derby, which would have sped up the acquisition of riches, two things. First, life is a long journey, and the number one quality you must bring to it is patience. The hardest thing for a young person, especially someone who’s ambitious about helping people, building a constituency or client list, or getting known in the industry, is that it requires time and patience.
Second, I was a big follower of the history of the New Deal when I was younger, and I read a book by Arthur Krock, a New York Times journalist who was the Thomas Friedman of his time and the most respected journalist at the Times. He wrote that he had to give advice to FDR, who was very frustrated in his first year or two because Congress, which didn’t like any of the New Deal programs, was rejecting all his legislation, before things started to pick up steam. Krock told him, in essence, that things are never as good as you think they are, and never as bad as you think they are. So we need a sense of balance. Take a deep breath. Stuff is going to happen in life. Hold the fort, keep your eye on the ball, have some patience, and keep doing good things for people. All the rewards come from those things.
Book Recommendations: How to Win Friends and Influence People, Timing Is Everything, and War and Peace
Gordon Lamphere (36:42): One way we get rewards is, as you mentioned, through books. Besides your own books, which we’ll put in the comments, is there a book someone should pick up, even if it’s not construction related? We’d love to put that in the comments as well.
Barry LePatner (37:04): There are probably three books, none related to construction or real estate, that had a huge influence on my life, and I’ve gone back and reread them numerous times. The first I read as a young man, when I realized I was going out into the world and had no understanding of how people lived and worked outside my small borough of Brooklyn, New York. It was Dale Carnegie’s How to Win Friends and Influence People.
Gordon Lamphere (37:37): That’s a great book. My grandmother gave it to me for my high school graduation and said, “You’ve got to read this before you get started.” Admittedly, for about two years I thought, “This is stupid, whatever.” Then I picked it up, maybe on vacation or a holiday break, started reading, and thought, “This is really good advice. Thanks, Grandma.” I couldn’t recommend it more, and it’s a book we consistently recommend on this podcast.
Barry LePatner (38:18): Think about it, Gordon. Someday, you’ll need to go to somebody who doesn’t like you, or doesn’t want to give you what you want, and ask them for something. Nobody tells you how to have that meeting. Carnegie did. He said to get that person, no matter what, to say yes to you twice. If you find out they love the same sports team you do, or have a hobby just like yours, and you start talking about it and get them to say yes twice, you’ve started
Gordon Lamphere (38:39): Yeah.
Barry LePatner (39:03): to melt their conviction that you’re a horrible person. There are a million other pieces of advice in that book.
Two other books had a huge influence on me. One is a little-known book I’ve given out to a hundred people over my lifetime, called Timing Is Everything, by Denis Waitley. That’s Denis with one N, W-A-I-T-L-E-Y. I can’t recommend it enough. He says everything in our lives, all relationships, all projects, everything we start and every dealing with people, is like the seasons. There are four. There’s winter, when you do the planning. Nothing is growing, so you order your seeds and figure out how you’ll lay out your field. There’s spring, when you plant and have to do everything right: water properly and get going. There’s summer, when you harvest the crops and say, “Wow, look at all the beautiful flowers, fruit, and vegetables.” And there’s autumn, when you take everything down and start planning for next year. Our relationships have those four seasons. You think back and say, “Yes, that’s how it went with my old partner. We started off great with great plans, and eventually it came a cropper for whatever reasons.” But if you identify a new season coming early enough, you avoid mistakes. I learned a huge amount from Timing Is Everything.
Finally, my number one novel, because it teaches more about the world than any other: War and Peace by Leo Tolstoy.
Gordon Lamphere (40:54): Tolstoy is phenomenal.
Barry LePatner (40:56): You learn about the whole world from that book.
Who Should Be Our Next Guest?
Gordon Lamphere (40:59): Besides Russian literature, one of the ways we gain knowledge on this podcast, and really the whole reason for it, is our belief that the men and women in the arena, the experts in their professions, tend to know the next expert to talk to. We won’t let you leave without dropping at least one name. Who’s the next person who should be on?
Barry LePatner (41:27): It happens to be the next person I want to meet, and I’m making arrangements for that to happen: Ezra Klein, who writes for The New York Times and just co-authored a book called Abundance. It discusses how concentrated power and overregulation are making it impossible to do the things we need for our democracy. He says we’ve overregulated our built environment. We’ve seen good intentions stymie development, and things we want done take five, seven, eight, or ten years because regulations meant to prevent bad development end up preventing development altogether, and we don’t even know how to promote good development going forward. The book argues that instead of pursuing growth while backing restrictive zoning, strict environmental laws, and expensive requirements tied to public infrastructure, we have to simplify how we build in this country so we can do it cost-effectively and more quickly to meet our growing needs.
How to Reach Barry LePatner
Gordon Lamphere (42:52): I saw him doing the rounds on a number of podcasts, including, I believe, a conversation with Jon Stewart about this topic. Absolutely fascinating. There’s one last question we always have to ask: Barry, what’s the best way for someone interested to get in contact with you?
Barry LePatner (43:14): My email, for I don’t know how many years since the internet started, has been [email protected], B-L-E-P-A-T-N-E-R at LePatner dot com. I get inquiries all the time, from people just wanting to say hello to people saying, “I finally read your book, and it saved my life.” I’m happy to connect with everyone in our world who wants to understand this wonderful world of construction that has made our world so great. I’ve had the good fortune to work on rebuilding the Statue of Liberty in the 1980s, and on Ellis Island. I’ve built headquarters facilities for companies and schools for governments. I’ve worked on wonderful projects, and all of it has let me meet fabulous, well-traveled, articulate people who became great friends. It’s a fabulous industry. I’d tell anyone who wants to go into it: find your niche. Don’t be a generalist. And with technology, which is hugely needed,
Gordon Lamphere (44:32): It’s a big industry.
Barry LePatner (44:41): the future is all about finding a better way to build a construction mousetrap.
Gordon Lamphere (44:47): Thank you so very much for hopping on the podcast. We have to have you on in the future.
Barry LePatner (44:51): It was a pleasure to be here with you, Gordon. Thanks for asking me to come on.
Gordon Lamphere (44:55): Thanks again to Barry. We appreciate his insights. If you enjoyed the podcast, please give us a like and a five-star review. Your interactions and subscriptions truly matter and help us continue to bring on quality guests. You can find us on YouTube, Spotify, or wherever you get your podcasts. I’m Gordon Lamphere with The Real Finds Podcast. Thank you for listening.
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