U.S. infrastructure construction cost woes stem largely from lack of competition in the construction industry and diseconomies of scale among public agencies procuring the work. I think I am using the latter term right. Very large agencies and projects are going to get better deals than smaller ones. This is somewhat of an iron law of economics, but you might be able to get around it somewhat by bundling smaller projects into larger packages and by getting larger agencies (like the federal government) more directly involved.

The former (lack of competition) is tricky. Architecture, engineering, and construction is generally not a high-profit industry, and it is a pretty high-risk industry. This all pushes towards a few large firms bidding on large projects where they can make a few pennies on a large volume. The construction industry just hasn’t made much in the way of productivity gains in the last half century either, while labor costs have been rising.

You could help solve the competition problem by allowing foreign firms in, and you could help solve the labor cost problem (from the contractors’ point of view) by letting foreign workers in. Both of these things are politically tough in the U.S.

This article in the blog Boondoggle does a pretty good job of summarizing the report in an understandable way, but it also attacks “high price consultants”. Being part of the engineering consultant industry for many years, I feel a need to push back on this a bit. Labor costs at these firms are high too, profit margins are also pretty slim, and there actually is a lot a competition in this industry. When public agencies hire a consulting firm, the price they see includes everything – the actual product of course and the employees’ salaries, but also all the employee benefits, project management, administrative, financial, and legal costs the firm has to bear, plus the taxes it has to pay. Finally, yes, a few pennies of profit on top of all that, and some money spent on marketing to the next batch of customers. When portions of a project are subcontracted, all those administrative costs get repeated at each level of the food chain. So yes, this adds of to a lot of administrative costs, and it would be great to trim them (maybe some hope for AI on this one longer term?), but the fact is that if the public agency tries to do the work with their own staff, they have almost all of these same costs, and they are typically going to be significantly higher. But people often compare only the labor and construction cost borne by the public agency to the entire cost of business borne by the private firm, which is not a fair comparison. And especially at smaller public agencies, they just aren’t going to have the capacity or expertise to do all the work in-house, which is exactly the gap the consulting industry has sprung up to fill.

So to summarize, here are some ideas:

• Allow foreign firms and foreign workers to participate, especially in industries where it is clear competition is limited and skilled labor supply is tight. You could also try to train and equip more Americans with the skills needed and encourage formation of more firms, in theory.
• Aggregate smaller projects and public agencies into larger ones to make them more attractive for firms to bid on. Get larger state and federal agencies involved in the procurement process where possible.
• Turn on the research and development funding fire hose to make progress on the construction productivity problem. AI, materials science, and prefabrication of more components are all ideas being bandied about. This also gets money into the academic and research institutions which creates skills and capacity for our society.
• Do I even need to say this? Have government provide health care and other benefits other countries are providing their citizens, and relieve this burden on our private firms so they can focus on doing whatever it is they are in business to do.