Editorial: Squeezed till it hurts
True stories from the industry's grapevine that recently jarred my ears:
- The owner's rep at a project meeting was dismayed about the price quoted for a big commercial boiler. So she asked the mechanical contractor if he would consider supplying it as a charitable donation for the tax deduction. He laughed, but the owner's rep wasn't joking. "Why not? We had movers give us boxes for free," she pointed out.
- Then there was the fixture manufacturer who missed out on a big government order because his company's quote for toilets was $1 per unit higher than a competing bid. His toilets were made in the U.S.A., the winning bidder's in a foreign land. The job was on a U.S. military base.
- A manufacturers rep told me of a wholesaler who supplied an emergency order by delivering a single tub/shower unit to an apartment job site at a charge to the contractor of 5% over cost. It was one of many reports I've heard of wholesalers selling materials virtually at cost, counting on their buying group or home office rebates to provide the profits.
So it goes in the modern PHCP world. No price hits rock bottom, no deal can't be renegotiated, no margin is so slim it can't be further sliced. What's more, all this has been happening during the most dazzling construction boom of the postwar era. Now that it's petering out, people are having nightmares about selling prices in a subdued marketplace.
The word "stupid" gets bandied about quite a bit in these conversations with industry citizens, but that is a facile explanation for the construction world's collective obsession with price cutting. Our industry's supply chain is not overpopulated with stupid people. By and large they are astute business minds merely responding to Adam Smith's invisible hand.
Cause for celebrationIn previous construction booms, you could count on profit margins getting a boost as shortages of key materials developed. Not this time. Despite the frantic pace of construction over the last 10 years, PHCP material shortages have been rare, thanks in large measure to the modern global economy. Companies around the world have been fueling America's economic engine, which in turn has kept the rest of the world from sinking into deep doo-doo. Worldwide, with few exceptions, there is more than enough production capacity to meet even spirited PHCP demands. As it says in Chapter 1 of any Econ 101 textbook, when supply exceeds demand, prices drop.
A more curious phenomenon is how all that building activity has kept up despite a severe shortage of skilled construction labor. The apparent reason is that while short on skill, there have been plenty of warm bodies available, many coming from across the border. These folks have absorbed crash courses in joining pipe and setting fixtures. Nor has the building design sector of our industry been troubled too much by the declining interest of America's youth to study engineering. Plenty of foreign-born engineers have picked up the slack. Globalization rears its head again. That, plus winking at immigration laws.
If stupidity were the root problem, it could be solved with "education." You've all heard the spiel. Stop selling price, start selling value. Concentrate on profits, not volume.
It makes for a good locker room pep talk, but in the real world harsh facts trump inspired verbiage. Manufacturing is all about capacity utilization. Factories are compelled to trim margins if it will keep the machines humming. Distribution also is volume-intensive, so if profits must be sacrificed to gain turns and market share, so be it. Likewise, contractors don't work unless their bids get chopped to the bone. Nor do engineering firms. Working folks desperate to feed their families will accept low pay and wretched job conditions.
In the ivory towers and government conference rooms where the world's most renowned economists hang out, this is cause for celebration. The way the academics see it, cheap labor coupled with computer-driven productivity gains led to an unprecedented era of non-inflationary growth during most of the '90s and continuing, barely, through today. People in America and other developed nations have enjoyed rising living standards as more and more goods became affordable.
No free lunchYet, someone always ends up paying for what appears to be a free lunch. There's a dark side to the inflation-free prosperity of the last decade. One element is that a lot of shoddy construction has been put in place. Moreover, the cost squeeze has stained some souls with the residue of corrupt business practices.
I'm thinking here of another conversation I had recently with a plumbing manufacturer about a job site shenanigan he claims to have suffered more than once. That's when wholesalers substituted inferior products for those specified for the job. He wasn't referring to an "or equal" agreed to by all parties, but cases where $5 off-brand widgets get sent to a job specified for $10 widgets. If discovered, the supplier claims a mistake and offers to issue a credit for, say, $2.50 per unit, still leaving himself a tidy $2.50 worth of extra profit on his "mistake."
Ideally, construction's checks and balances should prevent such capers from taking place. The engineer is obligated to forbid the substitution and the contractor not to install the cheaper devices. Except, engineers operating on cut-rate fees don't spend nearly as much time as they used to inspecting job sites, and contractors are under so much pressure with compressed construction schedules (another cost saver), they are apt to cut corners rather than cause delay. This assumes anyone would even notice the materials aren't what they're supposed to be. As for all those lawyers who get paid big bucks supposedly to keep people honest, there's not enough windfall in litigating $5 widgets. Thus, the calculated risk of illicit substitution looks promising to a sleazy merchant.
One hopes such behavior is an aberration, but when there's so much smoke, there's usually fire. The PVF sector in particular is riddled with accusations of trade irregularities, and it's been going on for decades. The temptation is great to take legal and moral shortcuts when squeezed to the breaking point.
There also are ramifications when cheap labor overwhelms the instinct toward craftsmanship. I said earlier it's not too hard to find warm bodies capable of joining pipe and setting fixtures, but it's an insult to the plumbing trade to suggest all those $8-an-hour "plumbers" can do it as well as journeymen who have passed through four-year apprenticeships.
The United Association and other construction trade unions have gotten animated the last couple of years with a program to convince construction clientele of the virtues of life-cycle costing. Their argument essentially says that a cut-rate bid is not such a bargain when factoring in the future costs of maintenance, repairs and potential litigation when systems fail or threaten health and safety.
I wish them well, and would love to see manufacturers and wholesalers hop on that bandwagon with a parallel emphasis on quality materials. The "pay me now or pay me later" pitch is not an easy sell in a society primed for instant gratification. Yet, it may be the PHCP industry's best hope to stay profitable and carry on its proud legacy as the guardian of our nation's health and safety.
Or do you care if you become known as nothing but a bunch of junk peddlers?