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Comment by Retric | Hacker News Reader

Glosses over the real reasons, both high costs and cost overruns are incentivized.

Usually this money comes from outside sources, such as higher-level governments, but even when it is purely local, individual stakeholders may treat it as money coming from other parts of the city. In this environment, there is an incentive to demand extra scope in order to spend other people’s money on related but unnecessary priorities.

There is little reason to be efficient when spending other people’s money without their input or any long term consequences.

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Slightly different but I work in defense as a contractor and I usually summarize it as "being paid for work".

The incentive is to do the most work because being done early and under budget doesn't maximize $. Usually the market keeps these entities honest. Do shit work that's over budget and you lose business. But there is no market at play here, thus the govt needs to play the part of the market and penalize for this behavior but they do not. /Endrant

In other words - different business environments create different equilibria.

In Chinese/Soviet/1920s America equilibrium, with an insatiable demand for construction work, the profit maximizing behavior is to be done quickly in decent quality, then hop on to another project.

In the modern western equilibrium, where projects are few and far between, the profit maximizing behavior is to extract as much revenue as possible from any single project, employ lawyers, ask for extensions, attempt regulatory capture, create an opaque chain of subcontractors, etc. - as it's not clear whether there will be any new opportunity to do so in the future.

We have a winner!

Zooming out a bit, this is why low growth is self-reinforcing. We need constant heavy demand to drive continual investment and productivity improvements.

Yes/no?

I mean I'm pretty sure there is massive demand for affordable housing (especially in Manhattan!) but there's no incentive for developers to shift towards that vs bilking the everyone out of as much as possible for more "high end" construction.

The current system "works" for the people taking in the money, which they can then use to lobby the people giving the contracts to continue the current paradigm.

As with most things related to capitalist enterprises I think the solution is pulling people kicking and screaming from their beds and dragging them to the gallows during a revolution, but that feels unlikely...

Alfred Chandler Jr described this as 'hidden unemployment'. The true social cost to society is high prices to support mostly inefficient jobs, this keeps people employed.

Well, you see, if you get the work done earlier and under budget, then the next time you'll be given stricter deadlines and less budget.

But if it's completed late and over budget, your company won't get the bid in the future because of your soiled reputation as long as there are enough competitors. Hence the reference to markets.

In a perfect world maybe, in practice I doubt it. It's just not very human-like to take a lot of risk in large projects. If IBM takes a big project and delivers it late and over budget, they still delivered it so they will likely be picked for another project with the same low-bidding strategy.

Exactly this.

I was at a "company retreat" back when I was in IT consulting. It was mostly the top salespeople for that year so I, being on the delivery side of things, found myself in a strange world. After some drinking one of the salespeople started talking about a project that went 2 months past the deadline. I asked "...and they just paid for that extra time?"

Everyone got all awkward as I realized that not only did they pay for that, they would continue to pay us to go over deadline. I was the naive one. It's just one of those topics you don't talk about.

This is basically part of the thesis that Alon Levy is presenting here. Essentially, the reason for the high costs is that the government lacks the management ability to recognize that the bids coming in are unreasonably low-balled, combined with subsequent difficulties actually overseeing the construction process.

Typically it’s a rule introduced by naive politicians who say you have to take the lowest bid. In Britain this came top down from central government in the 1980s, previously it was more typical to take the bid closest to the average across of a minimum of three bids.

Even if the government has the ability to properly manage the process it does not bring it to bear because both the government bureaucracy and the contractor benefit from the waste of resources.

The larger the amount of taxpayer money that is being spent the more opportunity for a larger more powerful bureaucracy to oversee the spending and more opportunity for profit by the contractor.

The same mutually beneficial waste exists at the contractor to labor unions interface (union drives up cost, more $$ for them, contractor passes on cost, more $$ for them) and at beureaucracy to politician and appointed administrator interface (bigger bureaucracy more resources go to it and more power for the administrating officials).

The only loser in the whole deal is the taxpayer who has to pay more for less.

And for projects internal to companies, there is usually no market or bidding (last time I heard of, anyway): here's the department's budget, go and deliver. You didn't manage to spend all of it? Next quarter, we're cutting your budget, and giving you a bigger project. Oh no, now you've overspent? Well, that's your fault really.

As the proverbial wisdom goes, "to improve a dairy's profits you'd need the cows to give more milk and eat less food, so feed them less and milk more often".

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