Posted 11/30/2009

THE GREAT RECESSION'S GREAT COSTS

I arrived in Naples, Florida last month to inspect the near $3-million parking project designed to improve the streetside of the two-tower condo.  Along with 141 other owners, I'd had to pony up some serious assessment money.

The whole renovation, from pavers to carports to front gate to spanking new sidewalks to new porticos, was breathtakingly beautiful.

Better yet, I figured the Great Recession must have driven costs down so we could come in under budget.  After all, the prices of cement, lumber and practically all commodities had been plunging during the construction period.  Not only that, but there were no pesky hurricanes and major storms to delay progress.

Boy, was I wrong.

The project came in over budget.

How could that be possible?

It turns out that the Great Recession ended up costing us an arm and a leg.

This project was a microcosm of what's going wrong with the country.  It explains why all the economists who were predicting the dangers of deflation were so dead wrong.  It provides you with a lesson in modern economics.

While the prices of commodities used in construction fell, the supply chain which connected all the pieces of the work flow was severely damaged – or destroyed.

Let's look at a few examples:

• Two major cement contractors went out of business.

• Many subcontractors scheduled to work on the project went out of business, setting off a scramble for replacements and causing major delays.

• The cement contractor whose business survived was diminished from 300 employees to a mere 15, due to his not getting paid by his contractors.  Our contractor was solvent and was paid regularly, but the other losses impacted progress on our project since more than 15 workers were required on many days.  Things were so bad that the firm's owner was doing day labor for us.

• The many Great Recession delays required the contractor to expand the project into a six-day work week, running up costs. 

• Saturday work required the condo manager and her husband to work Sundays from noon until six in order to catch errors made on Saturday.

• Pre-formed cement drains, which are usually kept in stock, could not be found in the entire state.  As a result, the costly and time-consuming task of building forms and pouring custom cement drains on-site had to be implemented.

• Construction nails and other hardware were in such short supply that they had to be ordered from other states. This meant carrying excessive inventories to prevent additional delays.

• Because of the catastrophic decline in Florida construction, many laborers with the skills we needed had simply left the state.  We had to import people who had been readily available before the Great Recession.  This took time.

• The days extra labor was needed resulted in costly delays because frequently there was simply no extra labor available.

• The project could have resulted in a disaster if the condo manager and the infrastructure committee had not had the foresight to order and stockpile pavers and roofing materials one year ahead of time.

Despite the impossible supply chain and all its missing links, the project was completed on time.  The quality of the project represents a huge improvement to the site, which will increase property values.

The success of the project was due in no small measure to the dedicated and hard-working staff employed by the condo association.

But something had to give.

We did go over budget.

And we gave our manager more than a few gray hairs.

PS.  I hope those deflation-oriented economists read this so they learn how things really work in America during periods of recession and falling commodity prices.  They might even discover that "labor" and "employment" are a lot more than mere statistics.

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