Size Matters

I was happy to read that the sale of Aecon was recently scuttled. It was a bad idea from the start. PCL, Ledcor and others recently met with the feds to ask that they block the sale, citing concerns that the state-owned construction company has a poor track record in safety, corruption and it would pose a security risk. That may or may not be true. The real concern is that of competition.

Currently there are a handful of large contractors in Canada. When it comes to building large projects, there are only a handful of companies able to take on these projects. If one of them is removed from the marketplace due to security concerns, there’s less competition, leading to less innovation and lower value for Canadians. If the newly owned Aecon was allowed to bid on projects, as The Globe and Mail suggests, they are driven less by profit due to their ownership structure and could bid lower fees, driving their competitors into the ground.

With the recent failure of Carillion, the large UK contractor and backer of many pieces of Canadian infrastructure, we can see that there is no such thing as “too big to fail.” We know that the profit margin on some of these companies is tight, and it’s getting harder to compete when there are fewer people in the game.

So why is an architect writing about this? Shouldn’t I be happy that contractors are being eliminated from the market and prices come down? No, here’s why.

To begin, contracting to build something is about service. I can draw up plans and have five people bid for the work and get five almost identical prices for supply and installation of the same quantity of drywall, studs, light fixtures and flooring. The thing that makes the difference is the service quality that comes with the contractors. Lower prices mean lower service, less innovation.

Second, there’s a parallel to architecture. Less competition in architectural practices means less innovation in design, lower value and less service. By eliminating small to medium sized practices from the market, there are fewer firms able to bid for the ever increasing amount of infrastructure investment we, as a society, need to be making if we want to build the 21st century Canada we dream of.

Size is relative. A small business in many contexts is company with less than 500 employees. In architecture, this is inflated by a factor of ten. A 50 person firm is a large business, and most firms are less than 10 people. Over 75% of firms in Ontario have 1 architect (which likely means 5 or so employees at most).

Then there is the issue of price.

When procurement (hiring) of architects is driven by price, as it generally is, the selection of an architect to lead a design team comes down to who will do it for the lowest price, once you’ve met a minimum technical score. A big firm can bid low, get the work and exploit weaknesses in the Request for Proposal and make up extras. The low bid can lose money over the short term while building experience and while the extras accumulate. A small-medium sized firm can’t afford that kind of luxury. If I want to get experience in, for example, schools, I can’t afford to submit an absurdly low bid just to get the experience; one project with major losses would sink the business. But a big firm can do this because they have a slew of other projects, and business models (engineering, interior design, planning), to make up the loss.

Think of it like this: when a superstore comes to town, they can sell groceries for an absurdly low price, buying their goods wholesale cheaply based on a volume discount, and losing money week after week. But with deep pockets, all they have to do is wait out the smaller businesses until they go under. When the only game in town in the superstore, their prices can go back up. Then there are fewer places to shop and less selection.

When we hire big firms over and over, we force small business to avoid sharing their ideas; they can’t afford to compete, and the public loses out on the interesting ideas new firms can bring. We end up with the same firms, the same ideas, the same teams over and over.

When we hire smaller firms, we support local smaller businesses with expertise, ideas and innovations. They can be more nimble, responsive and deliver high quality services while offering good value for the public.

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