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The current Congress has passed the 2,300 page Financial Reform Bill which will have major impacts to the construction industry.  After the 2008 elections there were three bills that were the focus of the new government: Healthcare, Global Warming, and Financial overhaul.  All three of these have major impacts on the construction industry and with the Global Warming bill effectively dead, it is clear that Financial reform will be the largest single impact to the Construction Industry.

The construction industry is fueled by lending.  It is safe to say that most construction relies on about 80-90% of borrowed money.  This value decreased since the financial meltdown as banks required more cash from the borrowers, but very few buildings are built or remodeled utilizing cash from operations, they are built from borrowed money.  The financial overhaul requires banks to hold more capital, which in turn means less lending.

There were two main political points to selling the bill: "banks should not be too big to fail" and "they should pay for their own bailouts".  Neither of these points will be fully realized in the implementation of the bill and neither will be good for the construction industry.

In hearing that banks should not be too big to fail, my first thought was the creation of legislation that would encourage smaller more regional banking.  This bill in practice will most likely lead to bigger enterprises and not smaller banks.  It took 2,300 pages to outline how they would create bodies to later regulate the industry.  Regulation favors larger enterprises.  Take your business as an example, is it easier for the larger national players to navigate the complexities of government work or for smaller businesses?  It usually takes lawyers, CPA's, and many other "non-essential" people to properly understand regulatory requirements.   Whether you are doing a $100k worth of work or $100MM of work, it still takes close to the same effor to ensure compliance.  The cost of compliance of is much smaller on a percentage basis for the larger firms than it is for the smaller firms.  This is why in practice it will most likely lead to the continuation of larger banks gaining more market share. 

For construction it means more local "unique" jobs may not be funded.  In local communities bankers can have a full understanding of the financial picture of project that may not be understood at a national or global level.  For example several years ago a developer was looking to build a retail center in a small mountain town.  Most of the banks looked at the demographics in a 5 mile radius from the site location and said the project was not viable, however those that lived in the community understood the reality.  In reality, this center was located on the one road that lead from a major metropolitan area (where most people worked) and 10 or more communities further away.  The lifestyle of those that lived in these towns was not one where they would only drive 2, 3, or 4 miles to go shopping, but one where they became accustomed to planning and further travel.  Due to local decision making the project was built and is a success story, if those decisions where made in far off places it never would have been built.

The new regulation will not force banks to "pay their own way".  This is a ridiculous argument.  Sure there are new fees on banks and be sure that these fees will be paid by their customers, just as you would pass along a sales tax hike in your material to your customers, but the money is not going to be set aside.  So many of the taxes we pay were put into place to pay for a single item, but end up in the general fund.  Then the money is spent on whatever is important that day and when the money is needed for the original purpose it is not there.  These fees will most likely increase the government's take, but it will be on the backs of consumers and businesses and will add no more stability to the market in the long run.

Lastly, what about new regulations?  Regulation by definition increases the costs and reduces supply.  In a completely free, open, and unregulated economy the costs to do business would be greatly reduced and the supply would be greater.  The final notes on this bill are a long way from being complete as the regulations have yet to be written, but this regulation will increase cost and reduce supply.  Banks and other businesses will have to spend more on overhead (unproductive labor) to ensure compliance and the rules will in practical terms limit the amount of supply.

It is impossible to say how bad this bill is, but it will not have positive impacts on the construction industry or those businesses that make up the construction industry.  The best we can hope for is that the economy recovers in full and the regulators are prudent in their rule writing prior to the full implementation of this bill 4 years from now.

About the Author

Craig Pierce

Craig Pierce has been working in the construction industry for the past 25 years helping subcontractors master their trade. Currently he is President of Atalanta Enterprises which provides consulting services to contractors And software solutions through