Information Failures: Cowboy Builders

It is great material for day-time television - seek out the desperately poor but expensive work of cowboy builders who seem able to pick up job after job when there are perfectly good experienced and well qualified builders struggling to find work. But cowboy builders cost the economy many millions of pounds in lost tax revenue every year and they often leave vulnerable people in desperate situations. These days you are fortunate to find a good builder (a “peach”) and worry about falling into the hands of a bad one (a “lemon”). Something should be done about it. Jamie Wilson connects the cowboy trade and links it to information failures. That reminds me ... I need to get someone to build me a new wall .....

An industry which demonstrates information failure is the market for builders. Builders often confuse their customers who do not fully understand the intricacies of the industry. Consumers are keen to perform building works as soon as possible and so they rush into contracts and informal agreements that look cheap at the start but end up costing much more.

A major issue in the industry is the growth of ‘cowboy’ builders who attempt to trick customers into paying them for a good, professional job, but cut corners to save money and maximise their profits. At the same time they attempt to confuse the consumer with jargon. They often demand cash in hand payments in order to avoid leaving behind any kind of evidence for the tax man. Often it takes months for property owners to fully realise the calamitous nature of the ‘improvements’ made to their houses!

There is an information gap in these circumstances as the builders manage to convince homeowners that their houses are in need of far more work than they really are, they may also offer a cheaper price than expected in order to secure a job. This is asymmetric information as the producer knows everything about the product, the building work, as they intend to do it themselves, however the consumer knows almost nothing except for the vague details of what is being done. This allows the builders to charge a much higher price for the quality of their service than the market would normally allow.

The problems of substandard construction work are obvious, it is often the most vulnerable, those who live alone or the elderly who are targeted by these ‘cowboy’ tradesmen and this means that it should be prevented. However it is particularly difficult to regulate this industry fully as much of it is based on illegal trading, cash in hand payments and avoiding VAT. These victims are often left financially damaged, with much of their savings having been wasted on a poor or nonexistent job and also there may be wider social problems as agents stop being able to trust each other.

The government could try to educate consumers by publicising the dangers of using substandard builders and to show the common signs of such builders. However it could be difficult to educate the public on the product itself as the knowledge required to tell a well built wall from a badly built wall is not easy to pass on. Also the government could toughen up regulation of the industry and make more data available on the quality of registered building firms so that consumers will know how trustworthy firms are. This will also mean that they will instantly be able to tell an illegal builder as they are unable to produce a rating or any other documents.

Another option is to impose harsher punishments to people found to be ‘cowboys’ and so reduce the market supply of incompetent or malicious builders. Finally, it could be possible to introduce a compulsory identification card for genuine builders, similar to those used by gas supplier employees to show the real builders from the fake ones and thus reduce the amount of poor quality builders in the market. Builders might also be forced by law to provide potential consumers with a hard copy of their professional, public and employee indemnity insurance to reduce the risks that consumers face.

The internet and mainstream television programmes also provide opportunities not only to highlight bad practice in the building industry but also for consumers to become better regulators themselves - for example by providing feedback on work done by registered builders - a Trip Advisor style system for the home improvement / building industry would help - is there sufficient demand for it among those people affected?