Do Project Managers Price-Gouge?

 

I used to live in Texas, and regularly vacation there (especially in the Corpus Christi – Padre Island area), so I watched the news coverage of hurricane Harvey rather closely. Of course, our thoughts, prayers, and donations go out to the victims. I have additional concerns that reach into the management sciences arena as well. I wouldn’t want any common misperceptions about how projects – specifically, rebuilding projects – can be optimally executed to get in the way of a speedy and efficient recovery for the area.

So, I experienced some level of trepidation when I heard media analysts complain about “price gouging,” which, I take it, is the practice of selling an item or commodity at significantly higher prices than consumers are used to seeing. The common narrative accompanying the charge of price gouging is that the owner of the item or commodity is “taking advantage” of the devastation in the wake of the hurricane in order to make an “unfair” level of profit. This charge, and its accompanying narrative, is invalid, and I can prove it.

First, let’s make a couple of definitions clear. A commodity is a resource that’s virtually indistinguishable from others like it. One gallon of unleaded gasoline is pretty much like any other, which is why a single gas station is highly unlikely to charge a price more than a few pennies more than its competitors. The same is true of purified drinking water, or canned peaches, or any other commodity. Those who deal in the selling of commodities are said to be “price takers,” since they have little control over the price at which they can expect their products to sell. The laws of supply and demand determine that selling point, which is why commodities trading can be so volatile and is a prime example of high-risk investing.

A certain television news website ran a story about a convenience store in Houston charging $99 (USD) for a case of bottled water, with the implication that it represented a prime example of price gouging.[i] Let’s take a look at that, shall we? Since many of the roads to Houston were flooded, the chances of prompt resupply of bottled water in the hurricane’s aftermath were remote, meaning that supply of that commodity was low. At the same time, there are a lot of people who live in Houston who chose not to evacuate, meaning that anticipated demand was high. The presence or lack of avarice on the part of the sellers of bottled water in the Houston area is irrelevant. With limited supplies and high demand, the price will escalate automatically. When it does, it signals potential suppliers that, if they can bring more bottled water into the area, they will be rewarded for doing so. This will lead to those who have access to (a) bottled water, and (b) a boat or high-suspended truck to risk bringing water to the area. What happens when additional supplies are brought in while demand stays level? If you said “the prices come down,” go to the head of the class.

And The Benefits Don’t End There

An additional benefit of the price going up is that, for those people who chose to (a) not evacuate and (b) not buy bottled water when it was only mildly overpriced, they will now only buy what they absolutely need to get by. If the price were to be artificially kept down, say, by well-meaning but micro-economically naïve cable news business analysts, then the first few customers who came in to that store and realized that a rare commodity was underpriced would tend to buy much more than they needed, meaning that later customers wouldn’t be able to purchase bottled water at any price. In addition to signaling the nearby communities that drinking water was more valuable in the Houston area, the higher prices also helped guarantee that the maximum number of people would receive the minimum amount needed, rather than a few having more than they needed, and most having nothing at all.

Meanwhile, back in the PM world…

But enough about commodities. What about Project Management? The same rules of supply, demand, and price are true here, as well. When the waters recede, and the city, county, State and Federal Governments start taking bids on the re-building projects, does anybody really believe that the bids will be at the exact same levels as similar jobs performed before the hurricane hit? The area’s utilities (yes, including drinkable tap water) are off-line, and most major construction projects require a reliable source of energy, water, and sewage/waste disposal. Sure, there are work-arounds, but the work-arounds tend to cost more money, as when the job site requires its own electrical generator, which itself needs potentially scarce gasoline. Many skilled workers won’t think of an area recovering from a major disaster to be a preferred work destination, and will probably need a little extra incentive to be attracted to such an area – at the very least, a dry and cool place to sleep and eat – so labor costs are likely to climb. And we’ve already seen what is likely to happen to the availability of the commodities used in construction.

Now imagine the same cable news business analysts who harangue water-selling convenience store owners goading politicians into performing a review of the recovery projects’ bids, and comparing them to previous budgets for similar projects, and discovering that the post-disaster bids are significantly higher. If they employ the same “logic,” will they not want to accuse the contractors of price gouging? No seasoned PM will view any of these cost-adders as representing an act of taking advantage. It’s simply the way projects are bid, accepted, and executed. If a contractor’s bid is too high, all the customer needs to do is award the work to a lower-priced competitor. And, if some politician or official were to review the project estimates with an eye towards charging those bidders on the high end with price gouging, what do you suppose would happen to the pool of potential bidders? If you said “It would dry up,” you probably also had the right answer to the previous pricing question.

In short, I believe everybody would be better served if certain cable news outlets would leave the management science “insights” to people other than journalists – preferably, to PMP®s.

[i] Retrieved from http://money.cnn.com/2017/08/31/news/hurricane-harvey-price-gouging/index.html on September 1, 2017, 14:28 MDT.