Maryland government wastes a lot of money. Some of it is obvious (taxpayer funding for sports stadiums or subsidies to prop up the horse racing industry, for example). Some of it isn’t so obvious. Reading today’s paper, I saw an op-ed by my friend Chris Eccleston exposing the ways the state wastes money on construction projects. Not many people realize that the state government is overpaying for state construction in many ways, something that hurts both businesses and taxpayers.

Chris talks about a project his company bid on to build a bathhouse on the Pocomoke River. His company had the lowest bid, but because of a state set-aside program, it went to another company. As Chris explains:

We as taxpayers face extraordinary costs to build a public building; it would make your head spin. Let's use the [bathhouse] example…. The low bid was $1 million. With the small business 5 percent preference, the state chooses a small business contractor. Now the price is $1.05 million… Included are several other compliance programs -- a minority business enterprise program, Davis Bacon Act and administrative costs (compliance paperwork to be processed on a weekly basis). All of these costs are paid by taxpayers, which adds about 15 percent to the total project cost. So 15 percent of a million dollars is $150,000 compliance, plus 5 percent small business preference, which is a total of $200,000 in added taxpayer expense. This same building, all items being equal besides state and federal compliance, could be built by a private owner and would cost roughly $800,000.

Instead of simply accepting the lowest bid, politicians have mandated that the state use its construction dollars to promote certain public policy objectives: increasing minority businesses, helping small business, aiding unions, etc. These set-aside programs give politically-connected businesses a special advantage in the bidding process.

This may be good for those businesses, but it’s bad for taxpayers. Take the prevailing wage requirement. This requirement is strongly supported by unions because it mandates that state construction projects be paid the “prevailing wage” in an area. Usually non-union businesses pay lower wages. If the prevailing wage mandate did not exist, these non-union shops could underbid union shops. But if all businesses are forced to pay the “prevailing wage” (something near the union wage), then the non-union business loses an advantage. The Davis-Bacon Act mentioned by Chris is the federal prevailing wage law.

A good article from the Cato Institute summarizes the various studies on the effects of prevailing wage laws. A Michigan study, for instance, “estimates that if Michigan municipalities had not imposed prevailing wage requirements, they would have saved $16 million that year.” In Ohio, a legislative commission “report concluded that by allowing competitive bidding Ohio schools had saved $487.9 million, which was 10.7 percent of construction spending.”

These requirements also hurt businesses. The most efficient businesses will be able to offer the lowest bids. But state law penalizes these businesses and, instead, favors less efficient businesses that fit into certain classes. This distorts the market, rewarding the less efficient. Competition is supposed to reward those who do better work using fewer resources. The state system favors just the opposite.

Some states have scaled back their set-aside laws. It’s unlikely Maryland will be doing this any time soon. Until it does, every time you see a government building being constructed, remember that you’re paying a lot more in taxes to build it than you should be paying.