Looking Over Private Inspections


One of the least publicized services that municipal governments hire private companies to perform is mechanical, electrical, plumbing, and building code inspections. In Michigan, regions as diverse as Clinton County and the city of Rockford contract with private inspectors to enforce code regulations.

There are at least seven private, for-profit firms in Michigan that cater to this niche market. Several also conduct city planning and zoning reviews under contract and can issue citations to code violators.

Detroit and other Michigan municipalities should seriously consider the advantages of contracting with the private sector for these services. This would not only save the taxpayers money, it also would alleviate a growing problem with regard to municipalities' use and possible abuse of inspection fees.

For example, one private inspection service owner told Michigan Privatization Report that a municipal client mandates that he return an "administration fee" equal to 10 percent of his inspection fee to the municipality that hired him. This is ostensibly being done under the guise of funding court costs when a judge is necessary to enforce building codes, but fees are apparently covering more than costs in many municipalities. The difference — or "kickback" as some would call it — can then be spent on whatever municipal officials fancy.

In March, state treasury officials informed municipalities they would have to establish a special revenue fund to designate how inspection fees are spent. This new demand is being made pursuant to recent changes in the State Construction Code Act, which requires local governments to establish "reasonable fees" which "bear a reasonable relationship" to the cost of operating a code-enforcing agency.

Public Act 245 of 1999 makes clear that fees generated from service may only be used "for operating the agency, the construction board of appeals, or both."

If enough evidence accumulates that local governments are redirecting revenues to purposes unrelated to building safety, the state could order offending municipalities to lower inspection fees. Instead, why not fix the problem and save money at the same time by privatizing inspection services?

For the 2000-2001 fiscal year, Detroit's city budget designates more than $24.5 million to the Building and Safety Engineering Department. Sixty-seven percent of these funds pay for inspections of a mechanical, electrical, plumbing, or building nature. A sizeable $4.2 million of the total budget appropriation is designated as a "net tax cost" to the city. This means the revenue Detroit is expected to derive from charges for its inspection services doesn't cover the expense of conducting them, to the tune of $4.2 million this fiscal year. The city simply charges this cost to the taxpayers, who unknowingly suffer the loss.

To the city's credit, it has been working to improve the speed at which inspections are completed. Indeed, officials in Detroit inform Michigan Privatization Report that the number of building permits issued by Detroit's Building and Safety Engineering Department increased from 2,500 in 1994 to 8,000 in 1999. The increase in number of building permits issued is important because it suggests that city officials were conducting more inspections.

Privatizing the inspection services currently performed by Detroit's Building and Safety Engineering Department would probably eliminate this net tax cost to city residents and perhaps would reap even greater savings. After all, time is money. And private inspectors who are paid according to how much work they do tend to move faster than government employees who are paid regardless of what speed they work.

By contrast, when builders use private inspectors, they save huge amounts of precious time. The city of Fort Worth, Texas, learned this when it began supplementing its municipal inspectors with private ones in March 1999. One Fort Worth contractor, Ron Formby, reported that privatization caused a dramatic drop in the inspection time required for building plan reviews for 80 to 100 homes. Before privatization the reviews took from 30 to 40 days. After privatization, they took only three to four days.

There is nothing about private, for-profit inspections that would make them of less quality than public ones. Private inspectors simply cannot afford to do shoddy work because it would hurt their profits. Government inspectors, on the other hand, have no such obvious incentive.

One recent case in point was showcased by the Detroit Free Press on Oct. 20, 2000. The story, "We Want A Safe House," told of a family that bought a house through a federal program. Both federal and Detroit inspections reported only minor problems with the house and allowed the family to move in. After experiencing problems with the home, the family hired its own private, for-profit inspection service, which found 181 building code violations. The family moved out after the private inspector told them the house was not safe to live in.

Time savings enable builders to make the same amount of profit on less revenue. This means they can charge municipalities less for their services. Result: The taxpayers save money.

For example, three years ago, the city of Battle Creek contracted with Associated Government Services of Michigan, a private inspection firm, for supplemental plumbing, electrical, mechanical, and building inspection services. To date, Battle Creek has saved roughly $600,000.

Extrapolating such savings to Detroit, it is possible to conceive of savings to the tune of $5.1 million per year as a result of contracting out for just half of the city's mechanical, electrical, plumbing, and building inspections.

But why stop there? Detroit could also save the taxpayers even more money by contracting out city planning, zoning and housing responsibilities to competent private-sector experts.

There's no inherent reason why the government should conduct inspections and enforce building and other codes when the private sector can do a better job for less money. This is especially true since the private sector has a more motivating incentive — the economic one — to conscientiously enforce these standards of excellence.

Michael LaFaive is managing editor of Michigan Privatization Report.


Privatization Sidebar
Private Building Codes?

If private inspection is cheaper and more efficient, why not also privatize the building, plumbing, machine, and electrical codes themselves? Private codes would place a huge area of economic activity off-limits to government regulators, preventing their use as a tool for expansion of government intrusiveness (since 1970, the book that outlines these codes for U.S. developers has more than quadrupled in size).

Who would enforce a private code? Insurance companies have a strong incentive to mandate, as a condition of insurance, that strict codes be enforced. Other interested parties would be the construction industry itself and Underwriters Laboratory, a private, nonprofit standards and testing institution.

Walt Disney World in Florida has largely promulgated its own building and fire code (and enforcement) since 1969. It maintains over 22 million square feet of building space. So successful has Disney been that many of its innovations have been adopted as "model code" for other municipalities.

For more on the concept of a "free market" in building code regulation, see Building Regulation, Market Alternatives, and Allodial Policy, by John Cobin.