For Want of a Nail

For Want of a Nail
Subject: Labor Shortage Solutions

For want of a nail the shoe was lost
For want of a shoe the horse was lost
For want of a horse the rider was lost
For want of a rider the message was lost
For want of a message the battle was lost
For want of a battle the kingdom was lost
                                                (13th Century German Proverb)

In the construction business if it’s not one thing, it’s another. The recession of 2007 is finally abating in earnest and everyone is busy, but the workforce can’t keep up with the demand.

For want of a plumber the plumbing was lost
For want of the plumbing the building was lost
For want of the building the project was lost
For want of the project the company was lost
                                                 (2018 Construction Proverb)

Skilled Labor Shortage

In this current environment, that trade person who left the industry in 2009 and has not returned could be your company’s demise. Construction workers left the industry in droves with few workers to replace them. An AGC survey says that more than 75% of contractors are having a difficult time filling trade positions. The CEO of NAHB called it an epidemic.

The Construction Generation Retires

With the baby boomers (who built post-war America by participating with great pride in skilled construction trades) retiring in droves, and younger people gravitating to the white-collar world, our industry has slipped into a staffing crisis. Compounding this problem, a whole generation of younger workers are no longer even considering construction as a viable career. Our society now elevates the white-collar worker up the social ladder while relegating the trades to a lower rung. Many high schools have phased out shop classes, and everyone seems to steer graduates to four-year colleges and white-collar careers. The higher education industry has successfully competed with construction and manufacturing in attracting the available workforce.

Reflex Action Makes Things Worse

You can’t fight this labor shortage. Even if you have all the people you need right now, it will not stop your cost of labor from going up. Others are already attempting to overcome the problem by offering higher wages and premium pay for a lot of overtime. One response is to poach from the competition. Although poaching is an age-old tradition in our industry and others, it has never solved the labor-shortage problem. It just moves it around.

Expanding Market + Shrinking Labor Pool = Higher Wages

This formula is inflexible. Only by affecting one of the variables on the left side of the equation can we prevent wage inflation. Either shrink the market or expand the labor pool. With neither unlikely, higher wages are inevitable.

Options

  1. You could attempt to shrink the expanding market by taking less work, but this strategy doesn’t work unless a hundred percent of your competitors do the same.
  2. As for expanding the labor pool, all of the ways to do that take too long to be of any immediate help.

The Solution is CAUTION

  • Target smaller jobs with shorter schedules rather than larger long-term projects to reduce the inflation exposure you will encounter over time.
  • Shorten the horizon when you can.
  • Be patient.
  • Raise your margins. Your competition is in the same boat so they will eventually.
  • Don’t outgrow you risk tolerance.

This seems like the ideal opportunity to grow and after the long slowdown, there is a strong desire to make up for lost ground. The market is ripe, but the conditions are not. Historically, growth opportunity was limited to available work—the strength of the marketplace. However, today that is not the case. 

Profitably Growth is Limited to the Extent that You Can Man the Work

Some are saying: “I’ll subcontract more of the work,” which, of course, changes nothing because the subs draw from the same labor pool–or lack of it. Other are saying “I will get the work and then worry about how to man it.” These are formulas for disaster. Growth is not the “prime directive” for top management–Profitability is. And that requires risk recognition, response and control. A labor shortage and diminishing skills present great risk any time, but is seriously magnified if it occurs while you are attempting to grow your business. Because it seems counter-intuitive to resist exceptional growth after such a long downturn it is a good time to be reminded that the failure rate of construction companies increases during growth and is magnified during a market recovery.

I Repeat: Profitable Growth is Limited to the Extent that You Can Man the Work

Read More: Financial Risk