Reality Check – Construction Labor Shortage
Since construction began emerging from the depths of the 2009-2010 recession, we have been cautioning the industry against the dangers hidden in the euphoria of growth during market recoveries and it’s effect on a construction labor shortage.
The Hidden Risks
In recent blogs, we have talked about the risk in taking on new unfamiliar types of work and it’s effect on construction labor shortage. We discussed the danger of stretching operating capital too thinly over expanded activity. We looked at the danger in roaming outside your home turf into new geographies or attempting new projects your firm has not seen before. As a result, we reviewed the risk in stretching managerial capacity beyond its tested capability. Subsequently, we analyzed the problem with finding enough skilled labor to maintain productivity and control quality.
Now that we’re six months into the year, we will look at whether risks like construction labor shortage were materializing. We begin with the last risk factor – finding enough skilled labor to produce all the new work.
Associated General Contractors Survey
The AGC conducted a survey of 1,312 firms from the District of Columbia and forty-nine states. That served as the basis for their 2019 Construction Hiring and Business Forecast.
- 58% reported performing $50 million or less worth of work.
- 33% performed between $50.1 million and $500 million worth of work.
- 9% percent performed over $500 million worth of work.
- 33% employed union workers.
- 79% planned to increase headcount in 2019.
- 87% of firms with more than $500 million in revenue planned to hire more skilled labor.
- Despite firms’ plans to expand headcount, 78% report that they were having a hard time filling salaried and hourly craft positions.
- When asked to identify which of 16 issues was the biggest concern to their firm, 30% of respondents chose worker shortages. (That greatly overshadowed second place – increased competition for projects – selected by 10% of respondents.)
- The most frequently mentioned challenge—listed by 43% of respondents—was inexperienced skilled labor/workforce shortage.
- One-third of respondents (33%) reported that staffing challenges drove costs higher than anticipated.
The Risk Was Real
Therefore, it gives us only mild pleasure to report that one of the risk factors (a shortage of skilled labor) was indeed hidden in the euphoria of construction market growth. The next question – what is the industry doing about it?
What’s the Industry’s Response?
Although only anecdotal, most firms report that they responded by raising pay and providing increased bonuses and benefits to reduce the construction labor shortage.
- 59% of firms report they increased base pay rates.
- 29% provided incentives and/or bonuses.
- 21% of firms increased contributions or improved employee benefits.
This internal industry competition for skilled labor was exactly the risk we cautioned against. From an industry perspective, this does nothing to increase available supply of skilled labor but only succeeds in raising costs.
A More Creative Response is Needed
63% of firms reported they plan to increase investments in training and development in 2019. Building industry leaders have turned away from the approaches of yesteryear, embracing new means of locating, recruiting and retaining workers.
Quoted in an article on the labor shortage in the construction industry in Forbes magazine, Joel Galassini, president for Texas and New Mexico with Cemex USA, the building materials and services provider based in Houston, Tex. described the labor shortage facing the industry:
“Throughout the U.S., we’ve experienced a tremendous labor market and three percent unemployment rate, creating a construction labor shortage” Galassini said. “And while that is good for the economy, it’s a challenge for the construction sector. If you think about it, most of the jobs are blue collar, skilled trades, and not a lot of people are going into that market.”
Admitting he has no silver bullet, Galassini says his company is exploring a wide array of what he calls “non-traditional avenues” in hiring. They include placing greater effort on hiring women workers and military veterans, boosting recruitment from trade schools and even launching efforts to appeal to foster children approaching 18 years of age.
Managing the Profitable Construction Business
“The (construction) organization’s growth must be qualitative, not just quantitative. Qualitative organizational growth takes time and needs to occur prior to sales growth or you will experience a construction labor shortage. It usually takes more time than it takes to capture larger projects and, almost universally, construction companies increase management after additional work is on hand, not before. Growth for the sake of growth is risky in any business but growing in the construction business by taking on projects two or three times larger than anything done before is by far much riskier.” (Managing the Profitable Construction Business, p.32, Thomas C. Schleifer, Ph.D. * Kenneth T. Sullivan, Ph.D. * John M. Murdough, CPA, Wiley, 2014)
We published that caution as the current recovery began to gather steam will help reduce construction labor shortage. Therefore, in future blogs we will look at the other “growth risk factors”. We will see if they are also hindering progress toward profitability. Stay tuned.