Rising labor costs eat away at construction company profits

The clamor over the construction labor crisis reached fever pitch this week, with new evidence suggesting historic wage increases for low-skilled site workers are eating away at contractors’ profits.

The average hourly wage for production workers and non-supervisors in construction reached $32.19 in May, according to the Bureau of Labor Statisticsa 6.3% increase from a year ago and the highest gain in 40 years.

But increasingly, those higher wages are coming at the bottom of the construction employment ladder, with unskilled laborers seeing the largest wage gains, economists told Construction Dive. This means that construction companies pay more for hard-to-find workers, without necessarily reaping the benefits of increased productivity or profits.

The construction premium decreases

The average construction wage of $32.19 in May was 17.8% higher than the average hourly wage of $27.33 across the private sector, where wages rose 6.4% from a year on year, illustrating the premium construction companies pay their workers compared to other fields.

The industry has emphasized this higher rate of pay to recruit more workers into what they often perceive to be more dangerous work, without the benefits of remote working, air-conditioned offices or more flexible hours.

While other industries have hiked pay rates in the face of labor shortages and soaring inflation, construction is losing its lead in the wage race, according to Ken Simonson, an economics economist. chief for Associated General Contractors of America.

“Construction still has a considerable premium, as I call it, in what it pays the average worker, compared to other industries,” Simonson said. “But that bounty has gone down.”

For example, before the onset of the COVID-19 pandemic in February 2020, wages in construction were 20 to 23 percent higher than in the private sector as a whole, Simonson said, compared to the current rate of around 18%.

“So the average hourly wage in the rest of the private sector has gone up, and that’s compressing what contractors are offering as a premium for getting out and working in 100-degree heat,” Simonson said.

More workers, less profit

At the same time, construction employers are getting fewer skilled workers for the higher wages they pay, said Anirban Basu, chief economist for Associated Builders and Contractors.

“‘Unskilled labourer’ is among the fastest growing occupational categories in the construction industry,” Basu said. This means companies get less value for their work. “Entrepreneurs are still hiring aggressively, but they often just throw bodies at jobs, without those bodies being more productive.”

Therefore, even though contractors plan to hire more workers in the coming months, they do not expect increased profits, as they normally would by adding more employees to fill more jobs.

This is the last ABC reading Construction Confidence Index Reportwhich tracks entrepreneurs’ expectations for sales, profit margins and staff over the next six months, with any score of 50 or more indicating growth.

While the May CCI scored a staffing outlook of 62.8, meaning contractors expected to create more jobs, the profit margin forecast was just 50. or barely clinging to growth expectations.

“As many entrepreneurs continue to recruit, expectations about profit margins are reversing,” Basu said. “They become more pessimistic.”

Just half the workers needed

On the labor front, contractors hired 455,000 people in April. But that was less than the 494,000 jobs still open, a 40% jump from a year ago, according to Simonson.

“We’re in perhaps the tightest market ever for construction job openings,” Simonson said. “The implication is that construction companies, including home builders, would have hired twice as many workers as they did, if they could find enough skilled workers.”

In effect, a recent article in the Wall Street Journal pointed to labor shortages that are hampering construction activity and corporate profits even as work on the $1.2 trillion Infrastructure Investment and Jobs Act comes into effect. vigor.

Jim Schneiderman, vice president for the Atlantic Center of Flatiron Construction, based in Broomfield, Colo., told the newspaper that rising labor costs were starting to eat into the company’s profits.

“We have learned our lesson and will incorporate these higher labor costs accordingly for future work,” he said. “Everyone I talk to in the industry has had the same realization.”

But Basu said that while contractors have generally been able to pass on rising material and labor costs to owners during the pandemic, that may change now, given the expectations of contractors. companies in terms of lower margins, even when recruiting to undertake infrastructure works.

“We are at an inflection point,” Basu said. “Whatever level of construction shortage there is when it comes to labor, it’s about to get worse.”

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