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Construction Labor Shortages

As the construction sector faces heightened demand brought on by low interest rates, an expanding economy and more natural disasters, landowners have been forced to rethink sourcing strategies that were once the norm. This increased demand has left subcontractor firms stretched thin, leading to surging costs and a rise in project delays.  

With hundreds of thousands of new residential and nonresidential builds underway, the average project deliverable cycle peaked at 22 months per project in 2017 (latest available data), up from 5.5 months in 2013. In addition, as labor shortages have reduced contractor availability, cost overruns inherited by landowners increasedDue to these changing market dynamicsProcurementIQ estimates that the price of new construction projects has been growing at an annualized rate of 2.0% over the past three yearsTo adapt to these trends, landowners have looked to a couple of key cost- and time-saving strategies for their construction projects. 

Hiring Out-of-State Tradesmen 

Hiring out-of-state contractors may be an effective short-term solution to reduce cost overages brought on by project delays. Originally adopted by states with a severe labor shortage, many municipalities have relaxed state- and city-level certification requirements, thereby granting out-of-state contractors access to more construction projects. The use of out-of-state tradesmen is beneficial to landowners and project managers because it has allowed for shorter project completion times. 

Despite this benefit, there is a higher up-front price quote when outsourcing. Out-of-state contractors incur higher costs due to inflated material acquisition costs and the costs associated with transporting equipment and machinery. While local firms can save on material costs because of established relationships with local providers, out-of-state firms are more likely to be price takers or face greater difficulty when trying to obtain discounts. At least a portion of these costs are passed on to buyers in the form of higher project quotes.  

The practice of outsourcing work to out-of-state contractors to mitigate the effects of the labor shortage is unsustainable in the long term. As demand for out-of-state laborers climbs, their capacity to take on more outside work will be reducedAs a result, these firms will raise prices, just as local firms have. According to ProcurementIQ, the average price of new construction work is expected to increase at an annualized rate of 2.7% from 2019 to 2022. 

Modular and Prefabricated Structures 

As project costs and deliverable times have risen, so has demand for modular and prefabricated structures as an alternative to traditional construction of residential and commercial buildingsAmid the labor shortage, some landowners’ preferences have been shifting to modular construction. This can offer cost savings stemming from the use of fewer materials and time savings achieved through the modular production process. Because modular buildings are built in a factory, there is also a reduced risk of incurring cost overages, as the threat of weather delays is limited to the time spent installing the buildings on a foundation. This may prove to be a viable longer-term solution than outsourcing. 

Overall, rather than waiting for the construction sector to overcome the labor shortage, landowners are expected to continue to seek alternatives like those discussed here, as well as other creative and out-of-the-box ideas to attract labor, including appealing to women, veterans and young people 

By: Deonta Smith
Originally published in the March 2019 issue of Inside Supply Management

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