If you’ve been with us since the first of the year, we have been discussing managing risk under the disrupted market conditions of 2023. The risk factors of inflation, recession, labor scarcity, and supply chain snags have combined to disrupt normal market conditions and put contractors at risk of financial loss. In addition, some of these risk factors have morphed from cyclical risk factors into long term industry trends. The shortage of skilled labor is one of the risk factors that has lasted long enough to become a trend. We make a distinction between market trends and cyclical risk factors because they must be managed very differently. 

Cycles

Rampant cost inflation has been plaguing the construction industry since the onset of the COVID-19 pandemic but is an entirely new phenomenon to most of the current generation of construction leaders. We’ve been operating our businesses for almost 35 years with little or no inflation. Suddenly, cost inflation roared in right behind the pandemic and surprised even the most careful planners among us. We never saw it coming as it exploded onto the scene in the wake of pandemic shortages. Inflation is a recurring market cycle.

A Trend 

The shortage of skilled labor we are suffering, on the other hand, has been creeping up on contractors for the last thirty years. Everyone saw it coming but nobody could figure out what to do about it. We can all learn from David DeSilva, Head of Construction for The Hartford’s Middle & Large Commercial when he says: “It’s no doubt, that the pandemic has increased the need for laborers…However, this was a growing concern pre-pandemic as well: more workers were leaving the field than entering it, and firms were beginning to address the issues pre-pandemic.  Now with the Great Resignation in the mix, an aging workforce and low interest from younger professionals, the construction industry needs to act in order to mitigate against risk.”

Skilled labor shortages are a “trend” in construction, and you can’t fixtrends, but you can adapt to them. The problem, of course, is that no one knew how to adapt. Many contractors resisted the labor shortage squeeze they were feeling by poaching workers from the competition with higher wages (more inflation) and better (more costly) benefits. This “fix”, of course, only made matters worse.

Risk Implications

• An Associated Builders and Contractors analysis suggests the construction industry will need more than half a million workers above its current pace of hiring, which has been 150,000 per year, in order to meet demand. That would mean, the report estimated, an additional 650,000 workers.
• “Labor is a significant issue in today’s industry,” DeSilva added. “Skilled labor shortages hinder the ability of construction companies to uphold the timeliness or contractual requirements with the owner or higher-tiered contractors. When you think about shortages and some of the issues they can cause, there are job delays, reengineering of construction sequences, and a veritable shift in the business model… going from self-performed to more subcontracted work.”
• With less labor, contractors aren’t able to take on as many jobs at the same time. “You’re seeing firms be more selective in their bids and more selective in the work they’re taking on,” DeSilva noted. “This means bidding has become more competitive in nature, thus driving up project costs for higher-tiered contractors or the owner, placing a strain financially on the project.”
• Fewer workers can also lead to workmanship issues. “When you think about less experienced workers coming onto site and completing these jobs, there is a potential for downstream implications on the quality of work,” said DeSilva.
• Worker’s Compensation - “It’s no secret that older workers take longer to recover from injury, which clearly impacts claim dollars and claim payouts,” DeSilva said. “Data has shown that less experienced workers, at the opposite end of the spectrum, tend to get injured more often, and with less workers in the field, there are higher demands on the workers that are left.”
• It also has workmanship implications, as fewer workers under more pressure can easily miss key performance and quality checks. Productivity is impacted.

Adaption

The labor shortage is likely to continue to be a challenge (a trend) in the long-term foreseeable future. How contractors handle the shortage will be a major factor in their performance and the reputation of their firm. Contractor cannot “un-shrink” a shrunken labor pool, but they can adapt to it. Our industry’s business model is shifting from “self-performed” to “sub-contracted” which pushes the labor shortage downstream to the subcontractors and the sub-subcontractors. In effect, the labor shortage gets cut down to more manageable pieces at the subcontractor level where it can be handled more efficiently. This realignment is adaptation.