CRE N Illinois

Labor shortages and material costs continue to shape the construction trades

Labor shortages and material costs,ph1
75 N. Fairway Drive in Vernon Hills, IL
Labor shortages and material costs,ph2
Rush Oak Park Hospital

Consumer spending is up and unemployment is down. The Dow Jones keeps creating new milestones to hit. By most indications, the U.S. has shaken off the last of the Great Recession. But for the construction industry, it’s not exactly back to business as usual.

According to a survey conducted by FMI Corporation, which tracks employment trends among engineering, construction and infrastructure firms, 89 percent of participants reported talent shortages in 2017. Only 53 percent reported the same in the 2013 survey.

What’s more, this skilled labor shortage, coupled with an energetic construction market, continues to drive up construction costs. Construction costs rose 1.34 percent in the fourth quarter of 2017, continuing a steady increase that has been trending since 2011. This is according to Turner Construction Company, which has prepared its building cost index for over eight decades.

At the end of last year, the Turner index shows, construction costs were more than 5 percent higher than at the end of 2016. And the pace of these cost increases is also rising; 2016’s cost of labor and materials was 4.7 percent higher than in 2015, which was 4.5 percent over 2014.

“The skilled labor shortage is one of the greatest issues the construction industry is collectively facing, and many top contractors have been bracing for its impact for years,” said Justin Brown, president, Skender Construction.

Not all markets are affected equally, of course. Despite the hot streak that industrial has been on, some new deliveries to the Chicago market in 2017 have gone unleased. “There have been a lot of speculative warehouses and not enough absorption,” said Steve Golumbeck, vice president Peak Construction.

This lower industrial absorption is already offsetting material availability. “One of the metrics that I track is the precasters—what they have and how far are they booked out,” said Golumbeck. “I talk to those guys about once a week and right now they can get me panels in April. Last year that was June/July and the year before that is was July/August.”

Areas where industrial is still strong, such as the I-55 and I-80 corridors, are doing so in part because of access to larger labor pools. “They have it a little better because they can pull from Joliet and those bigger cities down in that area,” Golumbeck said.

But the construction trade, overall, is seeing higher average cost, due in part to a smaller labor pool. To stay competitive in the face of these challenges, many in the industry have adopted the “Lean” approach, modeled after low-waste, high-efficiency manufacturing methods.

“The Lean approach is demonstrating significant value in mitigating risk and improving project performance,” according to a recent Dodge Data & Analytics report. “High lean intensity projects” were three times more likely to complete ahead of schedule and two times more likely to complete under budget, according to owner-provided data in the report.

The core principles of Lean construction are the elimination of waste, increased production and reduced costs. This may seem obvious, however 70 percent of projects are delivered late and over budget, according to the Lean Construction Institute.

“Skender’s value-optimized approach to Lean is a vital part of the way we do business,” Brown said. “We combine the best practices of Lean manufacturing with our tailored construction services, providing clients with a refreshingly innovative approach that results in greater efficiency, quicker deliveries and cost savings.”

Reducing material waste is the most expedient way to cut down on construction costs; by building Lean, however, a firm can eliminate waste throughout a project’s lifecycle. More transparent and collaborative communication between owner/operators, developers, architects, contractors, engineers, material suppliers and subcontractors can also make a project go up more efficiently, from start to finish.

Tasked with transforming an 18-year-old, four-story, 190,000-square-foot office building in Vernon Hills, IL, Peak Construction collaborated with design partners, the client and village officials to deliver a state-of-the-art research and development space. Improvements included an extensive modification and reuse of the existing building’s electrical and HVAC systems.

Skender recently served as general contractor on the interior build-out of a medical clinic at Rush Oak Park Hospital. As they were working in occupied space, it was up to Skender to coordinate all construction logistics to reduce any impact on ongoing operations.

Firms need to have a plan in place to address the labor shortage, whether that’s Lean construction, better recruitment/outreach, employee training and incentives or other methods. If the trend for construction industry labor shortages persists, there could be short- and long-term consequences.

In the short-term, construction firms will be reluctant to bid on projects without the assurance of access to enough qualified employees to complete the job on time. This will both delay new projects and drive up wages, making the rise in construction costs even steeper. In the long-term, those firms that successfully weather the storm of a shrinking labor pool will likely have done so by doing more with less. This means the move toward automation would only be hastened, shifting even more employees out of the industry.