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How to explain the construction labor shortage to senior management


This article appeared in our newsletter The Construction Labor Weekly.

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Source: Giphy

(That's your senior management team giving you an ovation after you deliver this presentation on how to deal with the construction labor market.)

This Week's Idea Summary

  • The labor challenge is getting attention at the board of directors level at a lot of construction companies.
  • That's a good thing because the labor challenge on our doorstep is different from all the others - not in a good way.
  • We break down the major drivers of the labor challenge: fewer people in the workforce, record open jobs, industry revenue growth, and record low Total Available Construction Labor (TACL)
  • The labor challenge in 2022 will be a zero-sum game. There will be winners and losers. The longer term idea of growing the labor pool will not materialize in the next twelve months.
  • We also give guidance on how to out-compete the competition in attracting labor by addressing recruiting strategies, retention strategies, and risk mitigation strategies.
Anybody need to make a presentation to senior management on the labor shortage? 
We got you covered. Read on.

The construction labor challenge has finally made its way into the board room.

The primary driver that boards are paying attention stems from the pandemic. Over the past two years, the broader labor challenge across all industries has impacted businesses. As a result, labor availability is getting real attention at executive levels.  
That means that senior management is looking hard at this issue and are looking for strategies to prepare for labor challenges.
  • How real is the labor risk?
  • What are the drivers of the current labor situation?
  • How will your company plan for these challenges?
  • What’s your company’s labor strategy?
Luckily, we’re here to help.

With this article – and the accompanying presentation slides (download those here) – you’ll be ready to put together a presentation “on how to deal with the construction labor shortages.”

This article also walks you through the key bullet points and discussion points to give an overview of the labor challenge and to present strategies for dealing with it.

Let's get to the presentation.

The basics of the construction labor challenge (slide 2)

Key point to make: The labor situation in 2022 is unlike any time in the history of the industry going back to the year 2000. The issue is made up of a combination of factors that are coming together this year.

Fewer numbers of available workers, record job openings, and industry revenue growth that has outpaced employment growth

The equation is daunting. For companies that have won work in bids from weeks or months ago the idea of going into a project without a clear path of securing labor would keep anybody up at night.

There are fewer people in the construction industry today (slide 3)

Key point to make: Since August 2006 when construction employment peaked, the industry has lost 691,000 people from the industry. There are simply fewer people available to fill jobs today.

The construction labor market peaked in August 2006 in total employment. The total number of potential employees (employed + unemployed) in construction also peaked in August 2006 at 8.594 million.

As of December 2021, 185 months later, the total number of potential employees in the industry is 7.857 million. That means that as of December 2021 the industry has 691,000 fewer people to draw from.

Open jobs are at all-time highs (slide 4)

Key point to make: Job openings in construction are at all time highs. Job opening growth is dramatically outpacing employment growth in construction. This means competition for the shrinking labor pool is increasing.

The BLS started tracking open jobs in the construction industry in December 2000. Ever since, growth in job openings has steadily outpaced industry employment. Job openings as a percentage of total potential employees (employed + unemployed workers) hit its all-time low in April of 2009 at 0.5% and ever since has steadily grown to where in 2021 it averaged 4.4%.

Real numbers of total job openings also peaked in October 2021 when there were 453,000 open jobs.

Industry revenue growth has outpaced workforce growth (slide 5)

Key point to make:  While construction employment peaked way back in 2006, industry workload did not. Construction industry revenues are up significantly since 2006 which has exacerbated the labor availability situation.

Comparing revenue of the ENR Top 400 contractors, revenue has grown at a rate of 4.1% per year since 2006. Industry employment, on the other hand has shrunk by 0.3% per year since 2006.

Some industry revenue growth can be attributed to inflation and rising prices. Yet for revenues to be up 76% since 2006 with industry employment shrinking the industry has pushed efficiency to the point where there’s little room for error.

It all adds up to the most constrained labor environment on record (slide 6)

Key point to make: Total Available Construction Labor (TACL) is a metric that shows how many construction workers are available for work after open jobs are filled. This metric shows the culmination of declining employee base and increasing job openings on the same chart. The result is very concerning.

We track TACL each month and are able to go back to the year 2000 for historic data. Even when construction was hitting its all time peak in 2006, the labor force was more robust. There were still people available to fill the open jobs. Not anymore. Virtually all slack is gone from the labor market.

What to do about the labor challenge in 2022 (slide 7)

Key point to make: Unfortunately, the labor situation is a zero-sum game right now. The winners in today’s labor market will win by attracting labor at the expense of the competition.

The construction industry workforce needs more people. However, that won’t get resolved in 2022. You’ll need to find a way to make the current labor market work for you. There are several key strategies to win this labor market.
Recruiting Strategies
  • Provide sign on bonuses
  • Provide referral bonuses to engage the network of existing craft labor
  • Hire more people early in the project than you expect to need. Build a buffer on turnover.
  • Schedule more overtime hours than necessary – more hours can attract labor
  • Increase pay rates and per diems
  • Include housing as a paid-for option. We’ve seen this be very attractive to craft labor.
  • Get your hiring needs seen and heard. Increase marketing efforts on your open positions.
Retention Strategies
  • Include completion bonuses in your pay
  • Find ways to offer back-to-back projects to incentivize longer term employment
  • Include periodic retention bonuses
  • Make site level leadership a priority. The better the skill sets of the site management team the more likely that turnover will be low.
  • Solicit feedback from your field crews and take real action on the ideas.
Risk Mitigation Strategies
  • Perform local and regional labor surveys to better understand the competition and pay rates
  • Include bid clarifications and exclusions on labor availability
  • For existing contracts, review force majeure language to identify if this is an option for a labor availability impact
  • Proactively approach customers about working together on increasing labor rates and/or per diems in the event of a labor availability challenge.
In conclusion

Key point to make: This challenge is real and its on the doorstep. We've laid out several options to address upcoming challenge. The companies that take action will win the day. In the short term, this is a zero sum game. There are only so many people available to work construction projects this year. Your job is to make sure those people chose to come work on your project sites.