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Subcontractors Grow More Selective as Labor Market Continues to Tighten

McShane Construction Co. is underway on Avenida Naperville, a 146-unit active adult community in Naperville, Illinois.

Rising materials costs and the shortage of skilled workers continue to pose a challenge for general contractors. In turn, these conditions have enabled subcontractors to be highly selective about the projects they are willing to accept.

“For the first time in many years, we have found ourselves encountering subcontractors who have passed up on project opportunities because the reality is that resources within qualified subcontracting firmsare finite as well,” says Anthony Johnson, executive vice president and industrial business unit leader with Chicago-based Clayco.

Given this reality, contractors are relying on existing relationships with subcontractors and spending more time on pre-construction phases with developers in order to manage costs.

“The most important thing we can do in this landscape is communicate with clients and manage expectations,” says Chuck Taylor, director of operations with Lemont, Illinois-based Englewood Construction. “For example, we make it clear how important timing is and that pricing could change from what we originally estimate if there’s a significant delay in a project due to design revisions or financing.”

Englewood specializes in the construction of retail and restaurant properties. Most subcontractors that the firm works with are currently charging what Taylor describes as high rates and are operating at capacity. For example, in 2018 Englewood budgeted an adaptive reuse project in Chicago based on its experience and historical data available for the market. But when the firm put the project out for bid a year later in June 2019, the subcontractor pricing came in 12 to 15 percent higher.

What’s more, subcontractors are in position to be very selective. They are prioritizing jobs with well-drawn plans, as well as projects where they can partner with general contractors or clients that they have good relationships with, says Taylor.

This selection process makes it difficult to line up subcontractors for projects where there are a lot of unknowns and drawings are still in the early stages, adds Taylor. “If there are changes after initial bids are submitted, some subcontractors don’t want to deal with revising their numbers.” In other words, they’ll simply move on to the next job.

Working relationships

Elevated construction costs are causing firms to spend more time on pre-construction and value engineering in effort to help meet budget goals, according to Marty Hoffey, business development manager for Lenexa, Kansas-based MW Builders. Value in this sense is defined as the ratio of function to cost.

Mat Dougherty, executive vice president with Rosemont, Illinois-based McShane Construction Co., says that developers are often bringing McShane in earlier to help with planning and cost-benefit analyses for projects. In addition, Dougherty says that having a national presence has enabled McShane to develop partnerships with subcontractors across regions. (McShane has additional offices in Alabama, California, Wisconsin and Arizona.)

“We work with subcontractors to customize schedules and the project approach to accommodate and ease the burden of having fewer men, while still meeting expectations,” he says.

McShane works mostly in the multifamily and industrial sectors. Notable projects underway include Six Points Apartments for developer Mandel Group in West Allis, Wisconsin, and a 2.2 million-square-foot build-to-suit for Digi-Key Electronics in northern Minnesota.

Projects that require more than a few hundred workers are most affected by the workforce shortage, according to Johnson of Clayco, a full-service firm that delivers industrial, commercial, institutional and residential projects.“This quest for skilled craftspeople creates a competition amongthe projects in the region, which in turn drives the cost of labor up on projects,” he says. “To adapt to this, we perform a very extensive labor study to understand where labor will be pulled from to execute the work, and what the economics will look like to ensure we can maintain those levels of forces throughout the project.”

Clayco is underway on a $26 million, mid-rise office project in Chicago’s West Loop. The firm recently completed Upshore Chapter, a 149-unit apartment building in Chicago with 5,300 square feet of ground-floor retail space.

Prices ebb and flow

Many firms note that they have increased their investments in training and increased pay in order to recruit workers, according to the Associated General Contractors of America (AGC). Average hourly earnings in construction increased 3.2 percent to $30.73 over the 12-month period that ended in June.That figure was 10.1 percent higher than the private-sector average of $27.90, according to the AGC.

Between June 2018 and June 2019, 42 states added construction jobs, while construction employment increased in 30 states from May to June, according to the AGC.

“Construction demand remains robust across most states, and contractors continue to add workers when they can find them,” says Ken Simonson, chief economist for the AGC. “But contractors are struggling to find all the workers they need in many states.”

Most industry executives believe that the labor shortage is more to blame for rising project costs than any increase in materials pricing. Aspike in steel pricing did occur initially in the first quarter of 2018 when the Trump administration imposed tariffs on steel and aluminum imports, but prices have since leveled off.

A certain level of panic within the market created by the imposition of the tariffs encouraged steel buyers to stock up on inventory, according to Aaron Underwood, vice president of construction products for Flack Global Metals, a supply chain manager for original equipment manufacturers. The overstocked inventories, coupled with a slow start to the year from weather-related issues, have caused steel prices to fall.

In fact, the percent change in the producer price index for steel mill products was down 2 percent from May to June, according to the U.S. Bureau of Labor Statistics.

The steel and aluminum tariffs imposed by the Trump administration have not impeded contractors’ ability to complete projects, say sources. For example, Hoffey of MW Builders, which constructs a variety of property types, believes that the steel and aluminum tariffs were not as severe as those placed on finish products for cabinets, countertops or doors. In Kansas City, MW Builders is constructing City Club Apartments, The Yards and Flashcube Apartments, the conversion of the former Commerce Bank executive office building into 184 apartment units.

Materials prices fell during the winter and spring months of 2019, but have since picked back up, according to Underwood.“We’re already quoting a lot of business for the third and fourth quarters from the construction segment,” he says. “We anticipate a definite pickup in the second half of the year and into 2020.”

Underwood’s current advice to contractors is to manage inventory. “Buy what you need rather than trying to stay ahead and beat the market,” he says. “There are rising costs, but what goes up most come down.”

Busy outlook ahead

Looking ahead, contractors are relatively bullish about the state of the industry and overall activity. “Well-heeledmultifamily and industrial developers are still in the market and able to find funding, which we think is a great indication of market strength,” says Dougherty of McShane. He says that developers are recognizing the benefit of bringing contractors into earlier stages of project planning. McShane projects that total revenues in 2019 will surpass those of 2018.

Johnson says he tries to interact with his customers as frequently as possible. “Learning more about their businesses not only helps me understand where they may be headed from a strategic point of view, but it also helps Clayco be of a higher level of service,” he says.

Technology is one area of the business Johnson expects to continue to leverage for the foreseeable future in an effort to expedite project delivery. The tech tools include building information modeling, drones, artificial intelligence and cloud-based systems. “Technology and innovation will limit risk, lower costs and help our teams meet the challenging schedules we face,” says Johnson.

Most contractors have a backlog of ongoing projects that will keep 2019 and into 2020 active, argues Hoffey. “The overall state of the industry remains the same — busy.”

— By Kristin Hiller. This article originally appeared in the August 2019 issue of Heartland Real Estate Business magazine. 

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