Labour shortage set to escalate construction costs in 2019.
3lite’s take on how to leverage the situation to come out on top.
A quick google on ‘construction labour shortage’ this year will show you multiple headings painting a dark picture on the global crisis in skilled and unskilled workforce in the construction industry. It’s felt from East to West and if not yet intensely, it’ll certainly take its detrimental toll in 2019 and beyond. Politics with the migrant crisis, Brexit, and changing immigration policies; Technology and its slow adoption by the construction industry; and the Social context, specifically, the decreasing interest in the industry by millennials; are all important factors in this review. But let us focus on how the issue of labour shortage affects the overall construction costs of projects, who will feel it the most, and what we can do to manage its negative effects and come out winning.
The Global Setting
Let’s start with the millenials. Thanks to increased social awareness, pay grade standards, syndicate influence, and urbanisation in the 1st world, this group is less and less interested in getting their hands dirty, and more keen on only management-level positions on construction projects. An example is Australia’s shortage of skilled engineers, with fewer graduates every year from technical colleges. In the US, immigration (or rather, the tightening regulation on it) is making waves across the first world ‘approaching epidemic proportions’, according to CNBC. In the UK, we face grave risks of losing a diversified workforce with non-UK workers dealing with the uncertainty that comes with Brexit. Germany claims to have a shortage of 1.6 million in unskilled workforce labour alone, a situation it’s trying to mitigate by changing regulation that allows for easier employment for non-EU nationals (read: immigrants) to fill this gap. No less meaningful are examples from less developed nations that are going through similar issues, and equally contributing to this social change that we are experiencing.
The construction industry is a lumbering dinosaur when it comes to adopting technology, its pace unmatched to that of other industries much quicker and more willing to adopt innovation and new ways of doing things. It’s no wonder millennials aren’t rushing to join a field that according to KPMG’s annual ‘Building a technology advantage – Global Construction Survey 2016’ is ‘the slowest to adopt technology – in other words, it’s still slow and labour-intensive. The effects of prefabrication, BIM, and building technologies, although truly exciting and quite revolutionary in theory, have yet to yield highly anticipated results of creating more efficient and technology-based processes within construction. Thanks to its well-known culture of being highly resistant to change and the fact that mistakes result in grave consequences in time and money, only the bravest are pioneers in implementing these changes. As we know, a project takes anywhere between 3-5 years from inception to completion and if the opportunity is missed to plan out the implementation of technology, it just doesn’t get done – which in itself becomes a habit.
The “Boom” Paradox
A decade since the global economic crisis and led by the USA, most developed countries are experiencing a major construction boom with US News’ ‘Where Are All the Builders’ article claiming that in 2018 an average of nearly 225, 000 construction jobs are being sought out by employers each month. The phenomenon repeats itself around the world with Reuters reporting that ‘German property boom to boost construction sales to 23-year high’, Business Insider deems ‘Australia’s housing building boom just keeps on getting bigger’, and even with the UK’s uncertainty facing Brexit, substantial investments from East Asia keeps its industry up and running (3lite Principal Milan Jankovic digs into this in his article ‘Asian funds driving London’s property market, how come?). If you think this boom has been a catalyst to drive change in the industry, you’d be sadly mistaken. Unfortunately, industry players still remember the burn from the 2008 crisis and are more concerned with continuing old practices and upholding a decent profit margin before markets go sour again. When this happens, labour prices will remain high, budgets will be lower, and new systems and technologies insufficiently tested in the industry – this can’t be good.
The Chain Effect
One of the most under-considered consequences of cross-border workforce migration is its chain effect in countries where the workforce originates. Countries such as Germany, Belgium, and France are pondering drastic regulatory changes to permit easier access to skilled and unskilled workforce from 2nd world countries in the Southeast and Eastern Europe regions, inherently creating a gap with markets such as Poland, Serbia, Croatia, Greece, and Turkey experiencing major workforce shortages. It’s a situation previously unseen or imagined where countries with traditionally strong construction industry and relatively cheap labour experience massive shortages and must now look to 3rd world countries such as India, Uzbekistan, Pakistan, and others to fill the subsequent demand created within their own country’s projects. It means that construction cost increases apply equally to 1st and 2nd world countries and has a major geographical impact.
The migration of skilled and unskilled labour across the globe drives substantial change both politically and socially, and in the construction industry, the impact is felt directly. We are increasingly experiencing issues in managing expectations of both prospective owners and contractors regarding cost and quality of projects. On the one hand, contractors are struggling to find skilled labour and on the other, clients are suffering from poor management staff which inevitably leads to poor workmanship and greater construction soft costs. Interestingly enough, most agreements signed in 2013 to 2015 are not yet feeling the full effect of construction cost increases. While contractors feel the heat, they build change order requests and claims to get more money to cover staffing expenses, and owners try to squeeze every last penny out of existing contracts, calling on existing rates. We also wonder whether a ‘force majeure’ clause will be activated with such major social and political changes occurring, such as Brexit. New deals made from 2019 onwards will be under a different set of price rules but no matter how much its talked about now, the fact will still come as a surprise to many.
2019 and Beyond
As construction costs escalate in many markets of the world, owners will have to bear greater fees from contractors or face the unrealistic alternative of hiring unskilled firms or labour that’ll produce poor workmanship and lead to deteriorating effects. Because let’s face it, no one likes a Ritz Carlton with a messy interior or an airport with a cracked runway. But perhaps this is the shock the industry needs to get its act together and start making meaningful changes.
We’ll have to become more practical, make quicker decisions, and have greater resolve to stick to them. Contractors will need to include better technology in how they operate, the supply chain will need to be broadened with those who include contemporary prefabrication techniques, governments will have to put people through better training programs in order to develop a skilled labour workforce. Owners must control their costs more with a hands-on approach to micro-managing procurement processes, value engineering will need to become an intrinsic part of the BIM-focused design process, and overall waste will need to be dramatically reduced.
Construction produces a lot of waste. Bad design, constant changes, collusion within the supply chain, opportunistic owners or contractors calling in warrantees or filing claims – these are all ‘priced in’ by contractors or ultimately lead to double or even triple-digit percentage overruns on projects. Whilst cost of increased labour is a reality, the aforementioned reasons to cost overruns are purely derived from mismanagement, lack of knowledge, and corruptive behaviour – these can and should change.
Strategic Steps to Win
Planning will be critical in order to make it through the upcoming turbulence caused by rising construction costs. Changes such as implementing BIM into the design process, enabling smart offsite production processes with well-planned prefabrication incorporated into the design and procurement strategy, digging into the Global Supply Chain to explore new technologies and systems being produced beyond what is being offered by the ‘usual suspect’ suppliers, and a proper management setup that can orchestrate this process to enable a practical, well-organized and cost-effective process in delivering projects – are what we need.
We believe this difficult (but not impossible) endeavour can only be undertaken by the bravest and boldest owners, contractors, and boutique (read: expert) consultants. The only way to leverage the increase in construction costs due to labour shortages will be to plan and execute projects in a better way whilst making use of what technology has to offer. As such consultants with vast experience in the field, we’ve had the privilege of working with the brave and bold few to set an example of how projects can be delivered successfully, even with the constraints we face and will continue to face in the coming years.
By: Vladimir Milovanovic