Inflation is pushing wages higher

As inflationary pressures and a continuing labor shortage push construction wages to record levels, contractors are looking beyond monetary reimbursement to attract and keep talent.

Contractors are reviewing their budgets to find creative ways and additional financial incentives to retain workers in today’s inflationary environment, said Misha Nikulin, managing director at Deloitte’s engineering and construction practice.

Average hourly earnings for construction workers climbed 6.1% from December 2021 to December 2022, exceeding the 5% rise in average pay for all private sector production workers, according to Associated General Contractors of America’s 2023 Construction Hiring & Business Outlook.

Even though 72% of contractors increased base pay rates and about a third boosted bonuses and benefits in 2022, 80% reported having a hard time filling positions, the report found. The survey gathered data from more than 1,000 construction firms.

But workers care about more than just a good salary.

The problem: Labor shortage inflates wages

The construction industry’s long and well-documented struggle to find workers shows no signs of slowing down and is widely believed to have become endemic. Workforce shortages, which make projects take longer and cost more, will likely intensify, according to AGC, with 69% of contractors expecting to need more workers in 2023.

“Construction was dealing with a labor shortage before the pandemic caused widespread labor shortages that have impacted all industries,” said Associated Builders and Contractors Economist Zachary Fritz. “Now there’s more demand for workers, and that made the construction industry’s shortage even worse.”

On average, 4.8% of construction jobs were unfilled through the first 11 months of 2022 — the highest on record, Fritz said. In March 2022, 3.3% of construction workers quit their jobs — again, the highest number ever. And people aren’t staying in the same sector when they leave their jobs.

“Contractors are now competing not only with other contractors, but also with Amazon and the distribution segment and potentially jobs that offer remote work,” Fritz said. “So, that’s pushed wages up, and they’ve particularly accelerated over the past year. Construction wages have increased faster than overall wages in 10 of the past 12 months and increased at a faster rate than overall monthly inflation in each of the past six months.”

Construction companies have always had to pay a premium to attract workers who are willing to work outdoors in the elements and have limited flexibility to come and go from jobsites, said Ken Simonson, chief economist for AGC. That premium averaged 21.5% from 2000 to 2019, but this year — despite wage increases — it has dropped to 18%.

“Construction firms are going to have to raise pay even more steeply relative to other businesses in order to get back to that historic premium or go above it,” Simonson said.

Additionally, contractors will have to find ways to reduce the number of workers on site, or the skill level of their workers, and they will have to pay more overtime for existing workers to stick to timelines.

Potential solutions: Culture, benefits and owner negotiations

Unable to compete on salary alone, contractors are proactively working to make construction more attractive and competitive with other industries.

After surveying and conversing with craft employees to determine their needs, DPR addressed employment issues with a new suite of benefits focused on developing long-term career paths for craft workers. That included utilizing dedicated employee coaches and Culture Con events in which employees have direct dialogue with leadership. DPR also restructured its paid time off to offer every administrative employee four weeks of PTO.

Firms are also focusing on workers’ mental health, work-life balance and opportunities to engage in meaningful work, said Greg Sizemore, ABC’s vice president of health, safety, environment and workforce development. More and more construction companies are moving toward creating employee-owned organizations.

Contractors may need to promise full-time employment rather than contract work and offer higher per-diems for workers who travel to jobsites, said Portland, Oregon-based Eric Grasberger, construction and design group chair for national law firm Stoel Rives. They also need to consider schedule and contract revisions with owners.

Owners’ single focus on completing projects on time gives contractors leverage in asking for incentives to pay for rising labor costs, Grasberger said. Contractors are increasingly asking for contingency funds they can tap or price-adjustment clauses to cover higher labor costs.

“Fixed bids are expected to be impacted the most by increased wages and inflation,” said Deloitte’s Nikulin. “Therefore, the contracting models and financing arrangements are being actively revised to reduce the negative impacts.”