(IND) (LABOR) Philadelphia: State of Industry & Labor Relations in the Commercial Construction Sector – A look at 2014 and Beyond

A brief summary of a recent report created by Gregory Management & Consulting Services for a local owner, developer and contractor group here in the City of Philadelphia:

2014 will find more projects, an industry moving past recovery and into growth mode; concerns arise over an increasing demand on the skilled labor force, associated cost increases and other factors that can impact 2014 / 2015 labor negotiations.

As reported on gregorymcs.blogspot.com and in the Gregory Management & Consulting Services REGIONAL CONSTRUCTION INDUSTRY UPDATE over the last twelve months, Philadelphia construction employers should be very concerned about anticipated labor shortages and related increasing costs.  With significant industry backlogs for the foreseeable future, reduced availability of skilled workers, strained relations in the general contracting community with industry stakeholders and facility owners along with favorable forecasts within defined benefit pensions, conditions are present that could lead to increasing labor costs throughout 2015 collective bargaining. 

Significant Industry Backlogs:

As of this report, there are currently billions of dollars of commercial construction work forecasted to take place in Boston, New York, Washington DC and Pittsburgh and even more in heavy and highway infrastructure related work taking place in the New York metropolitan area; some industry experts have forecasted backlogs in these areas extending beyond the next 5 years.  Another 30 billion was recently announced for additional projects in the NY/NJ metropolitan marketplace. 

AGC’s Ken Simonson recently reported that “many contractors will find more projects to bid on in 2014 than they have in the past five years. Judging by recent producer price indexes, they should be spared most materials price shocks. However, labor availability will become an increasing concern.”

Simonson also stated that “the year opened with an upbeat report on construction spending from the Census Bureau on January 2. The agency reported that spending in November was the highest since March 2009 at a seasonally adjusted annual rate (a statistical technique to remove distortions due to normal weather or monthly variations). For the first 11 months of 2013 combined, year-to-date spending rose 5.0 percent from the same months in 2012.”

With Philadelphia’s current back log of work including several significant projects within the University City area, Cira II and Comcast II, it appears that we have begun to follow suit with the surrounding major metropolitan markets.

Reduced Availability of Skilled Workers:

As the downturn started, 2006/2007, and positions became scarce, we began to see a flight to stability taking place in Philadelphia within our skilled workforce.   A quick review of one trade’s current active participants in their pension plan indicates a 28% reduction in Active Plan Participants from May 1, 2008 through April 11, 2013.   More to this point and in this same time period, we saw a 48% increase from Plan Year 2008/2009 to Plan Year 2012/2013 in the number of individuals that are listed as “Retired or separated from service and entitled to future benefits.”  That is, members that are no longer paying into the plans through hours worked, yet are due benefits.  Total hours worked for this single craft also tells a similar story with a current 29% reduction in overall man hours worked from its high in 2006 as the city was enjoying the tail end of a city wide building boom.  When you look at all of the data, the trend points towards a real loss of experienced, skilled workers within our industry as opportunities were no longer available.

AGC’s Simonson’s recent blog post warns of upcoming labor shortages and increasing costs.  “Labor costs and, especially, availability will be bigger worries. The unemployment rate for construction workers tumbled from 18.8 percent (not seasonally adjusted) in November 2010 to 8.6 percent in November 2013 as 890,000 former employees left the ranks of the unemployed. Unfortunately for contractors, the industry added only 327,000 employees in that span. That means most of those experienced workers left the industry, at least for now.”

“To get them back, contractors will likely have to spend more on wages, benefits and bonuses. Firms that can’t find the additional workers they need will increase their payment of overtime wages. As a result, employers’ costs for employee compensation, BLS’s overall measure of wages, salaries, benefits and required payments such as unemployment and workers’ compensation, will probably go up 3-4 percent in 2014, compared with a 2.1 percent rise from the third quarter of 2012 to the third quarter of 2013. Even then, more contractors will likely experience difficulty finding skilled craft workers, supervisors and estimators”

This market sector has lost a significant number of the labor force that were highly skilled, very well trained, experienced and educated by the industry, over many years, and at a significant investment.  Whether they return to the industry remains to be seen.  Will higher wages be enough to attract them back to an industry that has rewarded them with instability in the past?  Will the attraction of stability and a predictable paycheck retain their services?  Only time and the market will tell.

Strained Industry Relations

Over the last 24 months, the industry has experienced continued and heightened strained labor/management relations between one of the region’s construction employer associations and their signatory trades as this employer group struggles to rebrand and to redefine its image and commitment to the industry as a whole.  These compromised industry relations are further strained by an ongoing failure to deliver on promises to provide leadership, focus and concessionary language with the region’s facility owners and developers.  This lack of commitment, execution and follow-through has lead to infighting and internal dysfunction within its own leadership. Strained industry relations will create additional challenges as this group engages in collective bargaining throughout 2014 and 2015 while questioning its own relevance in light of a changing and evolving construction model that is growing in popularity.  This internal dysfunction continues to create frustration and conflict within the industry amongst its labor, management, community stakeholders, facility owners and public officials.

Favorable forecasts within the defined benefit pension arena:

Adding to the volatile cocktail of increased backlogs, decreasing labor supply, associated increasing costs and industry dysfunction are the ongoing concerns with industry defined benefit pension plans, their viability and their most recent return to significant gains at the close of 2013.  Milliman, a widely recognized and respected consulting and actuarial firm, reports in its latest Pension Funding Index that U.S. pension plans experienced a $10 billion increase in asset value and a $10 billion decrease in pension liabilities in December alone. The funded status of the corporate pension plans improved by $318 billion during 2013, driving the funded deficit down to $73 billion by year end.”

"This was the first win-win year for pensions since 2007, with assets improving by $128 billion and liabilities decreasing by $190 billion," said John Ehrhardt, co-author of the report. "Just to put this rally in perspective: these pensions saw a $337 billion decrease in funded status in 2008, and in the past year, we saw a $318 billion improvement. These plans' performance in 2013 nearly erased the losses of 2008. We are getting back on track."

“With similar market returns and interest rate movement in 2014, the Milliman study projects the nation's largest pension plans could be fully funded by the end of the year. Based on pension portfolio median returns of 7.5%, combined with a discount rate just under 5%, the funded status deficit would turn positive by the end of 2014 (100.9% funded ratio) and realize a surplus of $106 billion (106.8% funded ratio) by the end of 2015.”

Barring any outside influence that would negatively impact the health of these plans, there is a very realistic possibility that some of our region’s better managed defined benefit pension funds could achieve at or near 100% funded status by the end of 2014 and some predictions of an overfunding surplus in 2015 as several significant regional collective bargaining agreements are expiring.  These potentially favorable conditions, if achieved, may cause some of our region’s general contractors to choose an alternate path forward for their firms.  Of concern to the contractor community should be any plan mergers and consolidations that would negatively impact the status of their current funds, effectively transferring another plan’s liability over a greater pool of contractors.

What to expect in 2014 and beyond:

As projects continue to come forward here in Philadelphia and in our surrounding metropolitan marketplaces, an already dwindling skilled labor pool will continue to have access to and seek out a multitude of excellent, long term economic opportunities for what is believed to be at least the next five years; many of these opportunities are within a reasonable distance from the Philadelphia marketplace in areas like the New York/New Jersey Metropolitan areas and in the Washington DC/Baltimore Metropolitan areas.

We are anticipating a gradual return of some of the regional skilled labor pool that chose to exit the marketplace during the last economic downturn.  However, we are only predicting a partial return as many may have chosen to pursue other, more stable and predictable, economic opportunities.

A continued shift in the widely accepted and existing construction model in the region as the current dysfunction within the industry remains and facility owners, users and outside contractors have begun to take notice. 

A forecasted return to at or near fully funded status for some of the region’s better managed defined benefit pension plans throughout 2014 along with a predicted over funding scenario in 2015. If achieved, this scenario would enable regional signatory general contractors to pursue other business models without the risks of incurring significant withdraw liability.  

With several industry guiding collective bargaining agreements expiring regionally over the next 24 months, an industry in growth mode, dwindling capacity in the skilled workforce, ongoing strained industry relations, a perceived lack of industry commitment and recent positive signs in the defined benefit sector, conditions exist that could lead to tenuous upcoming collective bargaining sessions as these are all factors that will most likely have a severe impact on the industry moving forward.  This uncertainty moving into negotiations should be of great concern to the wider industry, especially to those groups committed to the industry.