Things are humming in the construction industry, with company executives in the New York area anticipating strong revenues for the next 12 months. But costs are rising, too, as construction firms face increases in compliance requirements and insurance premiums and shortages in labor.
For a recently released report entitled “Issues & Trends that Impact Profitability,” Jericho-based accounting firm Grassi & Co. interviewed more than 100 general contractors, subcontractors and other industry insiders about their top concerns and challenges.
“Costs continue to increase due to additional regulations, a lack of skilled labor pool that requires paying overtime to maintain key workers, insurance costs that have skyrocketed, technical training, etc.,” one survey respondent told Grassi & Co. “Margins have steadily decreased.”
Construction spending in the New York area is strong. In its Construction Outlook 2018-2020, the New York Building Congress projected that a record $61.8 billion would be spent in New York City in 2018 and a total of $177 billion would be spent over the three-year span.
Most respondents to the Grassi & Co. survey said they expected revenues to either increase (50 percent) or stay the same (36 percent) over the next 12 months. Only 7 percent said they expected revenue to drop.
“There is still a lot of work going on in the area, and from a financial standpoint everyone is pretty confident that spending is going to remain intact in 2020,” said Carl Oliveri, partner and construction practice leader for Grassi & Co. “In New York City, Google has been a very big consumer of construction spending. Healthcare is a big spend in Long Island and the city, as different facilities are converted to new uses with the expansion of outpatient care and urgent care centers. And infrastructure projects are expected to take charge over the next few years.”
But uncertainties are rising, he noted, as companies face increasing pressure on profits.
Compliance issues
Chief among concerns cited by survey respondents is the regulatory environment.
“New York [State] and New York City regulations are becoming unbearable,” one respondent bemoaned. Nearly three-quarters (71 percent) of the survey respondents expect regulatory oversight to increase further.
One of the most impactful regulations has been New York City Local Law 196, which was passed in 2017 and when fully phased in by Sept. 1, 2020, will require workers at certain job sites to receive 40 hours of safety training and supervisors to receive 62 hours of safety training. Nearly two-thirds (63 percent) of respondents said they are factoring higher safety costs into bids because of Local Law 196, while three-fifths are investing or planning to invest in safety training because of it.
The statewide Labor Law 240/241, commonly called the Scaffold Law, holds employers 100 percent liable for gravity-related injuries even in cases where employees are at fault, which leads to higher insurance premiums.
“I think a sensible tradeoff for having to provide so much OSHA training is that the contractors should be able to hold employees who have height-related injuries partially responsible for their negligence,” a survey respondent told Grassi & Co.
In addition, contractors must comply with MWBE requirements, which now hold that 30 percent of state-funded work must be performed by minority- or women-owned business enterprises. New York’s is the highest MWBE utilization percentage in the nation.
“So if I’m a general contractor working on a state-funded contract, I have to subcontract out 30 percent to MWBEs,” Oliveri said. “Many contractors find that there aren’t enough MWBEs out there to meet the need.”
As one respondent noted, “The high MWBE goals are turning general contractors into CMs [construction managers] as they have to subcontract their own work to meet the goals.” The respondent went on to state that in many cases, the subcontractors “do not have the required insurance, cannot get bonding and cannot perform the work to contract schedules and quality standards, forcing the GC to cover the costs.”
Labor shortages
Finding qualified workers is increasingly challenging as the number of people entering the industry is not keeping pace with the amount who are leaving.
About three-quarters (76 percent) of respondents reported that foremen were “difficult” or “very difficult” to find, while project managers (73 percent), estimators (70 percent) and skilled laborers (56 percent) were also listed as difficult or very difficult to find.
“The salaries of project managers, site supers, estimators and other experienced professionals have significantly increased,” one respondent bemoaned. “The job market is becoming more competitive. Folks are moving from company to company frequently.”
Skilled labor shortages have led to higher labor costs, in large part because companies have had to pay overtime to existing workers. Most respondents (86 percent) agreed that hiring less qualified or unqualified laborers lowered the quality of the work and led to safety issues.
“Baby boomers who may have founded the company are nearing retirement age, and not a lot of younger people are coming into the industry,” Oliveri said. “They’re not going to trade or vocational schools; they don’t look at it as a viable path.”
Oliveri advises clients to get creative when recruiting.
“Find smart people who are not in the industry that you can teach,” he said, adding that the entrepreneurial nature of many positions and some of the creative new building technologies could be promoted to draw some people to the industry who would not have otherwise considered it.
Most respondents said the construction industry needs to fund and develop programs that recruit (85 percent) and train (77 percent) younger workers.
