The Labor Crunch 3: Learning to Fly

This is the final installment in a three-part series on the labor shortage in construction and its potential impact on the LBM channel. You can find Part 1 here and Part 2 here.

For nearly a decade now, the industry has been waiting for a breakthrough year when the housing market would finally kick into gear.

Like the one that followed the 1970s recession: from 1.16 million in 1975 to 2.02 million in 1978. Or maybe like 1983, when falling interest rates (down from 16.04% to a mere 13.24%) drove starts from 1.06 million to 1.7 million in a single year.

Instead, what you're seeing right now may be the breakthrough.

Existing home sales drive the rest of the market. They hit a ten-year high in March. The difference is that Millennials are finally in the market.

First-time buyers normally make up 40% of the total. That percentage fell below 30% when the recession hit and stayed there until 2012. So far this year, first-timers have accounted for 42% of all home purchases. The Wall Street Journal believes that will "kick a housing market already flush with luxury sales into higher gear."

Nationwide, single-family housing starts in April were up a respectable but not impressive 8.8% YoY. But individual markets are all over the board. Through the first quarter, starts were up more than 20% YoY in 35 of the top 125 housing markets, and up more than 30% in 21 of them. Just seven MSAs were down more than 10%.

After a decade in the dumps, single-family new construction in many markets is finally back into a Field of Dreams scenario: If you build it, they will come.

But only if you can build it.

The Perfect Storm

"Opportunities for new work are abundant across the country," the contractor told a reporter from Contractor magazine. "The flip side of that is that we have a limited labor force. It's a perfect storm of great work opportunities and not enough qualified field leaders and field plumbers, pipefitters, and sheet metal workers to complete the work on time."

That's right—he's a mechanical contractor, not a home builder.

He's relevant here because he'll make you feel bad. There were 772,900 production and non-supervisory employees in the mechanical trades at the pre-crash peak in July 2007. As of March 2017, employment stood at 781,700. Plumbing/HVAC is the only trade in which employment has fully recovered from the recession.

Framing, on the other hand, is in worse shape than any of the other trades. The number of employed framers peaked at 167,900 in January 2006. As of March there were 71,500 working framers, still 57.4% below its pre-crash peak.

As discussed in Part 1 and Part 2 of this series, the shortage may not be temporary.

Three out of four framers lost their jobs during the downturn; analysts assumed they'd come back when the market recovered. They didn't. Thousands moved on to new careers, notably the oil and gas industry where production and non-supervisory wages are 65% higher than framing.

Immigrants won't save the day, either; they've been leaving steadily ever since the crash, and for good reason. Unemployment in Mexico is just north of 3% and the welcome mat isn't exactly out here.

Nor is recruiting a solution. It takes time to develop a journeyman's skills. Recruiting wouldn't pay off for years even if it was effective.

And it has not been effective. Earlier this spring, NAHB surveyed 18- to 25-year-olds nationwide on their career choices. "The majority of young adults (74%) say they know the field in which they want to have a career. Of these, only 3% are interested in the construction trades."

Many think more money would do the trick. Among the one in four who told NAHB they hadn't decided on a career, 21% said they'd have to make at least $100,000 to consider a career in the trades. 43% said no amount of money could entice them onto a jobsite.

The Bad Old Days

For mechanical contractors, says Contractor, "the big solution is to turn to a manufacturing approach that uses as little labor as possible" by "fabricating large assemblies built to exacting tolerances that are shipped to the jobsite and installed with as little labor input as is practical."

Commercial contractors use building information modeling (BIM) software to plan projects, work out design bugs, and coordinate with other trades. "Everything we fabricate is extracted from the BIM model," says one. "The central point of activity moves from the jobsite to the fab shop."

Another exec told Contractor that "what in the past would have been 50% of the field man-hours on a project are now redirected to their shops."

There are obvious parallels to residential shell construction. Truss and panel plants redirect at least 50% of field man-hours to the factory, and often more. It is more than likely that demand for panelization will increase in production and spec home markets.

BIM, on the other hand, is not widespread. In a December 2016 survey, roughly 10% of single-family builders told NAHB they currently use BIM. Single- and multifamily builders who say they're familiar with BIM rose from 17% in 2014 to 27% in 2016. But those who say they're considering BIM in the future fell dramatically, from 47% to 23%.

It isn't clear why, but as construction projects go, a single-family home is a lot simpler than a multistory commercial structure. Maybe home builders have decided BIM is overkill. If so, they may or may not be right.

In 2003, NAHB published a series of studies on jobsite efficiency. It found that the typical 2,000-square-foot single-family home generated four tons of waste during construction. The typical builder received 4.5 homeowner callbacks per home due to installation mistakes, at a cost of $350 each.

Typical cycle time costs were $291 per day, and other NAHB sources estimated that the typical project accumulated 45 days' worth of unnecessary delays.

Put that in 2017 dollars and account for the fact that most new homes are larger than 2,000 square feet, and it means the average single-family builder throws away over $20,000 in profit on each home.

There are no parallel studies from the 1960s or 70s when the trades were flush with skilled craftsmen paid by the hour. But anyone who's been around the business long enough remembers that framers worked differently then.

Yeah, homes took longer to build. Hourly wages were certainly a factor, but more assemblies were fabricated on site, too. Waste was minimal; they found a use for virtually every bit of scrap. Installation errors that cause callbacks were less common partly because the work moved at a slower pace, but partly because it took years to become a journeyman. Chances are full-stop delays were less common, too, since the crews were less specialized.

This is all anecdotal, of course. The point is that diligence can accomplish at least some of what BIM is designed to accomplish.

BIM will be a great tool if and when it does go mainstream. But you get many of the same benefits by combing through the plans and correcting flaws in advance, holding pre-construction meetings to get everyone on the same page, and monitoring your jobsites closely.

That doesn't always happen. A shortage of skilled people to do it is certainly part of the reason (and a reason to use BIM). But there is a more fundamental reason: misaligned incentives.

Most framers do high-quality work, but they get paid by the square foot. Careful planning and installation slows them down and eats into their profit. Most dealers do everything in their power to save money for their customers. But they get paid on volume; waste and redos boost sales.

This is Management 101: If you want a certain outcome, the surest way is to get it is to give people a vested interest in that outcome.

If You Want the Job Done Right, Do It Yourself

That's why turnkey shell construction is taking hold in single-family construction. Twenty-four dealers on this year's ProSales 100 list say they provide framing labor for their builders. Our own surveys have found that someone is providing turnkey in at least 40 of the top 50 U.S. housing markets.

The model is the same as in commercial construction: a combined bid for labor and material with a guaranteed price. That gives everyone involved an incentive to build efficiently. It isn't cheaper, but it does make construction costs more predictable.

In a handful of markets, framing subs are large enough to own their own component plants and supply yards. The more common model is a dealer who partners with his or her framer customers, often on an ongoing basis. Typically, dealers who offer single-family turnkey started out building commercial and multifamily projects.

Some dealers worry about competing with their customers. There are ways around that, says Reed Kneale, vice president at Uniontown, Pa.-based O.C. Cluss Lumber.

Kneale positions himself as a fill-in option for builders who have projects in hand but can't find framers from their normal network. He won't bid on projects his framer clients are bidding on, he keeps his prices high, and most important, he's extremely choosy about who he provides labor for.

"The single biggest factor affecting profitability is how you select your customer," he says. "Do disorganized customers have a history of killing margins? Do they have 'scope creep' issues caused by poor quality plans? Do they have issues keeping to a schedule? Is site supervision poor? By selecting your customer rather than vice versa, you're in control of the deals. You supply labor or pass on it based on your strengths and the expected profitability of the job."

Other dealers avoid turnkey on the grounds that if their builders can't find skilled labor, chances are they can't, either. That is an issue, but one independent dealer who prefers not to be named (for reasons that are about to be obvious) says he found a solution. Or more accurately, the solution found him.

"We were approached by a project manager who was working for (a chain competitor) and didn't like the restrictions that came with working for a large company. When we hired him, he not only brought all his framing subs, he brought the builders he was doing projects for."

Other independents report that they've gotten into the business the same way, and it may be easier than you think. BMC/Stock, 84 Lumber, and Carter Lumber are all making a concerted push into turnkey framing. The breadth of those initiatives alone means there are likely to be a few dissatisfied project managers out there. Finding them may be as simple as putting the word out to your network and letting them come to you.

In theory, turnkey unlocks the savings from panelization. Framing a shell with semi-skilled labor in four or five days rather than ten to 15 goes a long way toward solving the labor shortage. But even if you have an ongoing relationship with the subs who provide your labor, it isn't always that simple.

Wayne Withers, president of NorCal Lumber in Marysville, Calif., is also a principal at West Coast Framing, Inc., a multifamily framing sub based in San Jose. Withers says his own guys are often reluctant to use panels. It may be that they feel like panels take the skill out of the job and make them a little less indispensable. But you can overcome that if they trust you and you have a track record to demonstrate that you can keep them working.

"Many subcontractors appreciate you handling the selling, managing the contract and the risk, and collecting money," says Kneale. "All they have to do is build the project correctly and on time."

This is not to say that turnkey is the future. As the market heats up, the real solution to the labor shortage is more prefabrication and corresponding price cuts by framers, and that can happen with or without turnkey. Turnkey is just the easiest way to get there.

Without a pipeline of incoming workers, the pool of journeyman framers is aging and shrinking. Just as roof trusses gradually eroded the base of skilled roof cutters, chances are prefab will gradually transform framing into a semi-skilled job. Skilled craftsmen obviously won't disappear entirely, but they will get more expensive. Their skills will be reserved for complex, high-end projects while prefab components will take over the production segment of the market.

Even if you wouldn't touch a tract builder with a ten-foot pole, it doesn't mean turnkey isn't in your future. In some markets, dealers are stick-framing high-end custom homes on a turnkey basis. A shortage of trade labor also means fewer home builders who came up through the trades, and briefcase builders are more receptive to turnkey—or anything else that helps ensure that the project gets built quickly and to the specs, at a dependable (not necessarily the cheapest) price.

The fact of the matter is that materials are never in short supply, at least not for long. Labor can be—and it is right now. That creates an opportunity to be indispensable.

"You don't have to be your customer's first choice for an install," says Kneale. "Being a ready second will provide additional business, and the more tangled up in your customer's business you become, the harder it is to replace you with a low-priced competitor."

Greg Brooks is editor of LBM Executive and a 46-year veteran of the construction supply industry. To subscribe to LBM Executive, CLICK HERE.