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Construction Volume Growing Faster Than Jobs, and That’s a Good Thing.

2-24-16

The most talked about reason for slower jobs growth is the lack of experienced workers available to hire.  In fact, recent surveys indicate about 80% of construction firms report difficulty finding experienced workers to fill vacant positions.  That certainly cannot be overlooked as one reason for slower jobs growth, but is that the only reason?

Even with all this talk of difficulty finding experienced construction workers, there is a lot of hiring going on. For the 5 year period 2011-2015 we added 1,100,000 construction jobs with the peak growth rate in 2014 at 6.1%. Jobs increased by 20% in 5 years.

For the two years 2014 + 2015 we added 650,000 jobs, the largest number of jobs in two years since 2004 + 2005.  In that two years, jobs expanded by 11%, the fastest percent growth since 1998-1999, the fastest pace in 17 years. But peak growth was in 2014 with slower growth in 2015. I expect even slower growth in 2016.

Construction spending hit bottom at the same time as jobs, the 1st quarter 2011. For the same 5 year period 2011-2015 construction spending increased far more than jobs growth. Why is it that jobs don’t increase at the same rate a construction spending?  Because much of that spending growth is just inflation. When describing a shortfall of construction workers, jobs growth should not be compared to spending growth. After adjusting for inflation from Q1 2011 to Q4 2015, we find that construction volume increased by 22% in 5 years.

Spend current vs constant2015 22pct volume growth

Now it looks like over 5 years jobs seem to be growing nearly the same as construction volume.  It even looks like productivity increased, but that’s still not the whole picture.

Real work output growth is total jobs adjusted by the hours worked each year. From 2011 to 2015 construction hours worked increased by 3.6% from near the lowest on record to the highest ever recorded.  The reason this has such a huge effect is hours worked gets applied on all 6.5 million jobs, not just the new jobs added. So, a workforce that grew by 20% worked 3.6% longer hours showing that net total work output actually increased 24.3%.

Jobs plus hours 24pct output growth

This data shows that over the last 5 years new volume increased by 22% while work output to produce that volume increased by 24%. Data clearly indicates we have added more work output than the volume of work we have produced. This indicates a drop in productivity over the last 5 years.

It is not uncommon at all that productivity declines during rapid growth.  This pattern of growth appears prominently in the last two expansions between 1996 and 2006. Firms may be increasing staff based on revenue without strict attention to real volume growth, only to then slow jobs growth and allow volume production to catch up.

By measuring to previous productivity levels, we could say the construction workforce is currently overstaffed. Of course, spending (and net volume after inflation) is expanding rapidly and with it so must the workforce. But, if there is any hope that eventually productivity will return to previous levels, then we must hope for a minimum increase of 2%+ in volume with no matching additional increase in new jobs or hours worked.

Over the next two years I predict construction spending will increase close to 20%, BUT construction volume will increase only 10%, most of that in 2017. In a previous post, “How Many Construction Jobs Will Be Needed” I predicted jobs will grow by 500,000 to 600,000, only about 8%.

Filling positions with workers less qualified than those who were lost accounts for some of the decline in productivity. Working longer hours also leads to productivity loss. To regain lost productivity, new workers need to gain experience AND overall hours need to be reduced and that workload replaced with new jobs. That’s certainly not likely to happen all in one year, but it may account for some of the reason why volume is currently growing faster than jobs, and that’s a good thing. I expect that will continue at least for the next two years.

Overtime Isn’t Always What It Seems – Lost Productivity Construction

1-30-16

It is sometimes necessary when the situation dictates to increase working hours to achieve a shortened schedule.  However, numerous studies can be found to support that Overtime results in lost productivity. There are other factors that affect productivity, but just to address the topic of Overtime, for the moment they will be ignored. This productivity loss set of data is from Applied Cost Engineering, Clark and Lorenzoni, Marcel Dekker, Inc., 1985.

As both hours and number of days worked increases over 5 days and 8 hours, productivity declines.  5 days and 8 hours is considered the norm = 0% productivity loss. Any increase in hours or days above this norm reduces productivity. All values approximate and % loss is loss of production on ALL hours worked.

5 days and 8 hours = 40 hrs @ 0% productivity loss = 40 hrs productive

5 days and 10 hours = 50 hrs @ 7% productivity loss = 46.5 hrs productive
5 days and 12 hours = =60 hrs @ 12% productivity loss = 53 hrs productive

6 days and 8 hours = 48 hrs @ 3% productivity loss = 46.5 hrs productive
6 days and 10 hours = 60 hrs @ 17% productivity loss = 50 hrs productive
6 days and 12 hours = 72 hrs @ 25% productivity loss  = 54 hrs productive

7 days and 8 hours = 56 hrs @ 7% productivity loss = 52 hrs productive
7 days and 10 hours = 70 hrs @ 20% productivity loss  = 56 hrs productive
7 days and 12 hours = 84 hrs @ 28% productivity loss = 60.5 hrs productive

Not only does overtime produce lost hours, but the cost of the overtime hours increases. Hours over 8 might cost 1.5x normal rate.  Days over 5 might cost 2x normal rate.  Increasing days and hours rapidly balloons the cost of completing the work. However, if absolutely necessary to meet unusual schedule demands, the cost vs time to complete work can be modeled for each scenario and the least destructive option (whether that be cost constrained or time constrained) can be agreed upon by all parties.  The best choice is always that which requires the minimum added cost to achieve the restricted schedule.

See this blog post for an example Construction Overtime – A Common Miscalculation

 

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