Labor Costs Will Keep Rising As Construction Industry Bounces Back, Reports Predict

During the pandemic, many construction projects in the LA area were considered essential and continued as other businesses were shuttered. Now, at the beginning of a new year and with the promise of coronavirus vaccinations and an economic rebound, construction experts are beginning to prepare for a very different year. 

Residential construction will be a leader in 2021, reports predict, with commercial trailing behind. The continuation of a labor shortage will be a factor in what are predicted to be rising construction labor costs in the coming year, especially as other sectors of construction begin to rebound. 

The extent of the rebound will likely be modest for much of the year. Cumming Corp. found that in the LA and Orange County area, the total construction market volume across all sectors was $43.8B in 2020. That is anticipated to rise to $45.05B in 2021 led largely by residential construction, according to a Q4 2020 report from the company. 

Cumming anticipates that construction will begin to pick up speed starting in the middle of 2021, with a full market return by the end of 2022. But between now and then, “we anticipate some challenging times ahead with labor availability, cost escalation, and schedules as teams move forward with re-engaged projects,” the report said. 

Especially as projects that were on hold start to come back online “and people try to get ahead of the market and be first to market again, across a variety of sectors, that’s going to continue to push pricing up and we are going to see those impacts in labor costs,” Cumming Corp. Regional Vice President Mark Fergus said. 

Already, Fergus said he is seeing a 3% increase year-over-year on the cost of labor on projects that are going forward now. 

Over the past year, material and labor costs rose, but were largely offset by a “shrinking contractor markup” that kept total costs relatively flat, according to a national construction outlook report JLL released in late February. However, contractors can’t sustain their operations that way forever, and as soon as the market recovers, they will be increasing margins accordingly, the report said.

Both Cumming's and JLL’s reports anticipated the beginning of a recovery in 2021 but didn’t think a full return to normal would materialize until 2022.

Nationally and in the LA area, forward-looking construction reports have indicated that residential construction will make up the majority of new construction project volume in 2021 by far. Fergus said that the growth in residential construction volume will run the gamut from market-rate to affordable housing and include the conversions of motels to homeless housing too.

That growth in residential construction “will continue to impact labor and material markets and drive up construction costs across the industry,” according to JLL's report. 

Labor costs will record a steady year of inflation in 2021, JLL predicts — between 2% and 5% for the year — though material costs are forecast to have the highest cost growth of any input. 

Though JLL’s report was a national one, JLL Project and Development Services Los Angeles Vice President Anu Rao said it’s indicative of local trends. Its national findings are in line with what Rao saw at the end of 2020 in the LA area, where labor costs were up 2% to 4% and materials costs were up 3% to 5% in the same period. 

Still, in projects that are in procurement now, Rao said contractors are pricing aggressively, with fees and markups at all-time lows.

“I think [contractors] are trying to keep all their teams busy and hold onto their teams while expecting that construction is going to pick up in 2021,” Rao said. 

Suffolk General Manager Ken Summers said he was also seeing competitive pricing.

“A lot of contractors have some backlog to fill,” Summers said. He also anticipates a slight rise in overall construction costs in the coming year. 

R.D. Olson Construction President Bill Wilhelm also believes that construction costs will rise in the next year, though at present, materials costs are responsible for more of those increases than labor. That could all change, though, if and when nonresidential sectors begin to pick up steam, he said.

“A year from now, I might have a different answer,” Wilhelm said. “That answer would probably be based on a concern I have today, that as these other industries — like hospitality, like education, like retail — come back, from a construction perspective, and you put that on top of the residential, which is hot and heavy, now the supply and demand of the labor side is going to give contractors the opportunity to start pushing their price points up.” 

JLL’s national report anticipates that overall nonresidential construction volume, which fell in 2020, will decline again in 2021.

But demand for sound studios, production facilities and other entertainment-related projects that might be needed to support the demand for streaming content could be another area where nonresidential construction could see some growth, Cumming’s report indicated.  

“Recent reports also show a potential surge in the commercial and manufacturing sectors, with projects that were previously paused now being dusted off and prepared for market,” the company’s report found.

R.D. Olson is involved in pre-planning on a number of nonresidential projects, enough to indicate that those areas are preparing to come back, Wilhelm said, but they aren’t there yet.

“The cycle is in motion but it has a ways to go,” Wilhelm said. 

With the expectation that the economic recovery is going to pick up soon and the understanding that construction lags behind the economy at least six months, “The next six months is a great time to build,” Rao said.