Labor and Supply Shortages Hit Small Contractors | August 2021
Shortages of both labor and supplies are negatively affecting small contractors amid a housing boom. When workers and materials are in short supply, small builders have to cancel or delay projects, often losing business to bigger companies with more resources.
One company struggling is Construction USA LLC, a small contracting company based in Detroit. A limited liability company (LLC) is a form of ownership that provides limited liability and taxation like a partnership but places fewer restrictions on members. Construction USA typically has ten active projects during the month of June, but this summer the company could only work on two because of a lack of subcontractors such as plumbers and carpenters.
Supply and Demand
Jeremy Thomas, the owner of Construction USA LLC, operates with a lean team. The company employs eight people and relies on work from subcontractors. But, due to the high demand and low supply of labor, subcontractors are asking for double to four times their typical rates, according to Thomas.
Businesses have had to increase wages to remain competitive or risk having employees and subcontractors poached by other companies. With materials also becoming more expensive, many of these costs are passed down to the customer.
The COVID-19 pandemic led to increased demand for new-home construction, remodeling, and do-it-yourself home improvement projects. This paired with supply chain issues has created major cost challenges particularly for small business owners. Small businesses, for example, keep less inventory on hand. This means that shortages in roofing materials, appliances, and copper wiring will affect them first. Additionally, larger builders are more likely to have contracts with suppliers that protect them from price fluctuations.
The Big Picture of Small Construction Business
Small businesses are anything but small. According to the Small Business Administration, small businesses account for 99.9 percent of all U.S. businesses. Small construction businesses account for more than 82 percent of private employment in the entire industry.
About 98 percent of small construction companies are either independent contractors or firms with fewer than 20 employees. Independent contractors are examples of sole proprietors who complete projects or engage in entrepreneurial activities for different organizations but who are not employees.
While this significant portion of the construction industry struggles, larger corporations, such as Lennar Corp., one of the country’s largest homebuilders, is benefiting from a business boom. The company has reported earnings up 61 percent year-over-year.
When Will the Shortage End?
Industry experts believe supply shortages are likely to remain. The surge in demand for home improvement has created a backlog of projects that will take a long time to complete, even when demand cools. In the meantime, the ten largest national home builders are increasing their share of new single-family homes. According to Associated Builders and Contractors, a national U.S. trade association, private construction companies will need to hire more than 430,000 people this year and 1 million more over the next two years to meet demand.
In the Classroom
This article can be used to discuss supply and demand (Chapter 1: The Dynamics of Business and Economics), limited liability companies (Chapter 4: Options for Organizing Business), and small business (Chapter 5: Small Business, Entrepreneurship, and Franchising).
Discussion Questions
- What is an LLC? What is an independent contractor?
- Describe how the labor shortage is affecting small contractors.
- Discuss the forces of supply and demand in the construction industry and why subcontractors are able to ask for double their typical rates during the housing boom.
This article was developed with the support of Kelsey Reddick for and under the direction of O.C. Ferrell and Linda Ferrell.
Sources:
Omar Abdel-Baqui, "U.S. Housing Market Booms, but Small Contractors Miss Out," The Wall Street Journal, June 26, 2021, https://www.wsj.com/articles/u-s-housing-market-booms-but-small-contractors-miss-out-11624699809
U.S. Small Business Administration Office of Advocacy, "2020 Small Business Profile," https://cdn.advocacy.sba.gov/wp-content/uploads/2020/06/04144224/2020-Small-Business-Economic-Profile-US.pdf
Vanessa Yurkevich, "America Desperately Needs 1 Million More Construction Workers," CNN, July 11, 2021, https://www.cnn.com/2021/07/08/economy/construction-worker-shortage/index.html