Sorry kid, Construction is a Cyclical Industry
How many times have we heard it – the cycles of the construction industry. Yada, yada, yada. Cyclical this, cyclical that. I’m sorry you’re getting laid off, but construction is just a cyclical business son. There probably is some truth to this statement. The unemployment rate in construction goes up and down like Sarah Palin’s popularity. From the limited information that I have gathered, our unemployment rate has gone from roughly 8% in 2006 to 21% in 2009 – and that is one wild ride.
Of course there are probably some reasons for this like seasonality and a high amount of temporary labor, but this still has to be one of, if not the most cyclical industry out there. And if you account for the size of the construction industry I bet it takes the prize for the most number of people laid off and hired in any one industry. So why is this? Well, I don’t know for sure, but I’m sure it has something to do with the fact that construction is of course tied to supply and demand of real estate property. When supply of commercial real estate is high, you sure as heck won’t see office buildings going up. Even residential demand, as we’ve seen lately can hit bottom very quickly.
But I’m really not too interested in delving into the theoretical side of construction economics (Constructonomics!). Rather, I’d like to direct some attention to construction organizations and why they tend to not account for this inevitable drop in demand for construction. They can’t use the cyclical excuse (even though they do) because it only takes about five years working in this business to realize its nature. The reason is simply this: they just don’t care.
Why would they not go after the most profitable work if they can just lay people off when it dries up, and then they run lean for a few years until it picks back up again. This is the most profitable strategy, however, it typically isn’t quite as profitable for the folks they can.
There is an architecture firm that I worked with who has offices in Philadelphia and Las Vegas. They do mostly high end commercial work like casinos and condo projects. They were at 200 people strong in late 2008 and now they are at 50. That’s a 75% drop! I can’t believe a company like this wouldn’t diversify into other, less cyclical markets like public works or low income housing. Construction already has more peaks and valleys than a trek through the Himalayas and if you look at just casinos and condos you might as well be riding the Free Fall at Six Flags.
My point is that there has to be some incentive for companies to take less risk when it comes to their choice of market segments. Some measly increase in unemployment premiums just doesn’t cut it. Perhaps we could institute a tax for excessive hiring and firing, which is on a graduated scale based on how much profit is made.
Maybe I’ll have Sarah Palin work on that one for me.
Another very obvious factor for this is the weather. The number of workers on any construction project that occurs outdoors will decrease in those parts of the country when the ground freezes. Have you ever tried to build a road in Chicago when the the temperature is -15F and the ground is frozen? It is hard enough to build a building under those freezing conditions, but both nature and the government prevents you from building a road, sidewalks, parking lots, and other physical features. That is a significant percentage of the workers who are layed off in cyclical nature of construction.
I don’t know of any sub-business that a pavement contractor can enter to minimize those ups and downs. Luckily, in the upper Midwest, the workers, both laborers and management, understand this phenomenon and account for it as well as they can. Unions have grown up to protect the workers as much as possible, good companies keep real good employees, whether labor or management, as long as possible, and they accept the fact that they can go to Florida in the winter.
You know, Sarah Palin and her rureaucracy really has to deal with that one!
I have got problems viewing your site layout through the latest release of Opera. It looks ok in IE7 and Firefox however.
All businesses go through cycles and adapt their staffs to it as needed. I once worked in a greenhouse and our staff flucuated 500%. There was no option to keep the extra people when the planting was done. Likewise a friend has a construction company who specializes in public projects and he may need 20 electricians today but next week he needs carpenters or drywall hangers. It is inefficient to have everyone trained for everything so he deals with construction unions and can hire who he needs when he needs them and then lay them off. The project is done on time and he keeps the best project mangers, estimators and generalists emplyed most of the time.
Wow – really interesting topic. I will blog about it too.