Wage hikes expected to have only minimum impact on construction project costs

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By Michael Lewis

Special to Ontario Construction News

Rising wages for unionized construction labour across Ontario in the wake of generous collective agreements probably won’t have a major effect on the price of housing and commercial real estate, industry experts suggest.

But the workers’ gain is likely to add to investor skittishness over additional inflation in construction costs which coupled with rate hikes and supply chain disruptions could threaten the provincial building industry’s robust growth.

“Any increases to the cost of construction, including any labour cost increases (irrespective of amount), combined with the increased prices of land, construction materials and equipment in combination mean that the return on investment of projects is negatively impacted, ” Alexandra Parliament, spokesperson for construction cost consultants the Canadian Institute of Quantity Surveyors said in an emailed statement.

She says supply chain challenges continue to hamper the planning, construction and operations phases of public and private sector projects including in the housing sector), “and this is leading to a rethink for projects that do not have a shovel in the ground and enhanced risk awareness on active construction projects. There remains a heightened sensitivity around increases to resource costs, irrespective of magnitude.”

Against a backdrop of steep post pandemic cost-of-living increases and a shortage of skilled construction labour – and amid mounting recession fears – approximately 30 building trades contracts expired as required by provincial legislation at the end of April.

After several work stoppages that saw more than 43,000 trades workers on strike province-wide at the peak of the disruptions in late May, the majority of those agreements have now been renewed. They feature an average total wage increase of between nine and 12 per cent over the terms of the deals, according to a preliminary estimate provided by Richard Lyall, president of the Residential Construction Council of Ontario (RESCON). That compares to an average gain of less than three per cent when the contacts were last renewed at a time when Canada’s annual CPI increase was within the central bank’s target range.

Katherine Jacobs, the Ontario Construction Secretariat’s director of research, said arriving at an average collective agreement monetary increase is a complicated calculation since gains are reported in formats including actual dollars and percentages. She said the OCS will reach a final calculation once all contracts have been settled.

Assuming a rough rule of thumb that assigns 50 per cent of construction costs to labour and assumes construction costs range from 35 per cent to 45 per cent of the total cost of building a new home, with land, government fees, taxes and other soft charges making up the rest, Justin Sherwood, a spokesperson for Canadian home builders association BILD said  labour would account for 17 per cent to 22.5 per cent of the price of a new home.

At 22.5 per cent, a 10 per cent total increase in the cost of labour over three years would add roughly $22,500 to the price of a million-dollar home in the GTA. “It’s not a deal breaker,” Lyall said, noting that interest rates have a far more significant impact on housing affordability.

The labour portion of the total cost of a project can also vary depending on factors including location, materials prices as well as whether it is public or private, residential, industrial or institutional.

Some critics argue that labour costs in any case are the sole reason construction projects’ actual completion costs exceed budget costs. They also cite research that shows construction costs and house prices moving in tandem for decades.

The view, though, may understate the influence of project efficiency, change orders, scheduling conflicts, contract language among other factors.

Moreover, said Maria Lily Shaw, economist with independent think tank the Montreal Economic Institute, the jump in union labour costs arrives amid a softening in prices for some commodities used in construction including lumber while hikes in interest rates by Canada’s central bank have cooled house buying and investment in new projects – although year over year price increases for housing remain elevated.

And while Statistics Canada’s examination of construction prices for the first quarter of 2022 shows an increase of 5.6 per cent in residential and a 2.6 per cent rise in non-residential costs, a combination of hikes in mortgage rates and softening demand for building materials could gradually depress the growth of those costs.

Already Statistics Canada’s New Investment in Building Construction data shows total ICI investment in Ontario flat in April compared to March at $1.38 billion – only a tenth of a per cent higher than the previous month.

ICI investment in Ontario between January and April, meanwhile, is down by 6.1 per cent compared to the same period in 2021, an analysis by the OCS points out.  It says commercial investment is 8.4 per cent lower compared to the January to April period last year, industrial investment has declined by 3.9 per cent and institutional investment is off by 0.8 per cent.

While increases in costs for labour can contribute to slowing investment, Shaw said they can also attract new workers to the field and help ease labour shortages that in turn contribute to lower prices for housing. A concern for union leaders, though is that rising unionized labour costs will ultimately drive more investment to non-unionized construction projects, where wages are typically lower.

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