Reject Exclusivity and Why.
In the world of mega-projects, it has become relatively standard for project owners to insist on the establishment of a Project Labour Agreement. There are two significant motives for doing so. First, owners want to have their projects protected from potential labour disruptions. Large construction projects typically take several years to complete and may span more than one round of provincial collective bargaining for the Building Trade Unions. Every time any union negotiates there is at least some risk of a strike disruption. The second motive to have a Project Labour Agreement (PLA) is to establish some degree of cost certainty. This risk is particularly important in a market where wages and other remuneration may be somewhat volatile.
Not to be contrarians but these motives to establish a PLA are unfortunately misplaced and result in solutions that do not address the real issues. Moreover, establishing a Project Labour Agreement may, as a means of mitigating against some risks, actually increase other risks which will have a distinct and profound impact on the project. However, project owners often receive advice from people who have a vested interest in establishing PLAs that provide exclusivity for a segment of the construction labour market in exchange for a piece of paper that claims to protect the project owner.
The issue we want to raise here is the need for project owners (and the people who manage these projects on the owners’ behalf (e.g. EPCM[1]) to establish an independent review of the labour market prior to making any commitments, such as a PLA, in order to assess the various alternatives that may be available to actually protect the project from the adverse effects of the market. Recently we were asked by some contractors who were non-union to suggest how they could provide a value proposition to project owners to address the perceived needs (protection against strikes and some degree of cost certainty). In looking for an answer we realized the problem is that owners are not understanding the real risks they are facing and therefore are seeking solutions to problems that should not be their main concerns.
First, looking at the risk of work stoppages we have to recognize that this is somewhat ironic. The people who would conduct a strike (i.e. unions), approach the project owner and offer up a solution to mitigate against that threat. Call that what you will but recognize that strikes only occur in about 1-2% of contract renewals and tend to be short-lived and it is up to the union to decide to strike. Despite media reports of a lot of strike activity in 2023 the facts remain that strikes are not increasing in frequency and remain a relatively low probability occurrence. Granted the impact is severe when a strike occurs and it would cause a delay in the completion of a large capital project, but this is not anywhere close to a project’s most significant labour related risk.
This contrasts with the probability of strikes from alternative sources of labour. Let’s face it, non-union contractors have zero percent chance of having a strike. Similarly, the incidence of strikes amongst some alternative unions is far less than that experienced by the traditional Building Trade Unions. We have no evidence of strike activities amongst alternative unions in the construction sector in the last few decades.
The key point here is that the threat of a strike while real should not be the project owners main concern. On the other hand. who wouldn’t want assurances of cost certainty if they could get them. However, in a tight labour market where there is increased competition for labour, cost certainty cannot be guaranteed by any piece of paper. If wages and other remuneration are locked in under a PLA and demand continues at the pace we have experienced lately, then that part of the PLA will have to be opened up. Otherwise the project risks not having a competitive offering and losing people to other projects. On the flip side we have seen long-term PLAs result in cost inflations that have over-priced projects well above the prevailing market costs precisely because they locked in premiums that became unnecessary when labour demand abated. PLAs are not as effective at creating cost certainty as some observers would maintain.
More importantly we suggest the real labour risks associated with mega-projects in Canada are related to supply and productivity. Productivity risks are high in Canada because of an industry failure to invest in capital improvements and advanced processes in the construction industry.
Practices that favour one labour model (the BTU) over others can create monopolies in market niches. For example, there are many people involved in mega-projects who firmly believe that only BTU contractors can effectively do mechanical work. To the extent that this belief governs contracting decisions it leads to the development of a degree of exclusivity that can and does breed subpar productivity in that market segment.
Productivity is a function of capital investment but requires that investment to be focused on practices that contribute to a more competitive marketplace not a less competitive one. The overuse of PLAs that restrict large projects to BTU contractors contributes to shielding those contractors from competition and allows them to maintain approaches that may be outdated and outmoded. Moreover, some collective agreements may also impose restrictive clauses that impair productivity. In particular some work rules with respect to apprentice-journeyperson ratios, and others related to trade jurisdictions have been shown to have profound dampening effects on productivity. In the assessment of labour related risks these key issues are largely ignored. This is another reason why the project owner must be careful in selecting advisors and ensuring the people helping them assess the risk do not have a vested interest in the outcomes.
Productivity is influenced both by capital, which is not of course a part of a PLA restriction, and by certain collective agreement restrictions. On the investment side, PLAs and the resultant project cost impact is restricting the flow of investment capital into industry. This investment is essential to improved productivity and to keep pace with international standards. With respect to the collective agreement productivity restrictions, the BTU collective agreements themselves have terms and conditions which restrict productivity such as limits on use of apprentices, reduced shift flexibilities, inefficient trade jurisdiction practices etc. etc. While these productivity restrictions could be addressed in a PLA they seldom are tweaked and never removed.
There are other examples of systemic exclusivity. For example, in the Ontario power sector large projects are exclusively let to building trade contractors under the rules of the Electrical Power Sector Construction Association (EPSCA). Also, another example is work conducted on behalf of the City of Toronto (and other municipalities) must be let to BTU contractors under established bargaining relationships between the City and the Building Trade Unions. There are dozens of these institutional arrangements across Canada and they seem to be increasing. To make matters worse, last week we discussed how Investment Tax Credits which favour the use of contractors who were signatory to multi-employer labour agreements (BTUs), restricts access to some projects for contractors who were non-union or signatory to alternative single employer union contracts.
The point we are raising here is that there are sufficient restrictions such as these that provide for some monopoly control of important segments of the construction industry (e.g. ICI[2] sector, municipal infrastructure work, power sector work) that stifle competition and ultimately impair investment in technologies and other changes that are needed to improve productivity. For those capitalists amongst us we need a market that has open competition as this promotes better practices and helps encourage investments geared towards improving productivity.
To quantify the impact, in our estimation there is a strong possibility that under an exclusive PLA arrangement a project owner will assume an opportunity cost equivalent to about 25% because of productivity lags. This is poignantly reflected in poor bottom-line performance (recognizing that about 85% of mega-projects go well above budget) and experience equally significant issues meeting the expected schedule. Under these types of exclusive contracting arrangements it can also result in catastrophic losses in the event of unforeseen events (e.g. weather conditions). In general, recovery activities after delays or events under exclusive PLA arrangements tend to be very costly.
The other risk that needs to be properly assessed is labour supply. When one labour model is favoured over another the project owner is cutting off access to a large portion of the labour supply. Across Canada the construction market is made up of contractors aligned with the BTU (15%), non-union contractors (80%) and alternative unions (5%). Despite the fact that there are avenues for workers to move across labour models this does not happen with a lot of frequency or fluidity. Some unions make it very clear that members of other labour organizations are not welcome. It seems logical therefore to maintain an open approach to ensure one has access to as large a pool of labour as possible.
The other restriction project owners impose on contractors is the insistence that work be performed by qualified journeypersons. While we see some opening up of work to apprentices, the efforts so far are not nearly enough to fix the long-term problem. By focusing only on getting apprentices trained up to journeyperson level we may simply be adding to the overall issue. If we expand our thoughts we know that there is a huge amount of work to be performed, which is necessary to the completion of the project, and can be done by semi-skilled or unskilled workers. We need contractors, engineers and project owners to think outside the box regarding how work can get done by people who are not necessarily fully qualified tradespeople or are not in the certification trades stream at all! This requires not only contracting with contractors who have the flexibility to staff and do the work in this way, but also may require the engineering to be differently designed and therefore constructed.
As an aside, construction methods like modular construction, palletizing equipment and other de-risking strategies have met with resistance by some unions who see these methods as threats to their jurisdiction. It is this kind of resistance that opens up another degree of risk that often has to be addressed in a PLA in the form of a covenant not to oppose certain construction methods. This is hardly the type of thing that engenders trust in the minds of project owners who are looking to hire contractors and workers interested in participating in a successful project rather than being interested in protecting the old ways.
While we have covered a lot of these risks under other articles, the specific points we want to raise here are two-fold:
1. If we are collectively going to solve the issues faced in our construction industry we need to educate project owners on their options and gain their support for a more open and competitive model.
2. Secondly, at Oakbridges we believe that a market where workers who are members of the traditional trade unions can work along-side of workers who are members of alternative unions and work along-side workers who choose not to be represented by a union.
These are signs of a healthy market. We need systems that encourage all players to be able to compete evenly with each other. We need to shun any form of exclusivity or favouritism which only serves to hurt us all.
[1] EPCM is the acronym for Engineering, Procurement and Construction Management. These are firms, typically very large, often international, that offer all of these services and can manage a large construction project on behalf of an owner that does not have the experience nor staff to manage a large construction project.
[2] ICI is acronym for Industrial, Commercial and Institutional sector.