How Do Building Service Contractors Deal With Rising Labor Rates?

Introduction

Cities and states are moving forward with double digit percentage minimum wage increases. By January of 2022 the State of California minimum wage rate will be $15.00 for companies with more than 25 employees and for all companies by 2023. After the state minimum wage reaches $15.00 an hour for all employees, the rate will be adjusted annually for inflation based on the national consumer price index for urban wage earners and clerical workers (CPI-W).  However, the minimum wage cannot be lowered, even if there is a negative CPI, and the highest raise allowed in any one year is 3.5 percent. Also, the Governor will no longer be able to delay a scheduled increase, and the first adjusted increases may be accelerated if the adjusted CPI-W exceeds seven percent in that first year.

Most counties and cities throughout the Golden State will reach this milestone by January 2019. Throughout history, double digit increases of the CPI-W are not unusual. However, in the Building Service Contractor industry, responsible employers are needing to constantly justify to their client base the need for double digit increases in service fees. The Building Services industry generally pays its employees well above the “Minimum Wage.” Building Service Company owners, those who I call “Responsible Employers,” provide: Fair wages, medical benefits, holiday pay, PTO, and reasonable job requirements. Field supervisors, customer service managers, operations managers and a general administrative team are the ones supporting the baseline employees. Pay rate increases which are well deserved, added to the increase costs in health care, business insurances, and general overhead burdens are stretching clients’ maintenance budgets beyond expectations. How do we justify this reality to our clients?

Great Economy – Double Edged Sword

Generally labor rate increases have nothing to do with a good or a bad economy.  In an economic downturn, business slows and baseline or minimally skilled labor becomes more available. New employees can be onboarded at the minimum wage, trained into the industry and given opportunities to build a career path within the company. In a great economy, business demand is up,  baseline employees are snapped up and trained into the higher skilled trades like construction, road work and roofing as apprentices or high end labor assistants. Most times the offered pay rates in the skilled trades are double digit increases from their current position. The Building Service Contractor is left looking to bring on minimally skilled labor.

Irresponsible Employer – Illegal Sub-Contractors

I would like to address the proverbial elephant in the room. Illegal subcontractors have notoriously clouded our industry. The formula is simple. A Building Service Contractor acquires a contract for, let’s say -  $1,000.00 per month. He offers a job to an individual for $700.00 a month, which results in a 30% profit month in and month out. Here is the problem: generally the client is unaware of the situation but does like the bill rate. Many times the “subcontractor” is not a true subcontractor. Wage rate increases are more often than not addressed in these relationships and irresponsible employers cherry pick a client base eager to keep expenses to a minimum. This article is not to debate the issue, but rather to point out situations that come up in the highly competitive industry of Building Service Contracting. Here is a list of frequently asked questions about subcontractors: https://www.irs.gov/pub/irs-regs/subcontractorsfaq&a.prn.pdf.

The Client

Building Service Contractors hope to compete on a level playing field. Most times this is the case. Responsible employers stand the test of time and in our situation of being in business for 25 years, we share the market with a great number of competitors that have also taken the high road in the industry and keep the reputation of worthy adversaries. Many of us are friends and have occasion to get together and discuss our industry. Sometimes it's nice to know that we share many of the same concerns. It seems if we keep to a 2-3% annual increase we have no problem renewing our contracts. However, as is evidenced by the rising annual double digit labor rate increases, CPI based contract renewals leave Building Service Contractors looking for ways to keep contracts while also making a profit.

Outside The Box Thinking  

IMG_6843.JPG

There are many ways Building Service Contractors make operational budgets work. Some include: increasing work space requirements, adding innovative equipment, switching senior labor to newly hired labor, and the responsible use of sub-contractors. One thing is clear, services are not going to get any cheaper so long as performance behavior is static. Interestingly enough, a simple answer to save clients money is to reduce a client to fewer days of service. A five day per week client would automatically save 20% per month eliminating one day of service. Since labor is the largest expense to a contract, both client and contractor can become innovative. Reducing tasks, such as vacuuming, to once a week can reduce labor. Having a central collection point for garbage and encouraging client employees to walk their small trash can to that location  would certainly save labor and consequently lower expenses. Dusting and detail cleaning can be put into rotating cycles. Quality Building Service Contractors must be innovative.

Summary

In conclusion, I am confident our industry is strong as ever.  Dealing with increasing base labor rates is a challenge we will face for as long as cleaning is done by humans. The onus is on us to make our clients happy while providing great service at a reasonable contract price. Remember, if it were easy, everyone would do what we do and we wouldn't be needed.

Best,

J. Ernesto Moreno

(CEO/COO)