Project Labor Agreement Basics: PLAs Increase the Cost of Construction
If you read the last post, you have learned how PLAs discourage competition from merit shop contractors.
Fact: PLAs effectively eliminate merit shop contractors and their employees from working on PLA construction projects.
So how does this fact impact construction owners and taxpayers?
Academic studies overwhelmingly show that union-only PLAs increase construction costs between 10 percent and 20 percent when compared to similar non-PLA projects.
A May 2006 study by the Beacon Hill Institute (BHI) at Suffolk University in Boston, Massachusetts, found that the use of PLAs on school construction projects in New York increases construction costs.
Project Labor Agreements and Public Construction Costs in New York State concluded the following key findings:
Based on data on construction costs and related variables for school projects in New York since 1996, we find the following:
- PLA projects have higher bid costs; again, we are more than 97% confident of this finding, based on the available data.
- The finding that PLA projects have higher construction costs is robust, in that:
- The effect persists even when the data are subdivided, so that the effect is evident separately for large projects, mid-size projects, small projects and elementary schools.
- A regression that weights observations by project size also shows the effect.
- PLA projects add an estimated $27 per square foot to the actual cost of construction (in 2004 prices), representing an almost 18% increase in costs over the average non-PLA project.
In sum, the evidence that PLAs have increased the cost of school construction in New York since 1996 is strong. The effect is also substantial; our estimates find that PLAs increase project bid costs by 20%
These findings support a fundamental premise of economics that is at the heart of the PLA debate: fewer firms competing for a contract results in higher costs. This is especially true when 84.4 percent of the construction workforce – and their employers – are eliminated or discouraged from projects subject to a PLA.
In addition, inefficient and costly union work rules add to labor costs, although academic research has been somewhat limited in this field and unable to generate a reliable figure that can be applied to construction projects.
If the New York study is not enough evidence to support the conclusion that PLAs increase the cost of construction, BHI completed a similar study of Connecticut schools (2004) that found that PLAs raise the cost of building schools by an average of almost 18 percent. A September 2003 BHI study of Massachusetts school construction concluded that bid prices on projects with a government-mandated PLA were on average 14 percent higher than bid prices on non-PLA projects. In addition, the average actual cost of construction was 12 percent higher for projects executed with a PLA.
Fact: PLAs increase the cost of construction when compared to non-PLA projects
So let’s answer the original question. How do PLAs impact construction owners and taxpayers?
PLAs increase the cost of construction between 10 percent and 20 percent. That means a construction owner has to either cut 10 percent to 20 percent of a project’s budget to build the exact same product (absent a PLA) or find additional money to cover the increase in costs.
If you are a taxpayer in a school district that is spending taxpayer dollars on schools subject to PLAs, that means you are getting roughly four schools for the price of five.
As a taxpayer, that may mean cuts in critical education spending, scaled back construction and/or increased taxes.
If you are a taxpayer in a community utilizing PLAs, Sometimes The Truth About PLAs hurts.