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Though construction firms can be generally defined as entities in pursuit of profit maximization via the production or maintenance of fixed capital there are enormous differences between firms that, taken together, reveal a messy diversity and speciation within the industry. The Bureau of Labor Statistics reports that 858,202 construction establishments were active in 2020 nationally; according to the New York State Department of Labor, 15,370 of these were active within New York City, meaning only ~2% of all active construction firms nationally were active in the city. The June 2021 NYS Comptroller report on the construction industry reveals that, of these 15,370 firms, the majority are quite small, with the vast majority having below 20 employees.
This is, however, a misleading total. As I’ve mentioned previously, construction employment is a bit of an ambiguous concept. A firm of below 20 employees generally refers to the number of full-time office employees, which occupy roles of construction management and administration. This says nothing about the amount of actual labor available to them on contract or showing up from union halls, what the BLS broadly identifies as “47-2061 Construction Laborers”, meaning they are involved in the direct production of a structure in the construction process. There were 49,090 persons employed in the Construction Laborer category as of May 2021, compared to 24,020 identified as 47-1011 Front-Line Supervisors.
This is all to say that a firm may be 5 people in an office, but employ 50 or so construction laborers directly and many more through subcontractors for a particular job. On the other end of things, in the 500 or more employees category, are the design-build full service firms which in NYC are AECOM Tishman or Turner. To these firms go the large public projects such as dockwork, heavy highway, and skyscraper construction, for the most part, though other firms of a smaller size can and do compete for these massive contracts. Viewed through the lens of real competition, this creates a curious sectoral battlefield, where the larger, more heavily capitalized firms do not necessarily enjoy the same economy of scale benefits their cousins in manufacturing might and are instead greatly dependent on winning enormous contracts to sustain their operations, leaving their position open in the event of a downturn. On the other hand, a smaller firm is able to “go dormant” if a project loss occurs, shedding laborers and consolidating on core office employees.
This firm size data also tells us something about sectoral entry and exit. To put it succinctly, entry is incredibly easy, with licensing and bonding being the only real hurdles to me personally going out and incorporating myself as a firm. For example, obtaining a Home Improvement Contractor License in the city requires a few hundred dollars for fees, surety bond insurance, and worker’s compensation insurance, along with a few other licenses for waste hauling and EPA certification. It is, all told, primarily a bureaucratic hurdle. As for exit, construction firms are uniquely positioned to weather economic hardship if they confirm to the sectoral regulating principle of minimal overhead costs and employee numbers, meaning they do not have to undergo the cyclical hirings and firings that plague other sectors in the event of profit loss. This survivalist feature can be attested by the fact that even while construction employment declined by 14.4% in 2020, the number of firms with fewer than five employees actually rose over the same period.
There is an additional benefit for small firms in New York City. Given the median age of a building in the city is 90 years, there is a wealth of opportunities to engage in maintenance work, where the already vanishingly small fixed capital investment requirements for construction entry (in an age where most equipment is rented) fall even further. Keep this in mind even when seeing bombastic figures (like those in this REBNY report) which tout the explosion of new construction filings. The lopsided state of the industry bears out with a look at NYC total permit issuances from the state comptroller:
Alterations may include facade work (tuckpointing and the like), interior renovations, or any number of other things. The categories on the map above (minor, significant, major) are also important – only the “Major Alteration” category refers to thorough construction work (defined as a change in use, egress, or occupancy for the building or unit). Specialization in alteration projects also carries with it another strategy for economic weathering behavior: since many of these are small in scale and contracted with an owner-occupier on a direct basis (that is, without subs), there is a greater leniency in project schedule and the balance of power may rest even more so with the contractor in the event of a need to shed construction labor. A default on a project or failure to complete (or complete sufficiently) in this arena more often means a settlement in small claims court than a drawn out fistfight over project surety like that which arises with new builds.
What this means overall, then, if we want to tie this back to the insipid mewling of positions which claim that construction and developers should be freed to “build more” at all costs, is that were this to come to pass (via a huge subsidy one-shot like the expansion of 421-a or something), this would likely be answered foremost by a sudden recomposition of the makeup of the construction sector as investment would likely begin to flow more steadily to firms capitalized for new building construction and, likewise, firms currently engaged predominantly in alterations would attempt to rush into new construction to extract their share of profits from a burgeoning sphere of new investment. The simple fact of the matter (as should be obvious) is that firms are not by any means adversely affected by the current state of the market; if anything, dramatic modification of expected outcomes could see a dramatic crash in firm number even if construction employment expands. Not like I particularly care about those firms crashing, but since plenty of people seem to be hellbent on making it their life’s work to go to bat for the small-time contractor or developer, maybe this will give pause.
Anyway. Have a nice Sunday.