In the post-COVID world of construction, industry analysts and participants have focused considerable attention on material price escalation concerns and impacts caused by raw material shortages, supply chain issues, and disruptions in the market (including volatility resulting from tariffs). But labor shortages also continue to grip the industry and warrant heightened attention from project owners and contractors alike, particularly given the threats posed to schedules and budgets on so-called “mega-projects.” Such shortages jeopardize the orderly flow and efficient prosecution of work, not to mention the paramount need for timely completion and utilization of the project.
Labor shortages pose potentially significant impacts to large infrastructure projects and mega-projects, particularly those in the energy and technology sectors (like large-scale nuclear and renewable energy projects and hyperscale data center developments where a premium is placed on scalability, on-time delivery, and budget spend). The dearth of labor has been attributed to an aging workforce and a general declining interest in construction, viewed by many as physically demanding, low-paying, and offering fewer career advancement opportunities than, say, working for the developer or end-user after completion of the project.
Large projects require a massive, dedicated stream of skilled workers, which places a strain on local labor markets, thus increasing competition between industries and between markets. Sectors like technology, energy, and manufacturing actively recruit skilled labor by offering higher compensation and improved benefit packages to workers. Limited availability of skilled workers, such as those with electrical and mechanical systems experience, expertise, and credentials, cause contractors to delay projects, pay higher wages, and potentially compromise the quality of the work, leading to increased costs, schedule delays, and the risk of claims. Adding to these possible impacts are increased safety risks and a higher likelihood of project site safety concerns and accidents, which also lead to delays, increased costs, and claims.
To address the labor shortages in their respective industry sub-sectors, general contractors and large trade subcontractors are implementing strategies to attract new workers by offering higher pay, more benefits, and better opportunities for advancement such as training, certification, and apprenticeship programs. Utilizing off-site construction methods, such as promoting efficiencies in the delivery of prefabricated, standardized project-specific equipment (“modularization”), can offset the strain caused by labor shortages. Leveraging technology – automation, robotics, construction management software, and Building Information Modeling (BIM) – can produce additional options to minimize labor requirements, reduce rework, and improve productivity.
To mitigate and manage the risks associated with project labor shortages, owners and contractors will (or should) consider risk-shifting language in their construction contracts. Contractors will seek to allocate labor shortage risk to owners by employing a number of possible contract provisions, some more creative than others, that owners would be wise to recognize in advance of contract negotiations. For example, contractors could argue that labor shortages could fall under the contract’s force majeure provision, which generally excuses a party from fulfilling its obligations because of unforeseen, uncontrollable events beyond the contractor’s control. These sorts of events, typified by natural disasters or acts of war, can make it impossible or impractical for the contractor to perform its contractual duties. But, from the owner’s perspective, natural disasters (earthquakes, floods, other natural catastrophes) and human-caused events (war, terrorism, government actions, pandemics, labor strikes) may only contribute to labor shortages. Project-specific requirements for labor across various disciplines of the work should be reasonably anticipated and estimated in preparing the contractor’s bid for the work. After all, the contractor should be in the best position to understand – and seek bids from – the trade subcontractor markets.
Contractors may also argue that unexpected labor shortages in the market (e.g., caused by unknown projects in the region competing for the same labor resources) that increase costs could constitute a basis to pull monies from the project contingency fund (if one exists), perhaps specifying that labor shortages and labor cost increases are within the scope of the contingency clause, designating a specific amount within the project budget to cover unexpected increases like labor shortages and wage increases, and outlining the approval process for and clearly defining how the contingency funds will be accessed and approved. Or, alternatively, contractors could seek to characterize any increased costs due to labor shortages as a “cost of the work” reimbursable under a guaranteed maximum price (GMP) cost model.
A more overt contractor risk allocation could involve an express labor cost escalation clause, similar to the price escalation clauses that are increasingly being negotiated for larger projects. Such a clause may specify events that trigger the clause (labor shortages or wage increases beyond a defined threshold), outline how cost adjustments will be calculated (using published indices or cost-based adjustments with detailed back-up), include a cap on the total amount of the price increase the owner will absorb, and possibly contemplate a de-escalation component that benefits the owner (if labor costs decrease beyond the defined threshold).
Of course, the project owner will desire its own risk mitigation measures in consideration of labor shortages, to ensure minimal disruption to the prosecution of the work and optimal chances of success to achieve project completion without unnecessary delay or cost impact. Collateral security in the form of performance bonds could be considered, but in the event of default termination of the original contractor based on its failure to perform, the surety’s designated completion contractor could face the same labor shortages, causing further delays and disputes.
An owner could include in its bid documents and agreement with the contractor an express acknowledgment and representation by the contractor that it has become familiar with the labor market conditions and utilized this information in preparing its bid (including both schedule and budget). A “labor market conditions acknowledgment” in the contract could also include language that the contractor considered local and regional conditions, the availability of workers in union shops nationally, and competing projects in assessing the required labor needs to ensure project completion without delay and budget impacts.
Labor shortages may be overshadowed by material shortage issues now, but they, too, can disrupt and derail a project. By carefully drafting and negotiating construction contracts, owners and contractors can effectively mitigate the risks associated with labor shortages and protect their financial interests. Parties should consult with legal counsel to ensure that mitigation and risk allocation clauses are properly drafted and tailored to their specific project needs.
Originally posted in the Oregon Daily Journal of Commerce on June 20, 2025
