In a bid to keep their businesses afloat, large suburban homebuilders have shrunk the size of the houses they’re building and limited the number of custom options.
Their penny-pinching now extends to a budget line item that was previously taboo to tinker with in the Chicago market — labor costs.
The largest publicly held builders, such as PulteGroup Inc., K. Hovnanian Companies LLC’s Town & Country Homes and D.R. Horton Inc.’s Cambridge Homes, are putting aside longstanding relationships with union contractors and asking nonunion shops to bid on projects this spring. If they direct more work to the so-called merit shops, it could forever change the construction labor market dynamic in metropolitan Chicago, considered along with St. Louis to be one of the last bastions of union construction might.
“This is where Chicago is going in the residential suburban market,” said Ron Martin, Chicago-area president of Columbus, Ohio-based M/I Homes Inc., which already has a 50-50 split between union and nonunion crews, and he expects the balance to shift more to merit shops. “The companies that try to hold onto the union are likely to go commercial, break union rules or be out of business.”
Smaller, privately held builders have long relied on merit shops to keep costs down and maintain profit margins. Meanwhile the largest companies, which completed as many as 1,000 homes annually five years ago, stuck with union shops that could provide a quality work force able to work en masse on a subdivision. Maintaining that relationship meant paying higher wages and dealing with far more constrictive work rules than those at merit shops.
With homebuilding anemic, though, the conditions that required those relationships no longer apply and builders, who expect to at most complete only a few hundred homes locally this year on land they paid dearly for during headier days, need to build them cheaper.
Local housing consultant Lance Ramella, principal at RW Real Estate Advisors in Oak Brook, views a paradigm shift as inevitable. “The reward far outweighs the risk. Right now everybody’s hungry and everybody wants to work.”
Companies say their intent isn’t to get rid of unions. Rather, the focus is to get quality work at the lowest price. Most companies predict they can slash the cost of building a home by as much as 20 percent by shifting work to merit shops.
But that’s not how the unions see it. “Everybody’s always calling it a merit shop,” said John Spiros, business agent for Painters District Council 14, which represents 13 local unions. “Sometimes you can change the work rules, but if you change anything significantly you have to open the whole contract and that would take the vote of the whole membership.”
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Homebuilders’ increased interest in merit shops was one topic talked about at a union meeting Spiros attended a month ago. Union leaders asked those present if the current contract, which runs until 2012, should be reopened. “Overwhelmingly, half my union hall, and a lot of them were out of work, said, ‘Don’t open the contract,'” Spiros said.
Despite a longstanding perception that union work is higher quality, builders say that’s no longer the case, particularly as some union tradespeople have secured jobs at nonunion companies.
Bill Haidl, owner of Edge Construction, a merit-based carpentry subcontractor in Bartlett, gets four to six applications a day from union carpenters, and general contractors have asked him to bid on projects.
“There’s a little bit of ‘that’s the way it’s always been, that’s the way it’s going to be.’ But the mold has a crack in it. The tides are completely turning for us,” Haidl said.
At job sites, the arrival of merit shops elicits mixed reaction. Most builders who use union and merit tradespeople establish separate entrances to projects and most of the time, there isn’t a problem.
“We work next to union guys and we don’t have a problem,” said Steve Rice, president of Southwest Painting & Decorating Inc., a nonunion employer in Oak Lawn. “Most of the time, these guys are just happy to be working.”
In front of the subdivision, however, it’s sometimes less friendly. In recent weeks, several firms have encountered union members staging information pickets on weekends, when most consumers come to look for houses.
Last weekend, Ryland Homes began handing potential homebuyers at some of its communities a flier explaining the firm’s position. The company also has had to summon local police.
“Does it have some impact on our sales? It probably does,” said John Carroll, division president of Calabasas, Calif.-based The Ryland Group. “But we’re now providing information to our customers.”
Ryland was one of the first larger companies to bring in nonunion workers, in early 2009, and a year later 60 percent of its work is nonunion.
“This is an evolution of the housing market and the housing labor market in Chicago, which for a long time has been unlike the rest of the country because there was a high level of cooperation between the unions and the builders,” Carroll said. “We excluded the merit shop contractors in the past because they didn’t have the manpower, and for the savings it wasn’t worth the malarkey of dealing with the union. Now it is.”
Bloomfield Hills, Mich.-based PulteGroup, which builds homes under Pulte, Centex and Del Webb brands, plans to decide within the next 30 to 45 days whether it will work with merit shops. The company is mulling whether the extra effort required, which includes dealing with potential union ire, is worth the cost-saving benefit.
One number that’s top of mind: Framing a house costs $3,000 to $5,000 less if it’s done by nonunion labor.
“We haven’t officially done anything but we understand that a lot of our competitors have made the change, and we’ve heard of the cost savings they’re achieving without affecting the quality of the home,” said Steve Atchison, PulteGroup’s Illinois/Michigan president. “You have to stay on par with anyone else.”
Ryan Building Group’s William Ryan Homes, considered the competitor to emulate, already is largely nonunion on all parts of its home construction.
Last week, union members twice picketed one of the Schaumburg-based company’s projects in Elgin, and occasionally picketers bring a large inflatable, teeth-baring rat. It no longer fazes division President Kevin Davis, who has seen his home-building costs drop from $70 a square foot during the height of the building boom to almost $40 a square foot.
“When they picket us, our traffic picks up,” Davis said. “The unions are allowed to use banners, and that draws attention to our project.”