TOKYO (Nikkei)–After a prolonged downturn in public works spending brought on by a weak economy and political scandals, contractors in Japan’s northeastern Tohoku region are swamped with work as efforts to rebuild the area devastated by last year’s earthquake pick up steam.
But they are still struggling to turn a profit in the face of steeply rising labor costs. To ensure that construction companies earn an adequate return on reconstruction projects and can drive the region’s economic recovery, the government must stay on top of the rapidly changing situation.
One contractor in Sendai, for example, took a 20 million yen loss on a single project, largely because a manpower shortage forced it to hire workers from far away.
According to the owner of one company operating on the coast of Miyagi Prefecture, wages for construction workers engaged in reconstruction projects are 50% higher than before the quake struck last March 11. Many local workers lost their homes, forcing the owner to hire people from areas such as Hokkaido and Kansai at a cost of 35,000 yen a day, sometimes paying more than double the pre-quake rate.
The spike in labor costs is partly due to the large number of workers hired by local governments at premium wages to remove the mountain of rubble left behind by the quake and tsunami. “Municipalities and construction companies set the daily wage of some debris removal jobs at 12,000 yen”, said an official at one local construction company. In contrast, people hired by Miyagi Prefecture to direct traffic made 7,200-7,900 yen a day in April 2011. The wage differential resulted in a flood of people taking jobs in debris removal, which pushed up labor costs in other sectors as well.
Whereas Tohoku’s construction industry was in the doldrums last April, with the shortage of construction workers at -3.9%, which was reversed to +2.5% in January 2012, showing the lack of manpower. “More and more firms are reporting losses” due to surging labor costs, said Hirotoshi Sato, president of the Tohoku General Construction Association.
The focus of reconstruction is expected to shift more skilled work in the future. That will further push up labor costs and may shift the balance of power between contractors and subcontractors.
The owner of a roofing company in Minamisanriku, Miyagi Prefecture, confirmed the trend. “Now I have my pick of jobs,” he said. Before the earthquake, half his orders came through lead contractors. Now he negotiates directly for most of his work.
The roofing company has monthly orders of about 4 million yen now, compared with 1.5 million yen before the disaster. And each project is more profitable as the company no longer has to pay an agent to line up jobs. The owner believes he will be able to speed up repayments on a five-year loan he took out last June for new equipment.
Cost bloom in May
According to an official at the Miyagi General Construction Association, people in the industry in Tohoku increasingly expect a further rise in costs in early May after the Golden Week holidays because big projects requiring large amounts of raw materials such as concrete and reinforcing steel will be getting under way by then.
The high cost of labor and materials has kept contractors from bidding on restoration projects. In Miyagi Prefecture, as many as 40% of construction contracts had no winning bidders for a while. That brought complaints from the Infrastructure Ministry at the end of last year, which said it was having trouble keeping up to date on labor costs in the quake zone. One ministry official quoted a monthly survey by the Labor Ministry purporting to show that labor costs had fallen in Tohoku from September through December, compared with the previous year. Obviously, his information was out of date, at least as far as the construction industry was concerned.
In February the Land Ministry finally reviewed the budget for some projects, which were then canceled because labor costs were deemed too high. But considering that the previous review had taken place in April 2011, many in the construction industry felt the latest review was tardy as they had been struggling to meet their payrolls following the quake.
The ministry official also acknowledged that the wages of traffic controllers, which were recently raised by up to 11%, were still lower than that of debris-removal workers, some of whom had themselves been victims of the disaster and needed financial support.
The Ministry hopes to set up a system that will enable firms from outside the area to form joint ventures with local firms, and to include inflation indexing provisions into construction contracts to help firms defray the surging cost of labor and materials.
Both the national and municipal governments must act quickly to make sure Tohoku’s reconstruction stays on track.