The Beacon Hill Institute has completed a groundbreaking study of the effects of Project Labor Agreements (PLAs) on the costs of school construction projects. In our analysis of 54 school construction projects undertaken in the Greater Boston area since 1995, we find that costs are substantially higher when a school construction project is executed under a PLA. After adjusting the data for inflation, using an index that includes the trend in both construction wages and in materials costs, and after controlling both for the size of projects and for whether they involve new construction or renovations, we find that the presence of a PLA increases project costs by $37.88 per square foot (in 2001 prices) relative to non-PLA projects.
This price differential represents 22.1% of the cost ($171 per square foot) of the average PLA project and amounts to an average of more than $5.0 million out of the $22.7 million cost per school. To illustrate: Malden could have saved $5.3 million on the Beebe School, Wilmington could have saved over $5.7 million on its new middle school, and Milton could have saved almost $6.6 million on its new high school had those projects not been bid under PLAs. Our findings show that the potential savings from not entering a PLA on a school construction project range from $1.9 million for a 50,000-square-foot structure to $9.5 million for a 250,000-square-foot structure.
Massachusetts policymakers and taxpayers need to consider this substantial additional cost in determining whether a PLA agreement is best for school construction in their towns or school districts.
Project Labor Agreements (PLAs) discourage non-union contractors from bidding on state construction projects by requiring them to conform to union rules and hire through union halls. It is widely believed that construction projects are more expensive when a PLA is in effect. Until now, however, the evidence for this has been largely anecdotal. No one has, to our knowledge, attempted carefully to estimate the degree to which PLAs might increase project costs.
The current study breaks new ground in that it presents clear evidence on the differences in cost per square foot between PLA and non-PLA projects. This measure is based on a thorough study of the cost of school construction projects in the greater Boston area since 1995. We use our measure to estimate the cost savings that would have accrued to three Massachusetts communities had their recent school construction projects not involved PLAs.
II. Historical Background of PLAs
Project Labor Agreements are a form of “pre-hire” collective bargaining agreement between the construction clients (such as towns or school districts) and labor unions pertaining to a specific project, contract or work location, and are unique to the construction industry. The terms of PLAs generally recognize the participating unions as the sole bargaining representatives for the workers covered by the agreements, regardless of current union membership status of these workers. A PLA requires all workers to be hired through the union hall referral system. Non-union workers must join the signatory union of their respective craft and pay dues for the length of the project. The workers’ wages, pension contributions and working hours and the dispute resolution process and other work rules are also prescribed in the agreement. PLAs supersede all other collective bargaining agreements and prohibit strikes, slowdowns and lockouts for the duration of the project.1
Project Labor Agreements in the United States originated in the public works projects of the Great Depression, which included the Grand Coulee Dam in Washington State in 1938 and the Shasta Dam in California in 1940. PLAs have continued to be used for large construction projects since World War II, including the construction of Cape Canaveral in Florida, the current central artery project (the “Big Dig”) in Boston, and even private projects, such as the Alaskan pipeline and Disney World in Florida.
PLAs in the Balance
As PLAs have become more common in publicly financed construction projects, and as the number of non-union construction firms has grown, PLAs have become controversial. Opponents of PLAs argue:
- that the agreements raise the cost of undertaking projects, and
- that non-union or open-shop contractors are discouraged from bidding on jobs that have PLAs.
Opponents cite the PLA requirements that all employees must be hired in union halls, pay union dues, contribute to union-sponsored retirement plans, and follow union work rules. They argue that the use of a union hiring hall can force the contractors to hire union workers over their own work force. The contractors and their employees are required to pay union wages, dues and contributions into union benefit plans even if covered by their own plans. The work rules restrict the contractors from using their own more flexible operating rules and procedures. These restrictive conditions cause costs to rise for a project that requires a PLA. In passing, it is worth noting that whether or not a PLA is in effect, all contractors must adhere to any “prevailing wage” rules that may be in effect.
Furthermore, open-shop contractors contend that their competitive advantages are nullified by the PLA. The result is that in practice, if not in principle, they are unable to bid competitively on jobs that have a PLA requirement. In turn, the absence of open-shop bidders for PLA projects results in fewer bidders for the project, and with fewer bidders, the lowest bids come in higher than if open-shop contractors had participated. Therefore, the cost of the project will be higher, with fewer bidders attempting to under-bid each other for the contract. Some opponents also argue that requiring a PLA violates state competitive bidding laws that require a free and open bidding process. A number of critics even see PLAs as a form of extortion, with an implicit threat that if a town does not agree to a PLA, then there is more likely to be disruption at the workplace.
Proponents of PLAs claim that the agreements provide for work conditions that are harmonious, and that they guarantee wage costs for the life of the contract. They contend that the provisions that prohibit strikes, slowdowns and lockouts keep the project on time and prevent cost overruns due to delays. Furthermore, the wage stipulations allow firms accurately to estimate labor costs for the life of the project and thus have more accurate bids. Also, the union rules allow for a safer work environment, thereby reducing accidents and thus lowering the number of workman’s compensation claims. Workers’ union certifications ensure the quality of the work and save money by avoiding costly mistakes. Or so it is argued.
The controversy over the use of PLAs in public construction projects has become more intense since the late 1980’s. Open-shop (non-union) construction firms and industry organizations have challenged PLAs in the courts. As discussed below, the executive and legislative branches at the federal, state and local levels of government have at times taken positions in favor of the use of PLAs.
PLAs at the Federal Level
The executive branch of the federal government has been involved in the PLA debate for over a decade. The administration of George H. W. Bush issued an Executive Order in 1992 forbidding the use of PLAs on federally funded projects.2 The Clinton Administration rescinded that order in February 1993 and attempted to go further in 1997, when it planned to issue an executive order requiring all federal agencies to use PLAs on their construction projects. However, due to extensive lobbying, the President instead issued a memorandum encouraging the use of PLAs on contracts over $5 million for construction projects, including renovation and repair work, for federally owned facilities.3 President George W. Bush canceled the Clinton order on February 17, 2001 by issuing an executive order prohibiting PLAs on federally funded and assisted construction projects.4
PLAs in Massachusetts
In Massachusetts, PLAs appeared on the legislative agendas of local and state governmental bodies as efforts were made to require them on local construction projects. The city of Cambridge has enacted a local ordinance that has put in place many of the same requirements that are found in PLAs, for all public projects. The Massachusetts legislature inserted PLA requirements in authorizing construction projects in the cities of Taunton and Brockton, and passed them over a veto by the Governor. The legislature also attempted to require PLAs on a bond authorization for the rebuilding and repair of courthouses throughout the state. Under intense negotiation between the legislature and the Governor’s office, a bill was produced that mandated PLAs for funds allocated to courthouse construction projects in Boston, Worcester, and Fall River only. The legislation created a commission to recommend establishing circumstances in which PLAs should be used. The legislation instructed the commission to consider the “appropriateness and function and the size, complexity and duration of the public construction projects” when deciding whether or not to use PLAs.5
The litigation came to a head in a 1993 Supreme Court case involving the cleanup of the Boston Harbor. In 1988, a federal court directed the Massachusetts Water Resources Authority to clean up the pollution in Boston Harbor. The Authority’s project management firm, IFC Kaiser, negotiated a PLA with the local construction unions for the project. The precedent-setting aspect of this PLA was that its use was mandated in the project’s bid specifications.6 A non-union trade group filed a lawsuit contending that requiring the PLA as a part of the bid specification violated the National Labor Relations Act. The case was appealed to the United States Supreme Court, which, in 1993, upheld the use of the PLA for the project. The Supreme Court ruling opened the door for the use of PLAs in other public Massachusetts projects, including local school construction.
School Construction Financing in Massachusetts
The School Building Assistance Program in Massachusetts has aided public school construction for more than half a century. The program began in 1948 as a three-year effort to provide resources to local communities for the building of schools for the “Baby Boom” generation, with a 25% percent reimbursement rate for the local school districts.7
The program has since grown to represent a hefty burden on state finances. After several extensions, today “the school building assistance program is the largest capital grant program operated by the Commonwealth … and the costs of the school building assistance program are increasing at an unsustainable rate.”8 In 1999, the program offered, on average, a 69% reimbursement rate for the construction and financing costs of school projects. Over the period 1991-1999 the Commonwealth of Massachusetts made total contributions to the program of more than $1.7 billion.9
The financial commitment for the state rose consistently over the 1990s. In fiscal year 1999, the annual payment for school construction projects was $201 million, a 58% increase from the $127 million appropriated in 1991.10By FY2003 school construction appropriations had jumped to $362 million, a remarkable 80% increase over the FY1999 level.11 According to the School Building Assistance Program website, for fiscal year 2003, there were 283 construction projects on the Priority List, with 19 new projects receiving authorization. The rapid growth of the program has prompted increased attention to the issue. A report entitled Reconstructing the School Building Assistance Program Policy Report, published in 2000, predicted that by FY2002 “this program will achieve ‘budget buster’ status.”12 It is within this fiscal environment that school construction costs have become an important concern in the building of public schools in Massachusetts.
III. The Evidence on PLAs
Although there is substantial anecdotal evidence that PLAs raise construction costs, no studies have provided formal statistical evidence of such an effect. To compare PLA with non-PLA costs it would be necessary to compare construction projects of a similar nature – for instance road repairs – where some projects are done with a PLA in place, and others are not. Situations such as this are rare, and even when they occur, the relevant information is difficult to obtain.
We have, however, found one suitable “natural experiment” that allows us formally to compare the costs of PLA and non-PLA projects. Driven by an increase in the student population, and encouraged by financial support from the state, many of the roughly one hundred towns and cities in the greater Boston area have financed school construction over the past several years. Some towns had PLAs in effect during the construction bidding process while others did not. Using data on construction bid costs, adjusted for inflation with an appropriate construction cost index, we were able to measure the difference in cost per square foot of construction between schools where a PLA was in effect and schools where there was no such agreement. Before reporting the results, we first need to discuss the sources of the data that we used, and explain how we adjusted for construction costs over time.
Our primary source of data was F.W. Dodge, McGraw-Hill Construction Information Group, a division of the McGraw-Hill Companies, in Lexington, Massachusetts. Dodge provided us with information on a variety of construction projects in the greater Boston area for the period 1995 through 2001, including the price of the winning bid, and the size of the project (in square feet). We supplemented these data with information on more recent projects by contacting school officials and construction companies, and by visiting official school web sites containing current construction-project information. Surprisingly, the Commonwealth of Massachusetts does not keep adequate or detailed information on the schools that are built largely at its expense.
We then excluded all projects with a valuation below $1 million, on the grounds that these are typically too small to be of interest to union contractors. We further focused our study on school construction projects between 20,000 and 250,000 square feet in size. Information on whether PLAs were in effect or not was obtained by contacting town and city officials (or in some cases, architects and contractors) in each of the towns for which we had cost information. Our sample comprises the 54 projects for which we had data, 31% of which involved PLAs, the remainder of which did not.13
Adjusting for Inflation
Our sample of schools covers the period 1995 to the present. In order to compare the construction costs of PLA with non-PLA schools, it was first necessary to correct for the fact that construction costs rose during this period, so that all costs could be expressed in 2001 prices. Specifically, we constructed a cost index that included both the trend in construction wages and the trend in materials costs between 1995 and 2001. Using 2001 as the base year, we first constructed a wage index, which was based on total wages and salaries for construction workers in Massachusetts, divided by the total number of workers in that sector.14
In order to account for the changes in materials costs, we constructed a price index based on the producer price index for intermediate materials, supplies, and components, as reported in The Economic Report of the President, February 2002.15 To construct the final cost index used in our analysis, we weighted the wage index and the adjusted producer price index equally to reflect the relative importance of wages and materials costs in a typical construction project. We applied the average annual increase in this index for 1995 through 2001 to estimate the expected price indices for 2002 and 2003.
Comparing PLA to Non-PLA Projects
A comparison of the key characteristics of the school construction projects in towns with a PLA (“PLA projects”) with those where there was no such agreement (“non-PLA projects”) is shown in Table 1. The most interesting finding is that PLA projects, on average, cost $35.24 more per square foot (in 2001 prices) than non-PLA projects.
The immediate question that comes to mind is whether the cost of PLA projects is statistically significantly higher than the cost of non-PLA projects. Could it be that the difference is due to chance, so that if one were to observe more examples of projects, the difference might disappear?
One way to address the issue is with a formal regression analysis. The dependent variable is the cost per square foot of construction (in 2001 prices). The independent variable of most interest to us is a dummy variable that is set equal to 1 for PLA projects and to 0 otherwise. We control for whether the project involves new construction or a renovation by including a dummy variable set equal to 1 for new projects and to 0 otherwise. We also control for the impact of a project’s scope on the cost per square foot by controlling explicitly for square footage, and for square footage squared. This is desirable because there may be economies of scale (within reason) in school construction, so that larger schools may have lower costs per square foot. The ordinary least squares regression results are presented in Table 2.
Our results show that PLA projects add $37.88 per square foot to project costs, controlling for whether or not the project involves new construction, and controlling for the project’s square footage. A formal (one-tailed) test of the statistical significance of this coefficient gives a p-value of 0.00, which means that there is less than a 1% chance that we have accidentally found that PLA projects are more expensive than non-PLA projects. Put another way, there is at least a 99% probability that PLA projects really are more expensive than non-PLA projects. With an R 2 =0.43, the equation “explains” a respectable 43% of the variation in construction costs across towns. The equation also shows that:
- projects involving new construction rather than renovations experience significantly lower costs per square foot; and
- the size of a project (in square feet) has some influence on the cost per square foot. For instance, a typical 110,000 square foot project would cost $4.00 less per square foot than a typical 100,000 square foot project. This effect – lower unit costs for larger projects – applies only to projects up to 147,000 square feet in size.
IV. The Million-Dollar Question
Towns in Massachusetts are increasingly being asked to answer the question: Should Project Labor Agreements govern school construction projects? In the cases that follow, we provide some additional context for the use of PLAs in Malden, Wilmington and Milton. We then use our statistical results to estimate the savings that these towns would have obtained if they had not used PLAs. The savings are potentially large; in many cases it really is a million-dollar question.
In 1996, the city of Malden began a five-year $100-million series of projects to replace its schools serving kindergarten through eighth-grade, and to remodel Malden High School. The projects were to be accomplished by closing nine existing schools, replacing five schools, and demolishing three.
On the recommendation of its construction project management firm, O’Brien-Kreitzberg, Inc., the city of Malden negotiated a PLA with the Building and Construction Trades Council of the Metropolitan District, AFL-CIO and the New Council of Carpenters, AFL-CIO. The agreement included many of the PLA provisions discussed in Section II, including: the recognition of unions as the sole and exclusive bargaining representatives of all project employees; hiring through the union referral process; the requirement of contractors to contribute to union employee benefit plans; uniform work rules and dispute resolution; and prohibiting strikes, picketing, work stoppages, slowdowns, and lockouts.16 The PLA was approved by a vote of the City of Malden municipal building committee in May of 1997; union approval followed.
In the initial phase of the project, the city bid the construction of the Beebe and Roosevelt schools as one project, with the stipulation that the project was subject to the PLA requirement. When the bids were reviewed by the city, the lowest exceeded the project budget and all bids were subsequently rejected. The project was modified and the city offered each school for bid separately.
On November 7, 1997, seven open-shop (non-union) contractors with public sector building experience filed for a motion of preliminary injunction against the use of a PLA in the bidding process. The plaintiffs argued that the PLA violated the state’s competitive bidding laws, and that they would have bid for both projects if the PLA were not included. The court denied the request for a preliminary injunction, and when the plaintiffs filed an appeal, the Massachusetts Supreme Judicial Court chose to hear the case.
The Supreme Judicial Court reaffirmed the lower court’s denial of the preliminary injunction. The court majority argued that the objectives of the state’s competitive bidding laws were to “obtain the lowest price for its work that the competition among responsible contractors [could] secure” and to create an “honest and open procedure for competition for public contracts.”17 The Court accepted the plaintiffs’ assertion that “they were inhibited from bidding, and that this inhibition could have anti-competitive effects.”18 However, the Court concluded, “that PLAs on public projects are not absolutely prohibited.”19 In echoing the decision of the Lynn case, and that of a New York case involving the restoration of the Tappan Zee Bridge, the Court stated that “the project is of such size, duration, timing, and complexity that the goals of the competitive bidding statute can not otherwise be achieved and the record demonstrates that the awarding authority undertook a careful, reasoned process to conclude that the adoption of a PLA furthered the statutory goals.”20
Interestingly, the Court did state “it may be that in certain cases, sheer size of a project warrants the adoption of a PLA. In most circumstances, the building of a school will not, in and of itself, justify the use of a PLA.” This first phase of the construction project came in on budget and on time, with no labor interruptions, according to city officials.21
According to our analysis, the new schools built in Malden could have been built more cheaply had the project not used a PLA. For example, the town would have saved $5.3 million, measured in 2001 dollars, had a PLA not been used in building the Beebe School.
Wilmington is a suburban industrial town that sits on the watershed of the Ipswich River some eighteen miles north-northwest of Boston. Faced with an increasing birth rate between 1986 and 1995, and a subsequent school enrollment surge in the 1990s, the Wilmington School District began to suffer from overcrowding. School enrollment increased 32% (900 students) in the decade from 1989, and another 9% (300 students) from 1998 to 2000.22 Under the pressure of this increase, and with an eye towards future growth, in the spring of 1997 the town voters approved a Proposition 2 1/2 override to fund a new $23 million middle school. Proposition 2 1/2 was a Massachusetts ballot initiative in 1980 that capped the rate of taxation on real and personal property and also limited the annual increase in the property tax levy. Wilmington’s residents decided to accept higher taxes in return for less-crowded schools.
The town selected Architectural Resources of Cambridge to design the new middle school. The town bid the project with a PLA requirement for the construction project. Construction began in December of 1998 and the project was completed as scheduled in time for the start of the 2000 school year. The citizens of Wilmington also spent more than necessary for their new Middle School. Our statistical analysis indicates that, in the absence of a PLA, Wilmington would have saved $5.7 million, measured in 2001 dollars, on constructing their new Middle School.
Milton has recently embarked on an ambitious $100 million program of school construction. The project includes creating a new high school ($50.3 million) out of the existing middle school, a new middle school ($28.6 million), the Glover school ($12.5 million) and the Collicot and Cunningham school ($27.3 million). The town has signed a Project Labor Agreement, so contractors must follow PLA rules. The bids for the new High School and the Glover School portions of the project came in substantial higher than the budget estimates of the town school committee. The lowest bid for the High School was $4 million over the school committee estimate, while the Glover School bids came in $800,000 over the estimates.23 Our calculations show that Milton would save $15.3 million on the construction of these four schools if it did not have a PLA; of this, $6.6 million would be saved on the construction of the high school alone.
It is widely believed that Project Labor Agreements add to the cost of construction projects. However, there has until now been no statistically sound study of whether PLAs add to construction costs in practice, and if they do, how large the effect is. By carefully constructing a database with information on the costs of school construction projects undertaken in the greater Boston area since 1995, and comparing the costs in towns with, and without, PLAs, we found that:
- PLA projects have higher construction costs. We are more than 99% confident of this assertion, based on the available data.
- PLA projects add an estimated $37.88 extra per square foot of construction (in 2001 prices), representing a 22.1% increase in costs for the average PLA project.
Applying our results to the experiences of three Massachusetts communities, we find that each of these towns would have lowered its construction costs by over $5 million in the absence of a PLA. Our study has identified seventeen schools that were put out to bid under PLA agreements in the greater Boston area since 1997; this is as complete a list as we were able to compile. Our estimates show that the cost of building these schools was, in total, $85.5 million (in 2001 prices) higher than it would have been if PLA agreements had not been put in place. About 70% of this additional cost was borne by the Commonwealth, with the remainder paid for by the towns themselves. When Massachusetts communities are asked whether to approve Project Labor Agreements in the future, they will now know that they are facing a multi-million-dollar question. The issue is likely to arise with increasing frequency in the near future, as Boston’s “Big Dig” winds down and the released workers seek other work more aggressively.
* Jonathan Haughton, Ph.D., is an Associate Professor in the Economics Department at Suffolk University and a Senior Economist at the Beacon Hill Institute (BHI) for Public Policy Research at Suffolk University. He holds a Doctorate from Havard University. Darlene C. Chisholm is an Associate Professor in Economics and a Senior Economist at BHI. She holds a Doctorate from the University of Washington. Paul Bachman, MSIE, is a Research Assistant at BHI. He holds a Master of Science in International Economics from Suffolk University. The authors would like to thank Dali Jing, Corina Murg and Hatesh Radia for their contributions to this report.
The Beacon Hill Institute at Suffolk University in Boston focuses on federal, state and local economic policies as they affect citizens and businesses. The institute conducts research and educational programs to provide timely, concise and readable analyses that help voters, policymakers and opinion leaders understand today’s leading public policy issues. This BHI report, originally published in March 2003, is republished herein by permission.
1 "United States General Accounting Office, “Project Labor Agreements: The Extent of Their Use and Related Information,” (May 1998).
4 Worcester Municipal Research Bureau, “Project Labor Agreements on Public Construction Projects: The Case For and Against,” Report No. 01-4, May 21, p. 7, (2001).
5 Herbert R. Northrup and Linda E. Alario, “Government-Mandated Project Labor Agreements in Construction, The Institutional Facts and Issues and Key Litigation: Moving Toward Union Monopoly on Federal and State Financed Projects.” Government Union Review, vol. 19 number 3 p. 91 (2000).
6 Ibid., pp. 12-13.
7 Massachusetts Executive Office of Administration and Finance, Reconstructing the School Building Assistance Program, Policy Report Series No. 3, January, 2000.
8 General Laws Of Massachusetts, Chapter 70: “School Funds and State Aid for Public Schools.”
9 Massachusetts Executive Office of Administration and Finance, Reconstructing the School Building Assistance Program, p. 1.
10 Fiscal year 1999 refers to the period July 1, 1998 through June 30, 1999.
12 Massachusetts Executive Office of Administration and Finance, Reconstructing the School Building Assistance Program, p. 1.
13 PLA contracts were in effect in the following towns: Boston, Lawrence, Lynn, Malden, Melrose, Milton, Waltham and Wilmington.
14 The source of wage and salary data is the Bureau of Economic Analysis; the source of the total number of workers is the Bureau of Labor Statistics.
15 The source of the producer price index is Table B-66, “Producer Price Indexes by Stage of Processing, Special Groups, 1974-2001,” The Economic Report of the President, February 2002.
16 John T. Callahan &Sons, Inc. &others vs. City of Malden &another. SJC-07959, Lexis-Nexis 493, July 22, p. 2 (1999).
17 Ibid., p. 2.
18 Ibid., p. 2.
19 Ibid., p. 2.
20 Ibid., p. 6.
21 Worcester Municipal Research Bureau, p. 9.
22 Town of Wilmington Master Plan, 2001, pp. 181-183.
23 Kimberly Atkins, “Milton May Reject School Bids," Boston Globe, May 2, 2002, Globe South,p 2.