Persistent Challenges: Local industries continue to navigate high business costs, workforce investments

Although local industry leaders say inflationary pressures are easing, they remain unclear how much of an impact any interest rate cuts the U.S. Federal Reserve might announce before year’s end would have on company operations.

Sean Thouvenot, vice president and co-owner of Branco Enterprises Inc., said the increased cost of doing business at his construction firm has hovered between 8% and 11% this year over 2023. That covers everything from job site equipment, fuel, utilities and office supplies for the break room, he said.

“Everything’s more expensive,” he said, noting fuel is always a wild card. “That’s a game we get to play as far as trying to figure out what the fuel’s going to do.”

According to AAA, the national diesel price average was $3.83 as of July 2, down slightly from the $3.85 cost a year prior. Prices statewide and in the Springfield area both are lower than the national average, at $3.43 and $3.33, respectively.

Business costs for Branco also include boosting worker pay, Thouvenot said, adding the company already has given two incremental hourly wage increases this year to its local 155-employee workforce. That’s in addition to two other pay increases for its employees last year. He said company pay generally ranges $20-$35 per hour, based on factors such as experience. The average tenure for employees is about 12 years, he said.

“We just don’t get much turnover, which is odd for a construction company, but we take care of our people,” he said. “We don’t want people leaving for 50 cents more an hour.”

Brad King, owner of King Built Properties LLC, said he’s also given raises to his eight-person workforce multiple times this year. The move was made, in part, to “keep them at what I would call market rate for their position.” He declined to disclose company pay but said it’s increased considerably over the past three years.

“Across the board, our percentage would be somewhere in the 25% to 30% range that I would have to offer additional to either keep someone around or to get someone new,” he said. “In my industry, it feels like we don’t have young people coming up that want to take the baton from the older generation that have great experience in the trades.

“All of us builders and contractors are out there chasing the same skilled tradespeople, which is in turn essentially driving the cost up for us.”

Employee wages and benefits was the top response for factors driving up the cost of doing business, according to participants of Springfield Business Journal’s 2024 Economic Growth Survey. Nearly 50% of respondents selected employee pay as the top choice, compared with 25% selecting the cost of goods and materials as No. 1. The percentages for the two responses fell in line with the 2023 survey, in which employee wages at 47%, followed by goods and materials at 26%, were chosen as the top increase factors.

Price hikes
With higher operational costs amid inflationary pressures, companies continue adjusting prices to compensate. Thouvenot said projects his company is tackling are more expensive to complete and thus bids they are submitting to clients are higher. Branco recently was chosen by the city of Springfield as general contractor for rehabilitation of the historic Jefferson Avenue Footbridge. The $10.8 million bid was 23% above the engineer’s estimate of $8.8 million. City officials cited supply chain disruption, risk involved with the work and competition with other public projects receiving federal funding through the American Rescue Plan Act as reasons behind the higher bid, according to past Springfield Business Journal reporting.

Thouvenot agreed.

“The risk was a big one for the cost increase just because of where it’s at and what it is,” he said, noting the company’s previous bid in 2021 for the long-planned project was $6.2 million – more than twice the engineering estimate at the time. “But the cost of materials and the cost of labor has increased. That honestly has increased that much in that short amount of time.”

Before the COVID-19 pandemic, King said his company in 2019 was able to sell newly constructed homes for around $140 per square foot and earn a profit margin. As inflation and interest rates rose since 2022, the company has priced its homes in the $195-$220 per square foot range to try to maintain the same margin. King Built’s single-family homes range $450,000-$2 million, according to SBJ list research published in January. The base rate for homes built by the company was $300,000 a year prior.

Under pressure
Nearly all operators in the U.S. restaurant industry – 98% – said higher labor costs are an issue for their business, while 97% cited higher food costs, according to the 2024 State of the Restaurant Industry report by the National Restaurant Association.

Increasing prices have been an ongoing struggle for Gilardi’s Ristorante, said James Martin, who has owned the 26-year-old restaurant since 2013. Food prices since 2020 are up 45% overall, while liquor costs are up 25%, he said, adding insurance rates have jumped to $2,100 per month from $1,200.

“Payroll pressures are beginning to ease slightly as more people have entered the workforce and there is less job hopping,” he said via email. “Of course, we are paying nearly 50% more in labor than in 2019, but that is the last cost that will create angst for me or this business.”

Menu prices have inevitably increased over the past four years by roughly 35%, he said, noting the fixed costs of insurance, utilities and licensing for the business will not decrease. He also expects variable prices such as food will stay elevated even once inflation cools.

“It is clear that in order to make the same profit with the same efficiencies would result in menu prices increasing over 100%, and that would still probably not meet our profitability needs,” he said.

When noting changes their company made as a result of inflation, 56% of respondents to SBJ’s Economic Growth Survey this year raised prices. The next highest response was reduced operational expenses at 40%.

At Branco, Thouvenot said he’d likely have work available for 10-15 people if he could fill open positions. Noting the company recently purchased a couple of new trailers that they use on job sites for $46,000 each – a roughly 65% increase over the same equipment from four years ago – he said the higher cost for projects likely will continue into the foreseeable future.

“We’re having to find creative ways to give our clients the buildings they want and need for the budget they have,” he said.