Can We Lower Construction Costs with Cheaper Labor or Materials?
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Can We Lower Construction Costs with Cheaper Labor or Materials?<br>Brian Potter<br>Jul 23, 2026
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3D printed structure, via Wikipedia.<br>Last time in our series on the nature of the construction productivity problem, we looked at economies of scale, finding that capturing economies of scale in homebuilding is difficult. Economies of scale primarily operate on the difference between the costs of the material inputs to some process and the cost of the final product. With housing construction, this ratio is already pretty low, not much higher than what we see in high-volume manufacturing industries that already maximize these kinds of cost advantages, such as the auto industry.<br>There is, however, another possible route for reducing construction costs: reducing the costs of the inputs directly, either by using cheaper inputs (less expensive materials or labor) or by using fewer inputs. To use a baking analogy, capturing economies of scale is like improving the efficiency of baking cakes by making them in a high-volume, industrial bakery instead of your home kitchen. Reducing the input costs is more like changing the recipe of that cake to require cheaper/fewer ingredients.<br>For housing construction, we can broadly categorize the inputs to construction as either materials or labor. (There are also equipment/machinery costs, but these are a very small fraction of housing construction costs.) Reducing the cost of labor inputs is difficult, for the simple fact that conventional construction is done on-site, limiting the ability to use cheaper pools of labor. Reducing the cost of material inputs appears somewhat more viable in theory (at least for some materials), but a variety of barriers make actually doing so difficult in practice.<br>Finding cheaper construction labor is hard
Historically, manufacturers have reduced their labor costs by moving their operations to places where labor is cheaper. As I note in “The Origins of Efficiency”:<br>Garment manufacturing, for example, has proven resistant to automation and remains a labor-intensive industry. As a result, garment manufacturing operations tend to continuously relocate to sources of low-cost labor (which are often, not unrelatedly, places with poor working conditions). By the late 19th century, New York City had become one of the largest garment manufacturing centers in the world, such that in 1890 New York made 44 percent of the ready to wear clothes produced in the US. But by the 1920s, the industry had begun to move where labor was cheaper — first from Manhattan to Brooklyn and New Jersey, then to New England, then, as the interstate highway system developed, to the South, and, finally, overseas. Similarly, Nike began importing footwear from Japan in the 1960s, then began manufacturing its own shoes in Japan in the 1970s. As labor costs in Japan rose, Nike shifted production operations to Taiwan and Korea, then China, then Vietnam and Indonesia. There have been similar shifts in other labor-intensive industries, such as shipbuilding (which moved from the UK to Japan, then to South Korea, then to China), as well as toy manufacturing (which moved from the US to Japan, then to Hong Kong, then to China).
This strategy, however, is difficult to pursue in construction, for the obvious reason that conventional construction is done on-site and can’t be relocated to where labor happens to be inexpensive.<br>A relocation strategy does become available if your construction is prefabricated, but this introduces new complications, notably the high costs of transporting prefabricated building components. As we’ve previously noted, most prefabricated construction is produced in distributed, relatively small-volume factories located to minimize transportation distance. (A common limit, noted by several manufactured home producers, is 500 miles, about the maximum that a truck can drive in a single day.)<br>There are labor cost differentials in the US, and modular builders do indeed locate their operations to take advantage of them. If we use RSMeans City Cost Index values for “installation costs” as a proxy for construction labor costs, there’s a roughly 2x cost difference between the 10th percentile city and the 90th percentile city.1 Modular builder Autovol fabricates its modules in Nampa, Idaho, and ships them hundreds of miles (far beyond the typical 500-mile limit) to Los Angeles and the Bay Area, where labor costs are far higher. Stack Modular builds its modules in China and then transports them to West Coast building projects using bulk carriers. Volumetric Building Companies has similarly noted that modular construction works best when a large labor cost differential exists between the factory location and the site location. But the added capital and transportation costs of modular construction dull this benefit. Autovol does boast that its construction costs are lower than conventional...