When Wages Prevail: Assessing the Cost of Construction
In California, legislation to streamline housing production and to fund the construction of deed-restricted affordable housing often requires builders to pay “prevailing wages” to the construction workers who work on the resulting project. These requirements are based on the idea that streamlined and affordable housing should create well-paying construction jobs for union workers.
The tradeoff: paying higher wages can often raise construction costs. However, determining how much higher construction costs are with prevailing wage requirements is difficult, because almost all real estate development financial data is private.
In Low Income Housing Tax Credit Construction Costs: An Analysis of Prevailing Wages, the UC Berkeley Terner Center leverages public data from Low Income Housing Tax Credit (LIHTC) applications to quantify the construction cost difference between prevailing wage and non-prevailing wage subsidized housing projects.
Key Takeaways
- Per-unit construction costs for new-construction projects that paid prevailing wages are approximately $94,000 higher than for projects that did not.
- Per-unit costs for rehabilitation projects that pay prevailing wages are about $48,000 higher than for projects that did not.
- Leaving out high- and low-cost projects (like those in the Bay Area and in rural parts of the state), the prevailing wage price premium averages about $83,000 per unit.
The Low Income Housing Tax Credit is the largest federal funding source for deed-restricted affordable housing, awarding $107 million to California projects in 2023. Funding is highly competitive; and the application requires nonprofit developers to submit detailed financial information about their projects, including expected land, development, and construction costs.
The LIHTC application data, which is shared publicly, is useful because it includes a wide variety of project types: rehabilitation and new construction; buildings in urban and rural areas; projects for seniors, families, and special needs populations; and, critically, projects that pay prevailing wages, and projects that don’t.
The researchers used application data from 859 projects that built or rehabilitated 75,400 subsidized homes between 2020 and 2023. Eighty percent of the applications were for new construction; and 53 percent of the projects paid prevailing wages.
To account for differences between different types of projects in different regions, and isolate the effect of wage requirements, the researchers conducted linear regressions to make “apples to apples” comparisons of like projects.
They found that prevailing wage requirements increased construction costs by on average $94,000 per home for new construction and $48,000 per home for rehabilitation. Leaving out highest and lowest-cost projects, they found that prevailing wages raised construction costs by about $83,000 per home.
LIHTC application data is not perfect: these applications include expected construction costs, rather than actual costs; and the researchers encourage future analysis using actual construction costs.