Fair Compensation and Inflation

I ran across an interesting article on Wireless Estimator.com that talks about a quickly growing rift between big wireless carriers and the myriad of smaller contractors that help them build and maintain networks. The article points out the disconnect between what the big carriers are willing to pay and what small contractors say they need to remain viable.

There has always been a tense dynamic between big carriers and small contractors. The big carriers have typically wanted to pay below-market labor rates and make up for it by offering long-term contracts with guaranteed work. The guaranteed long-term employment is attractive to many small contractors because they know that the alternative is to always be hunting for work and occasionally having no work.

This arrangement has worked for the last decade because we’ve been in a period of low inflation. Contractors could accept multi-year contracts at fixed rates with the knowledge that the rates would still be higher than their costs in a few years.

But every generation or so, when the economy enters into a cycle of inflation, the long-term contracts no longer work for small contractors. Compensation rates negotiated a few years ago are no longer profitable, and the owners of small contracting companies are squeezed to the point of making little or no profit, or even losing money by continuing to work.

What I have always found amazing is that we never learn from history. This is at least the fourth time in my career that we’ve run into the same issue – and the result is always the same. The big carriers are initially unwilling to talk about renegotiating compensation rates and adamantly insist that small contractors adhere to their contracts. Small contractors are squeezed, and many of them walk away from unprofitable contracts. Eventually, when the carriers can’t get the work done, common sense enters the picture, and rates are renegotiated at realistic levels to match the new cost of doing business.

This time is a little different than in past years since the big carriers are all spending huge dollars on infrastructure. In past economic downturns, the amount of infrastructure spending typically dipped along with the rest of the economy. But the entire telecom industry is currently going gung-ho in implementing 5G small cell sites or laying fiber.

This gives some market power to contractors who do generic work. If Verizon or AT&T won’t pay enough for crews to construct fiber, a contractor has numerous other opportunities to work on the huge number of other projects looking for fiber crews. But it’s still not an easy decision to walk away from a carrier that has provided steady work for the last decade. The contractors in the worse position are those that specialize. For example, a contractor who only builds wireless towers is not going to be able to easily transition to other work.

This is not only a telecom issue, but it is happening across the economy. I know a company that rehabs vacated apartments when tenants change that recently walked away from a long-term contract that was no longer profitable. Any small contractor working on a fixed compensation contract is probably feeling the pinch.

There is no culprit in this story – it’s the consequence of an unexpected change in the economy. Big and small companies alike have grown used to having minimal inflation and don’t build anything into contracts that allow for a renegotiation of rates. If you think back to times of higher inflation, contracts always included escalator clauses to compensate for external changes in costs. This isn’t ancient history – it was a routine part of contracts as recently as the 90s. But when the economy gets good, everybody seems to get amnesia and forget about past inflation.

If the big carriers want to keep building networks at a frenetic pace, they will have to listen to the financial plight of the folks who are building their networks. If not, they’ll find themselves far behind schedule and falling behind faster over time. Big companies almost instinctively resist paying more for standard commodities, but eventually, the new economy forces them to get realistic. Unfortunately, this means one more big disruption in an industry that is already in huge turmoil. When somebody tries to understand the causes of supply chain problems – fair labor compensation is another among the many causes.

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