Digital Magazine Magazine Year 2021

Commoditized Risk: The Future of the Engineering & Construction Industry

Commoditized-Risk-The-Future-of-the-Engineering-Construction-Industry.

As cost became the prime evaluation criteria, Engineering and Construction companies (E&C’s) have evolved to focus singularly on that goal regardless of the long-term impact on our industry.

MARTIN VAN SICKELS & TODD C. FRANK

By Todd C. Frank
Regional Marketing Manager, Burns & McDonnell

By Martin Van Sickels
President, MVS Consulting LLC,
and Executive Director, Rice Global E&C Forum

Are we on a sustainable trajectory?

In the late 1970s, a shift occurred in industrial engineering and construction (E&C), the ripples of which continue today. Plant “owner” organizations started to focus their E&C services procurement efforts primarily on price. Over time, this approach has commoditized the E&C industry and significantly impacted the way it operates, more so with each economic downturn.

The oil crash of the mid-1980s, the Asian Economic “Flu” of the late 1990s, the 2008 U.S. foreclosure crisis (which led to the Great Recession), and most recently, the COVID-19 pandemic, have been key major events that have further reinforced this culture of commoditization.

In order to stay competitive, E&C’s have sought ways to optimize workflows and use technology to improve project execution efficiencies while concurrently seeking lower labor costs by driving engineering and design work overseas using “high-value” centers.

The economic principle known as Goodhart’s Law is best summarized this way: “When a measure becomes a target, it ceases to be a good measure.” As cost became the prime evaluation criteria, E&C’s have evolved to focus singularly on that goal regardless of the long-term impact on our industry.

Technology “Enablers”

Advances in computer systems allow for faster, more accurate engineering calculations and designs that can be built entirely virtually. Technology improvements allow engineers to rely more heavily on tools.

Unfortunately, these tools avoid applied engineering’s crucial learning steps, particularly for young engineers, necessary to know if these yield value outputs. If a human error occurs in either programming or data input and the computer’s answer is wrong, an engineer will not intuitively recognize that there is a problem.

The same is true of having field experience. Engineers who have been to the types of facilities they are designing or have been on actual construction projects to see how the design comes together are inherently better engineers and can identify and correct flaws during the project design phase.

This results in avoiding the costly correction of errors during construction. Unfortunately, many young engineers today haven’t had the opportunity to work onsite, primarily due to a lack of entrants into the industry in the late 1980s through the early 2000s, along with the timing of recent downturns which allowed owners to demand E&C firms assign only experienced engineers to their projects.

Big data, 5G, artificial intelligence, and advanced robotics are all advancing technologies that will set the next generation stage. These technologies will likely reshore many of these jobs to the U.S. (albeit less will be required). Still, this will also make many engineers merely stewards of data, telling IBM’s Watson what they want while the AI-driven computer entirely designs it? Will this stifle creativity and innovation? And can robots then build it, reducing the need for field labor?

Globalization of the Engineering & Construction Workforce

Further, the migration of engineering work to non-U.S. design centers is another factor directly resulting from commoditization. U.S. E&C firms partnered with, built or bought these “offshore engineering centers” to bring down hourly rates.

But as salaries increased over the past decades and the pool of talent pool became fully employed, the industry pursued the same model in other cities, regions, and countries. Concurrently, as companies honed their ability to workshare overseas, more significant percentages of projects are shifted to these offshore centers.

Attempting to emulate this model to offset deficits in qualified craft, the same has happened in the construction industry. Companies are designing modularized facilities and having them built overseas, thereby reducing the number of craft required onsite for final assembly.

The global E&C industry is running out of places to go to lower costs. And if the engineering and construction professions fully migrate overseas, might this create, for the U.S., future domestic security challenges such as those seen in 2020 in the pharmaceuticals and industrial manufacturing sectors?

A Symbiotic Supply Chain

As more E&C companies file for bankruptcy or consolidate to mitigate financial losses, we must seek ways to improve the health of the supply chain. Owners, E&C firms, technology providers, and manufacturers must focus on developing a sustainable solution, one that allows everyone to be competitive while making a reasonable profit.

Although “partnerships” remains a negative term when trying to pair owners with suppliers, maybe we should consider the idea of a symbiotic supply chain, where mutually beneficial terms make everyone stronger. Rather than price alone, we should consider performance-based contracting models that drive in- novation resulting in benefits for all involved.

As engineers and constructors, we love to tackle challenges, and we will need to work together as a community of companies to find a path forward that sustains us all.

Possibly of your interest: Houston: the future capital city for energy transition – RGF 23rd Annual Forum

About the Authors

Martin Van Sickels

Mr. Van Sickels is the executive director of the Rice Global Engineering & Construction Forum. Currently through his firm, MVS Consulting LLC, he provides technology and management consulting services for the process and E&C industries ranging from R&D to technology sales. Prior to forming his consulting firm, he was VP and Chief Technology Officer and a member of the executive committee at KBR.

Todd C. Frank

Mr. Frank is the chairperson of the board of directors for the Rice Global Engineering & Construction Forum. He has over 25 years of experience working for several major industrial engineering and construction firms in a variety of marketing, communications, and business development roles. He is currently with Burns & McDonnell, a leading U.S.-based engineering, construction, environmental and consulting firm.

About the Rice Global Engineering & Construction Forum

The Rice Global Engineering & Construction Forum is an organization made up of members from engineering and construction (E&C) and supporting firms based at Rice University for the purpose of discussion and analysis of issues, problems, and opportunities facing the contracting side of the global E&C industry. Rice University provides a neutral site for these activities and access to the academic and research facilities of Rice, primarily the George R. Brown School of En- gineering, the James A. Baker III Institute for Public Policy, and the Jones Graduate School of Business.

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