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Offshoring of Engineering Services in the Construction Industry John I. Messner, Ph.D. Director, Computer Integrated Construction Research Program Associate Professor of Architectural Engineering Pennsylvania State University ABSTRACT continue to use lower cost labor in other countries to remain competitive globally and to make the construction of more The construction industry is a large contributor to the facilities by U.S. companies economically viable. U.S. and world economies. Participants in the industry are Measures that should be considered to address the impacts responsible for designing and constructing the built environ- of offshoring include supporting the education and develop- ment including infrastructure, housing, offices, and other ment of globally focused engineers; supporting the export of facilities. This diverse industry has many project types and engineering services from the United States; ensuring that requires that many engineering disciplines (civil, electrical, national security and intellectual property are appropriately mechanical, chemical, and architectural) work together. Em- protected when design services are offshored; and encourag- ployment in the industry is currently strong and is supported ing young people to pursue productive careers in engineering by a strong U.S. and global construction market. in the construction industry. Offshoring of engineering services in the construction The construction industry is a large, diversified industry industry is not new. U.S. companies have had offshore of- that focuses on the design, delivery, and renovation of a wide fices in low-income countries for many years to perform range of facilities, from large petrochemical plants, bridges, design and construction management services. But with the buildings, tunnels, roads, and ports to residential units. These increase in information technology and the drive to reduce facilities play a significant role in housing the population engineering costs on projects, offshoring in the industry has and providing core infrastructure. Engineers from many increased recently. In particular, many large capital projects disciplines perform many different tasks in this diversified being built by U.S. companies are being designed with some industry, including facility programming, design of engi- level of engineering work in low-cost engineering centers. neered systems, construction engineering and management, To date, offshoring of design services for smaller projects and facility management. is limited to a relatively small amount of CAD drafting, 3D The revenues for the global construction industry total modeling, and engineering detailing performed by offshore $3.9 trillion per year (Tulacz, 2005). The United States has technicians, architects, and engineers. the largest construction market of any country with a current Although offshoring is having an impact on the U.S. con- annual value of approximately $1.22 trillion, 9.2 percent struction industry and the structure of jobs in the industry, the of the gross domestic product of the United States (USCB, impact is limited at this time. The United States remains a net 2006b). U.S. companies also perform more than $34 billion exporter of design services in the construction industry and per year in international work (ENR, 2006a). employment for engineers remains strong. But the industry The U.S. construction market has recently grown sig- is prone to economic cycles that could have a significant nificantly. Figure 1 shows the annual construction spending impact on this situation in the future. Therefore, it would be from 1993 to 2005. The average annual growth rate during prudent to consider taking steps to minimize potential nega- this period was 7.3 percent. Construction spending in the tive impacts of offshoring. U.S. companies will certainly 137
138 THE OFFSHORING OF ENGINEERING 1,200 1,000 800 U.S. $ (billions) 600 400 200 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Year FIGURE 1â Construction spending, 1993â2005. Source: USCB, 2006b. U.S. market increased by 12 percent from 2003 to 2004 and to find employees to design and manage the construction of 11 percent from 2004 to 2005. This rate slowedMessner Figure 1 slightly in facilities. 2006 to 8.5 percent (USCB, 2006b). This paper focuses on offshoring of design and construc- The global construction market has also been growing in tion management services in the construction industry. response to the need for infrastructure and housing in devel- However, there is no universal definition for offshoring oping nations such as China and India, along with continued (Trefler, 2005), and the definition is important. The American investments in high-income countries. Data on the overall Society of Civil Engineering (ASCE) has defined offshoring size of the global industry are limited and not very reliable, in the construction industry as âthe practice of acquiring but Engineering News Record data collected from multiple architectural/engineering services from sources outside of sources show that the global construction market grew from the United Statesâ (ASCE, 2005). But, because some level $3.4 trillion in 1999 (ENR, 2000) to $3.9 trillion in 2004 of design services have historically been performed in other (Tulacz, 2005), a growth rate of 14.7 percent over a five-year countries for international construction projects, this defini- period. tion seems incomplete. For example, if a power plant is being The U.S. share of international work (work performed constructed by a U.S. contractor in India, some design work by a company not headquartered in the country where the has historically been performed in India, and some design construction is done) has been declining. In 2005, U.S. con- work may have also been performed in the country of the struction companies listed in Engineering News Record âTop large equipment suppliers. Therefore, I propose that we use 225 International Contractorsâ had revenues of $34.8 billion, the following definition: or 18.4 percent of the international work done by the largest Offshoring of design services in the construction industry 225 international contractors (ENR, 2006a). This percentage is the relocation of work that is typically performed in one is down from 36.5 percent in 1985, although it has remained country to design professionals in the same company in an- relatively stable for the past 10 years. other country, or to a different company in another country, One of the most significant challenges facing the U.S. to reduce wage rates. construction industry is the supply of workers, both field employees and professional employees. Fewer people are Sometimes offshoring is performed through offshore interested in working in the construction trades, which has outsourcing, that is, when a company hires an external raised problems for the consistent delivery of quality facili- company to perform a service in another country. At other ties. Significant efforts are being made to recruit new design times services are performed by company employees located professionals into the industry, but these efforts face many in a company office in another country. Large international barriers, including a negative perception of the construction construction companies work in many international locations industry and low salaries relative to other industries. The and have set up offshore offices to perform services on their limited recruitment of new design professionals, combined international projects. Many of these services would not typi- with an aging population of experienced engineers who are cally be performed in the United States, and thus they are approaching retirement, is making it difficult for the industry not covered by the definition of offshoring, which considers
OFFSHORING OF ENGINEERING SERVICES IN THE CONSTRUCTION INDUSTRY 139 the potential shift in work from the United States to offshore to recognize that a very large percentage of the revenue for locations. But recently companies have been either setting up the top 400 contractors is subcontracted to specialty firms. offices, using existing offices, or hiring companies abroad to Therefore, the industry is very diverse with many different perform design services that have previously been performed companies contributing to facility construction. in the U.S. office. These services do fit the proposed defini- Design work, which includes architectural and engineer- tion of offshored services. ing services, is one portion of the overall revenue in the con- struction industry. According to Engineering News Record, which ranks the top 500 design firms in the United States ENGINEERING SERVICES IN THE each year, they generated $59.25 billion in design revenue in CONSTRUCTION INDUSTRY 2005, an increase of 11.8 percent over 2004 (ENR, 2006c). The construction industry can be divided into several Engineering is important to all phases of the construction and categories. For the analysis of offshoring, it is helpful to delivery of a capital facility. The primary phases for deliver- separate the industry into two market sectors: (1) the engi- ing and operating a facility have been defined by Sanvido et neering, procurement, and construction (EPC) sector, and (2) al. (1990) as managing, planning, designing, constructing, the architectural, engineering, and construction (AEC) sec- and operating a facility. The involvement of engineers in tor. Companies that perform work in the EPC sector focus on each of these phases varies, from the initial facility con- large industrial or infrastructure facilities. Companies in this cept through the operation and renovation of a completed sector tend to be large and employ many engineers and engi- facility. neering technicians to work on the design and construction The projects most likely to involve offshore engineers of large projects, such as power plants, refineries, industrial have certain identifiable characteristics. Engineers typically facilities, offshore platforms, and public works such as water perform work on large, unique projects. Owners rarely use purification plants, wastewater treatment plants, dams and the same design for multiple buildings or facilities. Even if rail projects. Companies in the AEC sector are much more they do, the design must be modified to accommodate site diversified. Engineers in this sector work on the design and conditions, and projects must comply with building codes in construction of buildings and residential facilities. The AEC the location of the project. To design a facility to meet local sector is fragmented and is serviced by a large number of codes and to take into account local geotechnical, weather, small companies. A number of companies perform work in and cultural conditions requires significant local knowledge. both the EPC and AEC sectors, but these companies typically Thus local design firms have an advantage. No matter the have different divisions for each sector. location of the project, some degree of onsite construction This paper addresses the offshoring of engineering will always be necessary. Thus onsite engineering support services in both sectors of the construction industry. The is always necessary. residential construction portion of the AEC sector (approxi- Another important factor is that owners are typically ac- mately 55 percent of U.S. construction) (USCB, 2006a) is tively involved in the design of their facilities, which requires not included because, even though there are some large resi- frequent interaction between owners, or ownersâ representa- dential developers that construct many units per year, a ma- tives, and architects and engineers. Finally, many owners do jority of residential design and construction companies are not want the detailed design information for their facilities very small and offshoring remains limited in this sector. widely distributed to international locations. Thus security There are almost 2.8 million construction firms employ- of the data is important on many projects. These factors can ing more than 7 million people in the United States (U.S. all make it more difficult to manage engineering teams from Census Bureau, 2002), but the vast majority of these com- various locations, and therefore more difficult to execute a panies are very small; about two-thirds of them have fewer project with offshore engineering labor. than 5 employees (BLS, 2006b). However, Bechtel, the larg- est U.S. contractor by revenue in 2005, had total revenues DATA-COLLECTION METHODOLOGY of $14.6 billion, with $7.2 billion in international markets (ENR, 2006b). Therefore, approximately 0.6 percent of The data used in this paper to analyze the current status the U.S. market revenue flows through this one company. of offshore outsourcing in the construction industry are The contractor with the largest share of the U.S. domestic taken from several sources, including the Bureau of Labor market was Centex with $12.6 billion in U.S. revenue, Statistics, the U.S. Census Bureau, the Bureau of Economic approximately 1 percent of the U.S. market (ENR, 2006b). Analysis, the National Science Foundation, and Engineer- The combined revenue of the 400 largest contractors for ing News Record. Data are also taken from two surveys 2005 totaled $200 billion (19 percent of the U.S. market) performed at Pennsylvania State University. The first survey (ENR, 2006b). was completed in 2004 and was sponsored by the Construc- As these figures show, the construction industry is very tion Industry Institute (CII). This survey was developed with different from many other industries, which are controlled significant industry input from a research team (CII Project by a small number of large companies. It is also important Team 211) with 16 industry and four academic members.
140 THE OFFSHORING OF ENGINEERING Throughout this paper, this survey is referred to as the a 16.5 percent increase (Hecker, 2005). This is one of the âCII survey.â Following the survey, more than 20 detailed largest projected increases for an engineering discipline interviews were conducted with survey participants to gain (the percentage increase is larger for environmental and additional insight into their global sourcing strategies and biomedical engineers, but they are much smaller disciplines challenges. by quantity). A second survey was distributed in July 2006 to the top In addition to the statistics, it is clear from discussions U.S. design firms listed in the Engineering News Record with industry executives that one of the most significant chal- âTop 225 Global Design Firms.â The survey was distributed lenges they face is the staffing of projects, which includes to the directors of engineering or design of the 82 U.S. firms the recruitment and retention of engineers. Throughout the on the list. However, because only nine responses were construction industry, there is currently a high demand for received (a response rate of 11 percent), no statistical data design and construction professionals in engineering and will be presented from this survey. The survey did identify architecture in the U.S. market. In addition, the engineering current perceptions of several large design firms in the in- workforce is aging, creating a shortage of experienced engi- dustry, which are incorporated into the recommendations and neers in many large EPC companies. Because of this, these comments in this paper. The small response to this survey companies can offshore their engineering work with little illustrates the challenges of collecting data related to offshor- impact on the size of the existing workforce in the United ing in the construction industry. States. In general, it is difficult to draw accurate conclusions In addition to engineers, architects are the other primary about offshoring based on the available data. No single professional design participants with a significant impact on source of data can be referenced to identify specific infor- offshore outsourcing in the construction industry, particularly mation about the current status or trends in offshoring in the in the AEC sector. The Bureau of Labor Statistics (2006a) construction industry. For example, no reliable data source reported that there were approximately 129,000 architects provides a breakdown of domestic and foreign employees in the United States in 2004, many of them professionally performing engineering and architectural services in con- registered design practitioners. Architects had a reported struction companies. For future studies, we need to identify median salary of approximately $60,300 (May 2004), and and develop methods to improve the collection of accurate average projected growth for 2014 is 22,000 architects (17.3 data on the offshoring of engineering and architectural ser- percent). vices jobs. It is also important to consider the size of the overall construction workforce. In 2004 5.2 percent of the overall workforce in the U.S. was working in construction supervi- ENGINEERING EMPLOYMENT AND EDUCATION sion or in the construction trades (Hecker, 2005). This does not include manufacturing jobs related to the construc- Demand for Engineers tion industry through the supply of building materials and Civil engineering is the primary engineering discipline equipment. in the construction industry, but many other engineering disciplines are also important, including electrical, mechani- Supply of Engineers cal, industrial, environmental, and architectural engineering (Grigg, 2000). However, the remainder of this analysis In the United States, 7,827 B.S degrees were awarded in focuses on civil engineering, which is the most representa- civil engineering in 2004, a decrease of more than 25 per- tive engineering discipline in the industry. The unemploy- cent from 1981, when 10,678 were awarded (see Figure 2). ment rate for civil engineers in the U.S. market is only 2.2 The decline in civil engineering is similar to the decline in percent (Rafferty, 2004). Of the 1.4 million engineers in degrees in all engineering disciplines. In 2001, 59,258 B.S. the marketplace in 2004, 237,000 were civil engineers, the degrees were awarded in all engineering disciplines, 23.6 largest percentage (16.4 percent) of any single engineering percent fewer than the high of 77,572 in 1985 (NSF, 2004). discipline (BLS, 2006c). (The percentage of electrical engi- But, although the number of engineering graduates in all neering and computer science combined is larger.) Although disciplines has been declining since 1985, with only a slight there are many civil engineers in the workforce, the average increase between 1993 and 1995, the number of graduates starting salary for these graduates is one of the lowest for in civil engineering increased sharply in the mid 1990s. Un- any engineering discipline. As of May 2004, the median fortunately, the number has declined from its peak in 1996. salary for graduating civil engineers was $43,679 for a B.S., In a recent study by Duke University, the number of $48,050 for an M.S., and $59,625 for a Ph.D. (BLS, 2006c). degrees (bachelorâs and sub-baccalaureate) awarded for en- The overall median salary for practicing civil engineers in gineering, computer science, and information technology in May 2004 was $64,230, the second lowest of all engineering 2003â2004 was estimated to be 644,106 in China; 222,335 in disciplines. The U.S. Department of Labor projects that an the United States; and 215,000 in India (Gereffi and Wadhwa, additional 39,000 civil engineers will be needed by 2014, 2005). Obviously, significant numbers of engineers are
OFFSHORING OF ENGINEERING SERVICES IN THE CONSTRUCTION INDUSTRY 141 12,000 10,000 Number of CE Bachelor's Degrees 8,000 6,000 4,000 2,000 0 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 Year FIGURE 2â Bachelorâs degrees in civil engineering, 1971â2004. Source: NCES, 2005. Messner Figure 2 graduating from universities in lower wage countries, many quantitative data. With these limitations in mind, survey and in civil engineering, although the total number of engineers interview data can provide insights into the current status and in these countries is a subject of debate. We do know that future trends in offshoring. several of the largest universities in China are graduating To date, the offshoring of engineering services to lower civil engineers, including Tsinghua University with 811; wage locations has primarily been focused in the EPC sec- Central South University with 593; and Wuhan University tor. Large EPC contractors, and the owners who hire these with 219 (Gereffi and Wadhwa, 2005). contractors, were the focus of the CII Survey. Administered U.S. companies can find and employ engineers in other in July 2004, the survey had a total response of 46 people countries (e.g., India, China, and Eastern Europe) for lower representing 33 companies (20 construction companies and wages. Wage rates vary based on region and demand, but fig- 13 large-facility owners) (Messner et al., 2006a). ures developed by Hira (2003) show that a typical engineer in Some large construction companies have been very active the United States receives an annual salary of $70,000, while in international markets and have been offshoring engineer- an engineer in China receives $15,120, and an engineer in ing work for more than 15 years (Rubin et al., 2004). Com- India receives $13,580. Thus there is clearly a wage disparity pared to several other service industries, the construction between engineers in different countries. However, based on industry as a whole has been slow to adopt offshoring, but interviews with engineering directors in several companies, larger companies, as well as companies in several niche mar- the wages for qualified engineers in Mumbai, India, and kets in the industry, have started to offshore tasks for some some other locations are increasing significantly. large-scale operations. Some examples of niche markets are the development of 3D models during the design process, the conversion of 2D sketches to CAD models, and the devel- CURRENT OFFSHORING IN THE opment of engineering shop drawings for trade contractors CONSTRUCTION INDUSTRY (e.g., mechanical and steel subcontractors). Limited data are available to quantify the current value of The United States is a net exporter of construction, work being performed in lower wage, offshore locations. At architectural, and engineering services. According to data this time, no single source of data in the public domain docu- compiled by the Bureau of Economic Analysis (cited in ments either the dollar value of offshore engineering work or Nephew et al., 2005), the United States had a trade surplus the amount of engineering time spent by engineers in lower in construction architecture and engineering services (CAE wage locations. The best data sources available at this time services) of $2,991 million in 2004 (see Figure 3). The are surveys and interviews with industry practitioners. Data collection from these sources has obvious limitations, how- â The export value in the Bureau of Economic Analysis data does not ever, including the potential for inaccurate self-reporting, include merchandise exports or outlays abroad for wages, services, materi- poor response rates, and reliance on perceptions instead of als, or other expenses. The import value is a total value.
142 THE OFFSHORING OF ENGINEERING 6,000 Surplus 5,000 Export Import 4,000 U.S. $ (millions) 3,000 2,000 1,000 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Year FIGURE 3â Trade surplus for construction, architectural, and engineering services, 1992â2004. Source: Bureau of Economic Analysis, cited in Nephew et al., 2005. Messner Figure 3 annual values vary widely depending on the number and type to detailed engineering, including the sizing and routing of of large projects in any given year. It is interesting to note piping; the design and location of electrical conduits and that the United States still has a trade surplus in CAE services wiring; and the detailing of structural elements. This type with low-income countries that are known for providing low- of repetitive, detailed engineering work makes offshoring cost engineering services to the EPC and AEC sectors of the more attractive than in some other design practices because construction industry. In 2004, the United States exported it is easier to systematize this type of work and less direct $107 million of CAE services to India (the location of many communication is required between the designers. offshoring centers used by EPC companies) and imported Of the companies that participated in the CII survey, 74 $42 million in services. This trade value does not include percent had international offices that were participating in company employees located in India, but does include con- multi-office execution strategies for the delivery of projects. tracted services by Indian companies. Therefore, the value Many had offices in low-cost engineering locations, such reflects only contracted offshoring, not all architectural and as India, China, Czech Republic, Russia, Romania, Poland, engineering offshoring. For large EPC companies, many of Mexico, and Taiwan. Some of these offices were established the offshore offices are sole ventures that are not included in specifically to provide low-cost engineering services for the import data. Nevertheless, it is clear that the volume of company projects. Others were developed to perform spe- CAE services performed under contracts with companies in cific design tasks for domestic construction projects. Large low-income countries is not great, and the United States has projects in low-wage countries often require that some design maintained a net surplus of services. work be done locally. In addition, it is sometimes necessary to use engineers in the local environment for code verifica- tion and other engineering work that requires a detailed un- Offshoring in the Engineering, Procurement, derstanding of the local environment. It is important to note and Construction Sector that many companies have international engineering offices Offshoring in the EPC sector of the construction industry in high-wage countries, such as England, Finland, and United is not new. One survey respondent to the CII study stated Arab Emirates, to develop global virtual teams. that âthe use of low cost engineering centers has emerged One goal of the CII survey was to determine the factors as a common practice among many large engineering, that influence companies to establish global engineering procurement and construction (EPC) companies. This has teams for the execution of projects. Table 1, which shows sur- primarily been driven by the realization that a large portion vey results for EPC-sector companies, indicates that the top of the detailed engineering-design work can be treated as a five factors that drive engineering firms toward the offshoring commodity.â of engineering work are (1) the need to reduce the costs of Large capital facility projects in the EPC sector often engineering services, (2) competition, (3) global customers, require many hours of engineering work, much of it related (4) the need to locate services close to a project, and (5) the
OFFSHORING OF ENGINEERING SERVICES IN THE CONSTRUCTION INDUSTRY 143 TABLE 1â Factors Affecting Global Virtual Teaming in the and the creation of design details for a completed conceptual EPC Sector design. Little reliable data are available about the extent of Average Score these services being performed offshore, but the current (1 = low, perception is that the number of jobs currently performed Drivers of Offshoring 5 = high) Ranking offshore is relatively small. However, a few companies with Need to reduce engineering-services costs 4.3 1 larger offices in lower income countries present a different Competition 3.2 2 scenario. Global customers or local customers 3.2 3 The other primary professional services that can be pro- Need to locate services close to the project 3.1 4 vided offshore are engineering tasks for a building project, location Need to shorten engineering schedule 2.9 5 such as engineering design for the foundation, structure, Need to expand detailing work for the same 2.8 6 mechanical system, electrical system, storm-water manage- cost ment, lighting, and other technical systems. The design of Country, client, or funding source 2.8 7 these technical systems requires expertise in both design and requirements analysis. Again, there is no reliable source of data on the size Need to understand/comply with codes and 2.7 8 standards or scale of offshoring in building engineering disciplines. Company policy (e.g., global procurement 2.6 9 Some companies offshore work, such as steel detailing for of services) fabrication, wood-truss detailing, and mechanical-ductwork Need to balance engineering workload 2.5 10 detailing; and based on survey results, the number of these among multiple offices companies is growing. Companies that are offshoring are Developments in technology 2.4 11 Availability of engineers 2.4 12 typically not interested or not willing to share detailed infor- Need to improve engineering quality 2.3 13 mation about their initiatives. However, the range of services Need to maintain consistency of 2.3 14 being offshored is believed to be relatively limited. products/services Several reasons have been provided for the limited off- Changing education/demographics 2.1 15 shoring in the AEC sector: Sources: EPC and owner data, Messner, 2006b. â¢ Most AEC firms are small, which make the economies of scale for offshoring less attractive when considering need to shorten the engineering schedule. Of these factors, an initial investment. the need to reduce costs, with an average score of 4.3 out â¢ Some projects involve secure or sensitive information of 5, ranked significantly higher than the other factors. the owner does not want distributed to non-U.S.-based Companies in the EPC sector face several significant service providers. challenges, including an aging engineering workforce. In the â¢ Design professionals must have significant interaction EPC sector, there is a growing shortage of engineers with 10 with the owner and other design professionals, which to 25 years of experience. In a study by Gibson et al. (2003), can be challenging when offshoring a project. 69 percent of the workforce was 40 years of age or older. The â¢ Local knowledge about the project conditions is im- study also concluded that the supply of new engineers would portant (e.g., soil conditions, local codes, standard be âinsufficient to replace departing engineers and to support construction practices, standard materials, and archi- the level of growth desired by some owners and nearly all tectural norms in the country). contractor firms.â â¢ Under current market conditions, design professionals can get reasonable fees with their existing labor force, which limits the incentive to reduce costs. Offshoring in the Architectural, Engineering, and Construction Sector Service providers in low-wage countries are organizing to Offshoring in the AEC sector primarily affects two profes- provide design services with offshore labor to architecture sional groups, engineers and architects. Until very recently, and engineering companies. To date, no large offshore com- very little work on U.S. projects was performed by offshore panies, such as Tata Group, Wipro, or Infosys in information architects or technicians. This is changing, however, as technology, have had a significant impact. As more foreign companies are looking for opportunities to offshore lower companies and domestic consulting companies provide and skilled techniciansâ jobs to lower cost markets. An example manage these services, it will become easier for architectural of this type of service is the transformation of hand-drafted and engineering companies to become involved in offshoring documents into 2D CAD or 3D CAD models. This straight- on a smaller scale (Bryant, 2006). At that point, the primary forward task, traditionally performed by CAD technicians issue will be how much work companies will be willing to or young architects, can be performed without extensive perform with offshore labor. Most architectural and engineer- knowledge of a project. Other tasks being outsourced include ing companies are small, and offshoring large parts of their the development of intelligent building information models business would be a significant undertaking.
144 THE OFFSHORING OF ENGINEERING Many architects and engineers are also very aware of their TABLE 2â Perceived Effect of Offshoring on Cost, Time, responsibility as service providers to the facility owner, as and Quality by CII Respondents well as their legal responsibilities for the final design. There- Impact on Metric fore, many may hesitate to begin offshoring because of a per- More More ceived loss of control over the design process and challenges Performance than 10% 0â10% 0â10% than 10% in communication and oversight. It is much more likely that Metric increase increase Same reduction reduction detailed analysis and modeling work will be performed with Engineering cost 4% 2% 7% 39% 48% offshore labor, because these tasks have traditionally been Construction cost â 4% 75% 17% 4% performed by technicians and lower level engineers who Engineering time 2% 18% 48% 24% 8% are just starting their careers. Consistent procedures have Overall project â 9% 59% 30% 2% been developed for these well defined tasks that can ensure delivery time Engineering 6% 11% 65% 18% â quality performance with little oversight. It is interesting to quality note that these same tasks have increasingly been replaced Construction 2% 19% 72% 7% â by software tools that can perform them automatically. For quality example, the detailing of steel continues to get easier as new Source: Messner, 2006b. computer applications automate the sizing and detailing of steel members and connections and newÂ 3D modeling software makes it easier to develop detailed 3DÂ information models for facilities. such as added travel, planning time, and information-system EFFECTS OF OFFSHORING ON ENGINEERING COST costs. A detailed study of projects by one large owner illustrates In the previous section, the primary driver for offshoring the potential savings on large capital facility projects based was shown to be cost reduction. Therefore, a critical ques- on the use of low-cost engineering labor. The study analyzed tion for the future of offshoring is if or how much offshoring five projects completed between 1992 and 2001. The owner reduces engineering costs. Several indicators suggest that was able to reduce engineering costs on all projects from an offshoring, when properly executed, can reduce overall engi- average of 16.9 percent for a typical facility to a design cost neering costs, at least for large-facility projects and specific, of only 10.2 percent. This means a total reduction in design- well defined tasks for smaller projects. service costs of 40 percent compared to the typical costs The CII survey included questions about respondentsâ (Messner, 2006a). The project team did not notice specific perceptions of how some offshore engineering work affected negative impacts for construction costs, although the com- the cost, time, and quality of projects. For any project, one pany had to overcome many challenges in the execution of must consider not only initial engineering-design cost, but the projects with engineers from different locations. also the total delivered-facility cost. Therefore, the survey This information is not meant to justify offshoring of asked about the effects on engineering and construction engineering services or to convince a company to pursue off- costs, as well as on time and schedule. Table 2 shows that shoring. It is intended to present findings based on opinions most of the contractors who felt that offshoring could reduce and some quantitative analysis of the impact of offshoring on costs projected the cost savings to be more than 10 percent. the cost structure of large capital facility projects. Like many In addiÂtion, they believed this reduction could be achieved other industries, the construction industry is extremely cost with no increase (and a potential decrease) in construction conscious. Therefore, economic factors must be considered cost. Opinions differed markedly about potential savings in when predicting future trends. If design and construction time, with the average response being that there was no ef- firms can consistently reduce their overall engineering costs fect. Most participants felt that engineering quality was the through offshoring without negatively impacting quality, same or slightly lower with offshoring but that construction then they will certainly continue the current trend of offshor- quality was the same or better. ing engineering work to countries that maintain a supply of Cost is one of the main concerns in facility design, and low-cost engineers. the cost of architectural and engineering-design services Different construction industry participants reaped differ- varies widely as a percentage of the cost of a project. Typi- ent benefits from offshoring. Facility owners, for example, cally, these costs are from 7 to 18 percent of the total capital may attempt to lower the cost for engineering services on a cost of a project, depending on its complexity and size. The project. During an interview, one executive stated that âsome cost of design services is impacted by labor rates for design projects become viable due to outsourcing, thereby creating professionals and productivity of the workforce. Even though more jobs once the project is complete.â Thus offshoring engineers in lower income countries earn significantly less might not only benefit the owner, but might also increase than U.S. engineers, some costs increase with offshoring, employment in the local economy. There are also potential costs of offshoring for U.S. citi-
OFFSHORING OF ENGINEERING SERVICES IN THE CONSTRUCTION INDUSTRY 145 zens, such as a decrease in engineering and architectural jobs on quality. Both opinions are predicated on a widely held in the U.S. market and downward pressure on the salaries of perception by U.S. practitioners that engineering services U.S. engineers. Another potential cost is a decrease in tax performed in low-cost centers is of lower quality. However, revenue paid to the U.S. government for services subcon- a few believe that the quality differential is generated not by tracted to offshore companies. But it is also important to lower quality engineering but by poor communications and note that if companies get more work because their design management. costs are lower, the overall tax revenue may increase. One thing is clearâif U.S. companies lose contracts because of ADDRESSING THE ISSUES RAISED BY OFFSHORING their higher cost structure for engineering, they will also lose engineering and architectural jobs and bring in less revenue. Because offshoring in the construction industry will con- In addition, fewer U.S. products will be incorporated into tinue to increase, it is important that steps be taken to mini- designed projects. mize the negative impacts of offshoring and take advantage of possible benefits. In the following sections, some of these steps are described briefly. THE FUTURE OF OFFSHORING IN THE CONSTRUCTION INDUSTRY Preparing Engineers for Global Team Responsibility Predicting what the future holds for the construction industry is difficult, especially because of the limited data One very important step that can be taken is to ensure on offshoring. There is a clear and consistent perception on that engineers who enter the construction industry, no matter the part of executives that the level of offshore outsourcing what their discipline, are prepared to work toward a global will increase. When asked about plans for their companies, design management role. This will require that students learn 92.5 percent of contractors in the CII survey said they plan about global issues along with the managerial skills they will to increase offshoring. Many interview subjects said they need to manage a global virtual team. believe an increase in offshoring in the industry is inevitable Recent changes in the assessment of education outcomes because of the need to reduce the costs of design services by the Accreditation Board for Engineering and Technology and the limited number of engineers in the U.S. market who (ABET) reflect the change in focus from input (or teaching) can meet the industryâs needs. to outcomes (or learning) (ABET, 2000). Since the imple- Some interviewees felt that the increased offshoring mentation of Engineering Criteria 2000 (EC 2000) by ABET, would be detrimental to the quality of design services in the the emphasis on professional skills has increased (Lattuca et industry. As one survey participant put it, âEventually, all al., 2006). International travel by students and participation owners will get what they wantâlow cost designsâhigh in study-abroad programs have also increased in the past 10 cost problems.â Many engineering disasters have been years (Lattuca et al., 2006). It is critical that these activities caused by poor coordination, communication, and un- continue to be supported and expanded. derstanding of design responsibilities. The possibility for Efforts are also under way to add four outcomes for these kinds of problems increases when engineering work students in civil engineering programs to the 11 EC 2000 is done by global virtual teams. Many who had already es- criteria. These outcomes, âthe knowledge, skills and traits tablished operational, low-cost engineering centers abroad necessary to become a licensed professional engineer,â are believe that they can develop quality engineered solutions described in The Civil Engineering Body of Knowledge for and documentation at a lower cost in their design centers, the 21st Century: Preparing the Civil Engineer for the Future provided the design teams are properly structured and man- (ASCE, 2004). In this report, outcomes related to business, aged. Some even use the lower cost structure to create more public policy, the understanding of the role of a leader, and detailed designs than they would typically develop in the leadership principles are defined and described. These ad- United States. Because design costs are lower, they argue, ditional criteria would expand the range of knowledge of they can save in construction costs with added detailing and engineering graduates and help prepare them to participate coordination. in global engineering teams. The recommendations in this Much of the quality debate associated with offshore out- study are consistent with recommendations developed by the sourcing depends on the industry perspective and industry National Academy of Engineering in The Engineer of 2020 segment. For example, if you consider the construction in- (NAE, 2004). dustry a service industry, then it is more difficult to provide good service to a client when separated by distance and Leadership and Research by Professional Societies culture, which cannot be avoided with global engineering teams. But if you view engineering services as well defined Professional societies have the opportunity and the re- tasks (more like a commodity), then you are more likely to sources to analyze offshoring and point the way to changes consider a low-cost engineering center a viable option for that will help the U.S. construction industry and other in- performing cost-effective design services with little impact dustries address the effects of increased offshoring. Some
146 THE OFFSHORING OF ENGINEERING professional societies have issued policy statements to ad- Retraining to Meet Changing Demand dress the issue. The American Society of Civil Engineering, As offshoring increases, the demand for engineers, archi- for example, has approved the following policy statement on tects, and technicians with particular skills in the industry offshoring of engineering services (ASCE, 2005): will change. For example, some technicians are specifically The American Society of Civil Engineers (ASCE) believes focused on the development of 2D CAD or 3D models from that the offshoring of engineering services should be accom- existing paper-based drawings or sketches. This type of work plished in a manner that protects the public health, safety and is easy for companies to offshore. Unless these workers are welfare. ASCE believes that A/E [architectural and engineer- taught some new skills, they risk losing their jobs. Compa- ing] services must address the following criteria: nies and the government should consider providing programs â¢ Appropriate homeland security requirements; to support the retraining of technical employees in areas â¢ Licensing laws related to responsible charge; that are in higher demand in the U.S. market. As offshore â¢ Principles and/or requirements of Qualification-Based engineers gain expertise (move up the value chain), U.S. Selection using full disclosure of staffing and location; engineers will have to continually outpace their lower cost and counterparts in productivity or knowledge. It is important â¢ Fair trade agreement practices which apply. that these engineers be provided with guidance and retrain- ing to enable them to remain active participants in the U.S. In January 2004, the National Society of Professional market. Engineers (NSPE) Board of Directors approved a much more restrictive position statement: Government Support for Exporting Engineering Services . . . the outsourcing of engineering should be done only when the talent cannot be found in the US. If outsourcing of For the long-term competitiveness of design professionals engineering work is done, it should be done using the same in the U.S. market, U.S. firms must remain competitive on rules, regulations, and laws that employers and employees a global scale. This will require that the U.S. government are subject to in the US. facilitate the entry of U.S. engineering and architectural firms into foreign markets. The more work they do in inter- In addition, NSPE says that outsourcing should not jeopar- national markets, the more overall work will be managed dize national security and that all parties should be aware of and executed by U.S. employees, even if some of the design the location of offshore work and the conditions under which work for these projects is performed by an offshore work- it is performed (Boykin, 2004). force. The U.S. government already provides some support These policy statements differ significantly. For profes- for the export of architectural and construction services, but sional societies to accurately analyze the impact of offshor- not at the same level as some foreign governments (Vonier, ing and provide guidance for engineers and companies in 2006). The continued expansion of markets and revenue for the construction industry, they will need additional data to companies is critical to maintaining a thriving international support these policy statements. Professional societies have and domestic construction industry. an opportunity to provide accurate information to their con- stituents on this topic that could lead to the development of recommendations for public policy. Ensuring Information Security For national security reasons, data related to U.S. and sen- Government-Imposed Trade Barriers sitive facilities abroad must be appropriately managed. This does not necessarily mean that work cannot be performed One thing is clear from surveys and interviews with ex- in international locations, but additional security measures ecutives in the construction industry. Whether or not they must be implemented when sensitive information is involved. support increases in offshoring, none of the respondents for Facility information related to infrastructure systems and this research wants the U.S. government to intervene by es- building projects in the United States should not be readily tablishing trade barriers that would impact the flow of trade available to all people throughout the world. in engineering services in the industry. Executives in com- panies that already use lower cost engineering centers feel that limiting the use of offshore engineers would negatively Recruiting and Retaining Engineers impact their ability to compete on a global scale. Execu- in the Construction Industry tives in companies that do not offshore engineering services Finally, we must send a realistic message to potential believe that government restrictions would simply not work engineering and architectural college students. Many fac- over the long term. tors, including salary and the image of the industry, impact a studentâs decision to pursue engineering in the construction
OFFSHORING OF ENGINEERING SERVICES IN THE CONSTRUCTION INDUSTRY 147 industry. Prospective students and their parents receive many will remain as it is. The construction industry is dependent negative messages through the media about the potential im- upon the capital-project spending of other industries (e.g., pacts of offshoring on engineering jobs in the United States. the oil, housing, and transportation industries, and private- Unfortunately, media stories rarely distinguish between the sector companies, etc.) Therefore, construction spending in types of jobs being offshored. Although offshoring will any particular segment of the industry is constantly changing. clearly have long-term effects on the structure of the con- If spending declines in market sectors with high rates of off- struction industry and the way engineering work is done, shoring (e.g., the power market), employment by companies there will continue to be a strong domestic demand for well in those sectors could easily be impacted. educated, motivated engineers. The United States is a net exporter of design services We should aggressively encourage young people to enter (architectural, engineering, and construction services) in engineering disciplines that support the construction indus- the construction industry, and the export of these services try, and universities must continue to work hard to retain provides significant benefits to construction companies and students in engineering fields by putting more emphasis on suppliers to the construction industry, as well as some other career progression, career coaching, salary comparisons, and companies. When U.S. design firms perform a project design, even the intangible benefits of seeing the results of a project. they tend to use materials and equipment that are familiar to Prospective students should be presented with an economic them, which are likely to be produced by U.S. suppliers, and picture of the industry that makes sense, and the industry they tend to support the use of U.S. contractors, who often should find ways to provide more support to students and have working relationships with the U.S. firms. Thus other develop a more robust talent pipeline. sectors of the U.S. economy also benefit. Many large design firms believe that the use of offshore, low-cost engineering centers enables them to remain cost CONCLUSIONS competitive in the low-margin environment typical of en- Offshoring in the construction industry will clearly have gineering projects in the construction industry. Some argue an impact, but it may not mirror the trends in other service or that using lower cost engineers in international locations, manufacturing industries. To date, most offshore outsourcing such as India, Mexico, and Eastern Europe, gives them an has been done for large capital facility projects that require advantage in winning engineering contracts. Without this many engineering hours. These projects are undertaken only cost advantage, they argue, those contracts might be awarded by large engineering companies in the United States and to competitors in other countries, thereby impacting the U.S. other high-income markets throughout the world. Most U.S. engineering community, as well as other construction com- companies are currently aggressively hiring new engineers panies and suppliers in the U.S. market. in the U.S. market, even as they expand their engineering While offshoring is not currently causing a decline in workforces in lower income countries. Therefore, to date engineering employment in the construction industry, it is offshoring has not had a significant impact on the employ- very important that the industry and the country focus now ment of engineers in the U.S. construction industry, although on fundamental changes to address the clear trend toward some lower level engineering technician and engineering offshoring. Recommendations for preparing for the future work has been relocated offshore. include expanding the range of engineering education to The fragmented nature of the AEC sector of the con- improve teamwork and leadership skills; increasing support struction industry, combined with the sheer complexity for U.S. companies competing for work overseas; ensuring and unique qualities of each project and the necessity of that national security and intellectual property are appropri- understanding ownersâ requirements, make offshoring on a ately protected when companies use offshore design profes- large scale more difficult in the construction industry than in sionals; providing guidance to engineers in the industry; some other industries. Some companies have focused on the and supporting research to improve our understanding of systematization of global virtual teaming processes to ben- offshoring and improve the quality of data. Finally, we must efit from offshore engineers, but many have not yet revised encourage young people to pursue careers in engineering in their standard business practices to use lower cost engineers the construction industry. to provide services. A significant number of executives are concerned that the use of lower cost engineers will have ACKNOWLEDGMENTS a negative impact on the quality of engineering services, thereby decreasing, or even cancelling out, the benefits of The author would like to thank the National Academy of reducing engineering labor costs. Engineering and the Construction Industry Institute (CII) for So far, employment prospects for new college graduates their generous support of this research. We thank especially or experienced engineers in the U.S. engineering workforce Samuel Florman and George Tamaro of the NAE Committee in the construction industry have not been much affected by on the Offshoring of Engineering and the CII Project Team offshore outsourcing. This does not mean that this situation 211 members. The author would also like to thank survey and
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