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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications
Offshoring of Engineering Servicesin the Construction Industry
John I. Messner, Ph.D.
Director, Computer Integrated Construction Research Program
Associate Professor of Architectural Engineering
Pennsylvania State University
ABSTRACT
The construction industry is a large contributor to the U.S. and world economies. Participants in the industry are responsible for designing and constructing the built environment including infrastructure, housing, offices, and other facilities. This diverse industry has many project types and requires that many engineering disciplines (civil, electrical, mechanical, chemical, and architectural) work together. Employment in the industry is currently strong and is supported by a strong U.S. and global construction market.
Offshoring of engineering services in the construction industry is not new. U.S. companies have had offshore offices in low-income countries for many years to perform design and construction management services. But with the increase in information technology and the drive to reduce engineering costs on projects, offshoring in the industry has increased recently. In particular, many large capital projects being built by U.S. companies are being designed with some level of engineering work in low-cost engineering centers. To date, offshoring of design services for smaller projects is limited to a relatively small amount of CAD drafting, 3D modeling, and engineering detailing performed by offshore technicians, architects, and engineers.
Although offshoring is having an impact on the U.S. construction industry and the structure of jobs in the industry, the impact is limited at this time. The United States remains a net exporter of design services in the construction industry and employment for engineers remains strong. But the industry is prone to economic cycles that could have a significant impact on this situation in the future. Therefore, it would be prudent to consider taking steps to minimize potential negative impacts of offshoring. U.S. companies will certainly continue to use lower cost labor in other countries to remain competitive globally and to make the construction of more facilities by U.S. companies economically viable.
Measures that should be considered to address the impacts of offshoring include supporting the education and development of globally focused engineers; supporting the export of engineering services from the United States; ensuring that national security and intellectual property are appropriately protected when design services are offshored; and encouraging young people to pursue productive careers in engineering in the construction industry.
The construction industry is a large, diversified industry that focuses on the design, delivery, and renovation of a wide range of facilities, from large petrochemical plants, bridges, buildings, tunnels, roads, and ports to residential units. These facilities play a significant role in housing the population and providing core infrastructure. Engineers from many disciplines perform many different tasks in this diversified industry, including facility programming, design of engineered systems, construction engineering and management, and facility management.
The revenues for the global construction industry total $3.9 trillion per year (Tulacz, 2005). The United States has the largest construction market of any country with a current annual value of approximately $1.22 trillion, 9.2 percent of the gross domestic product of the United States (USCB, 2006b). U.S. companies also perform more than $34 billion per year in international work (ENR, 2006a).
The U.S. construction market has recently grown significantly. Figure 1 shows the annual construction spending from 1993 to 2005. The average annual growth rate during this period was 7.3 percent. Construction spending in the
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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications
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
The construction industry is a large contributor to the U.S. and world economies. Participants in the industry are responsible for designing and constructing the built environment including infrastructure, housing, offices, and other facilities. This diverse industry has many project types and requires that many engineering disciplines (civil, electrical, mechanical, chemical, and architectural) work together. Employment in the industry is currently strong and is supported by a strong U.S. and global construction market.
Offshoring of engineering services in the construction industry is not new. U.S. companies have had offshore offices in low-income countries for many years to perform design and construction management services. But with the increase in information technology and the drive to reduce engineering costs on projects, offshoring in the industry has increased recently. In particular, many large capital projects being built by U.S. companies are being designed with some level of engineering work in low-cost engineering centers. To date, offshoring of design services for smaller projects is limited to a relatively small amount of CAD drafting, 3D modeling, and engineering detailing performed by offshore technicians, architects, and engineers.
Although offshoring is having an impact on the U.S. construction industry and the structure of jobs in the industry, the impact is limited at this time. The United States remains a net exporter of design services in the construction industry and employment for engineers remains strong. But the industry is prone to economic cycles that could have a significant impact on this situation in the future. Therefore, it would be prudent to consider taking steps to minimize potential negative impacts of offshoring. U.S. companies will certainly continue to use lower cost labor in other countries to remain competitive globally and to make the construction of more facilities by U.S. companies economically viable.
Measures that should be considered to address the impacts of offshoring include supporting the education and development of globally focused engineers; supporting the export of engineering services from the United States; ensuring that national security and intellectual property are appropriately protected when design services are offshored; and encouraging young people to pursue productive careers in engineering in the construction industry.
The construction industry is a large, diversified industry that focuses on the design, delivery, and renovation of a wide range of facilities, from large petrochemical plants, bridges, buildings, tunnels, roads, and ports to residential units. These facilities play a significant role in housing the population and providing core infrastructure. Engineers from many disciplines perform many different tasks in this diversified industry, including facility programming, design of engineered systems, construction engineering and management, and facility management.
The revenues for the global construction industry total $3.9 trillion per year (Tulacz, 2005). The United States has the largest construction market of any country with a current annual value of approximately $1.22 trillion, 9.2 percent of the gross domestic product of the United States (USCB, 2006b). U.S. companies also perform more than $34 billion per year in international work (ENR, 2006a).
The U.S. construction market has recently grown significantly. Figure 1 shows the annual construction spending from 1993 to 2005. The average annual growth rate during this period was 7.3 percent. Construction spending in the
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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications
FIGURE 1 Construction spending, 1993–2005. Source: USCB, 2006b.
U.S. market increased by 12 percent from 2003 to 2004 and 11 percent from 2004 to 2005. This rate slowed slightly in 2006 to 8.5 percent (USCB, 2006b).
The global construction market has also been growing in response to the need for infrastructure and housing in developing nations such as China and India, along with continued investments in high-income countries. Data on the overall size of the global industry are limited and not very reliable, but Engineering News Record data collected from multiple sources show that the global construction market grew from $3.4 trillion in 1999 (ENR, 2000) to $3.9 trillion in 2004 (Tulacz, 2005), a growth rate of 14.7 percent over a five-year period.
The U.S. share of international work (work performed by a company not headquartered in the country where the construction is done) has been declining. In 2005, U.S. construction companies listed in Engineering News Record “Top 225 International Contractors” had revenues of $34.8 billion, or 18.4 percent of the international work done by the largest 225 international contractors (ENR, 2006a). This percentage is down from 36.5 percent in 1985, although it has remained relatively stable for the past 10 years.
One of the most significant challenges facing the U.S. construction industry is the supply of workers, both field employees and professional employees. Fewer people are interested in working in the construction trades, which has raised problems for the consistent delivery of quality facilities. Significant efforts are being made to recruit new design professionals into the industry, but these efforts face many barriers, including a negative perception of the construction industry and low salaries relative to other industries. The limited recruitment of new design professionals, combined with an aging population of experienced engineers who are approaching retirement, is making it difficult for the industry to find employees to design and manage the construction of facilities.
This paper focuses on offshoring of design and construction management services in the construction industry. However, there is no universal definition for offshoring (Trefler, 2005), and the definition is important. The American Society of Civil Engineering (ASCE) has defined offshoring in the construction industry as “the practice of acquiring architectural/engineering services from sources outside of the United States” (ASCE, 2005). But, because some level of design services have historically been performed in other countries for international construction projects, this definition seems incomplete. For example, if a power plant is being constructed by a U.S. contractor in India, some design work has historically been performed in India, and some design work may have also been performed in the country of the large equipment suppliers. Therefore, I propose that we use the following definition:
Offshoring of design services in the construction industry is the relocation of work that is typically performed in one country to design professionals in the same company in another country, or to a different company in another country, to reduce wage rates.
Sometimes offshoring is performed through offshore outsourcing, that is, when a company hires an external company to perform a service in another country. At other times services are performed by company employees located in a company office in another country. Large international construction companies work in many international locations and have set up offshore offices to perform services on their international projects. Many of these services would not typically be performed in the United States, and thus they are not covered by the definition of offshoring, which considers
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the potential shift in work from the United States to offshore locations. But recently companies have been either setting up offices, using existing offices, or hiring companies abroad to perform design services that have previously been performed in the U.S. office. These services do fit the proposed definition of offshored services.
ENGINEERING SERVICES IN THE CONSTRUCTION INDUSTRY
The construction industry can be divided into several categories. For the analysis of offshoring, it is helpful to separate the industry into two market sectors: (1) the engineering, procurement, and construction (EPC) sector, and (2) the architectural, engineering, and construction (AEC) sector. Companies that perform work in the EPC sector focus on large industrial or infrastructure facilities. Companies in this sector tend to be large and employ many engineers and engineering technicians to work on the design and construction of large projects, such as power plants, refineries, industrial facilities, offshore platforms, and public works such as water purification plants, wastewater treatment plants, dams and rail projects. Companies in the AEC sector are much more diversified. Engineers in this sector work on the design and construction of buildings and residential facilities. The AEC sector is fragmented and is serviced by a large number of small companies. A number of companies perform work in both the EPC and AEC sectors, but these companies typically have different divisions for each sector.
This paper addresses the offshoring of engineering services in both sectors of the construction industry. The residential construction portion of the AEC sector (approximately 55 percent of U.S. construction) (USCB, 2006a) is not included because, even though there are some large residential developers that construct many units per year, a majority of residential design and construction companies are very small and offshoring remains limited in this sector.
There are almost 2.8 million construction firms employing more than 7 million people in the United States (U.S. Census Bureau, 2002), but the vast majority of these companies are very small; about two-thirds of them have fewer than 5 employees (BLS, 2006b). However, Bechtel, the largest U.S. contractor by revenue in 2005, had total revenues of $14.6 billion, with $7.2 billion in international markets (ENR, 2006b). Therefore, approximately 0.6 percent of the U.S. market revenue flows through this one company. The contractor with the largest share of the U.S. domestic market was Centex with $12.6 billion in U.S. revenue, approximately 1 percent of the U.S. market (ENR, 2006b). The combined revenue of the 400 largest contractors for 2005 totaled $200 billion (19 percent of the U.S. market) (ENR, 2006b).
As these figures show, the construction industry is very different from many other industries, which are controlled by a small number of large companies. It is also important to recognize that a very large percentage of the revenue for the top 400 contractors is subcontracted to specialty firms. Therefore, the industry is very diverse with many different companies contributing to facility construction.
Design work, which includes architectural and engineering services, is one portion of the overall revenue in the construction industry. According to Engineering News Record, which ranks the top 500 design firms in the United States each year, they generated $59.25 billion in design revenue in 2005, an increase of 11.8 percent over 2004 (ENR, 2006c). Engineering is important to all phases of the construction and delivery of a capital facility. The primary phases for delivering and operating a facility have been defined by Sanvido et al. (1990) as managing, planning, designing, constructing, and operating a facility. The involvement of engineers in each of these phases varies, from the initial facility concept through the operation and renovation of a completed facility.
The projects most likely to involve offshore engineers have certain identifiable characteristics. Engineers typically perform work on large, unique projects. Owners rarely use the same design for multiple buildings or facilities. Even if they do, the design must be modified to accommodate site conditions, and projects must comply with building codes in the location of the project. To design a facility to meet local codes and to take into account local geotechnical, weather, and cultural conditions requires significant local knowledge. Thus local design firms have an advantage. No matter the location of the project, some degree of onsite construction will always be necessary. Thus onsite engineering support is always necessary.
Another important factor is that owners are typically actively involved in the design of their facilities, which requires frequent interaction between owners, or owners’ representatives, and architects and engineers. Finally, many owners do not want the detailed design information for their facilities widely distributed to international locations. Thus security of the data is important on many projects. These factors can all make it more difficult to manage engineering teams from various locations, and therefore more difficult to execute a project with offshore engineering labor.
DATA-COLLECTION METHODOLOGY
The data used in this paper to analyze the current status of offshore outsourcing in the construction industry are taken from several sources, including the Bureau of Labor Statistics, the U.S. Census Bureau, the Bureau of Economic Analysis, the National Science Foundation, and Engineering News Record. Data are also taken from two surveys performed at Pennsylvania State University. The first survey was completed in 2004 and was sponsored by the Construction Industry Institute (CII). This survey was developed with significant industry input from a research team (CII Project Team 211) with 16 industry and four academic members.
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Throughout this paper, this survey is referred to as the “CII survey.” Following the survey, more than 20 detailed interviews were conducted with survey participants to gain additional insight into their global sourcing strategies and challenges.
A second survey was distributed in July 2006 to the top U.S. design firms listed in the Engineering News Record “Top 225 Global Design Firms.” The survey was distributed to the directors of engineering or design of the 82 U.S. firms on the list. However, because only nine responses were received (a response rate of 11 percent), no statistical data will be presented from this survey. The survey did identify current perceptions of several large design firms in the industry, which are incorporated into the recommendations and comments in this paper. The small response to this survey illustrates the challenges of collecting data related to offshoring in the construction industry.
In general, it is difficult to draw accurate conclusions about offshoring based on the available data. No single source of data can be referenced to identify specific information about the current status or trends in offshoring in the construction industry. For example, no reliable data source provides a breakdown of domestic and foreign employees performing engineering and architectural services in construction companies. For future studies, we need to identify and develop methods to improve the collection of accurate data on the offshoring of engineering and architectural services jobs.
ENGINEERING EMPLOYMENT AND EDUCATION
Demand for Engineers
Civil engineering is the primary engineering discipline in the construction industry, but many other engineering disciplines are also important, including electrical, mechanical, industrial, environmental, and architectural engineering (Grigg, 2000). However, the remainder of this analysis focuses on civil engineering, which is the most representative engineering discipline in the industry. The unemployment rate for civil engineers in the U.S. market is only 2.2 percent (Rafferty, 2004). Of the 1.4 million engineers in the marketplace in 2004, 237,000 were civil engineers, the largest percentage (16.4 percent) of any single engineering discipline (BLS, 2006c). (The percentage of electrical engineering and computer science combined is larger.) Although there are many civil engineers in the workforce, the average starting salary for these graduates is one of the lowest for any engineering discipline. As of May 2004, the median salary for graduating civil engineers was $43,679 for a B.S., $48,050 for an M.S., and $59,625 for a Ph.D. (BLS, 2006c). The overall median salary for practicing civil engineers in May 2004 was $64,230, the second lowest of all engineering disciplines. The U.S. Department of Labor projects that an additional 39,000 civil engineers will be needed by 2014, a 16.5 percent increase (Hecker, 2005). This is one of the largest projected increases for an engineering discipline (the percentage increase is larger for environmental and biomedical engineers, but they are much smaller disciplines by quantity).
In addition to the statistics, it is clear from discussions with industry executives that one of the most significant challenges they face is the staffing of projects, which includes the recruitment and retention of engineers. Throughout the construction industry, there is currently a high demand for design and construction professionals in engineering and architecture in the U.S. market. In addition, the engineering workforce is aging, creating a shortage of experienced engineers in many large EPC companies. Because of this, these companies can offshore their engineering work with little impact on the size of the existing workforce in the United States.
In addition to engineers, architects are the other primary professional design participants with a significant impact on offshore outsourcing in the construction industry, particularly in the AEC sector. The Bureau of Labor Statistics (2006a) reported that there were approximately 129,000 architects in the United States in 2004, many of them professionally registered design practitioners. Architects had a reported median salary of approximately $60,300 (May 2004), and average projected growth for 2014 is 22,000 architects (17.3 percent).
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 supervision or in the construction trades (Hecker, 2005). This does not include manufacturing jobs related to the construction industry through the supply of building materials and equipment.
Supply of Engineers
In the United States, 7,827 B.S degrees were awarded in civil engineering in 2004, a decrease of more than 25 percent from 1981, when 10,678 were awarded (see Figure 2). The decline in civil engineering is similar to the decline in degrees in all engineering disciplines. In 2001, 59,258 B.S. degrees were awarded in all engineering disciplines, 23.6 percent fewer than the high of 77,572 in 1985 (NSF, 2004). But, although the number of engineering graduates in all disciplines has been declining since 1985, with only a slight increase between 1993 and 1995, the number of graduates in civil engineering increased sharply in the mid 1990s. Unfortunately, the number has declined from its peak in 1996.
In a recent study by Duke University, the number of degrees (bachelor’s and sub-baccalaureate) awarded for engineering, computer science, and information technology in 2003–2004 was estimated to be 644,106 in China; 222,335 in the United States; and 215,000 in India (Gereffi and Wadhwa, 2005). Obviously, significant numbers of engineers are
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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications
FIGURE 2 Bachelor’s degrees in civil engineering, 1971–2004. Source: NCES, 2005.
graduating from universities in lower wage countries, many in civil engineering, although the total number of engineers in these countries is a subject of debate. We do know that several of the largest universities in China are graduating civil engineers, including Tsinghua University with 811; Central South University with 593; and Wuhan University with 219 (Gereffi and Wadhwa, 2005).
U.S. companies can find and employ engineers in other countries (e.g., India, China, and Eastern Europe) for lower wages. Wage rates vary based on region and demand, but figures developed by Hira (2003) show that a typical engineer in the United States receives an annual salary of $70,000, while an engineer in China receives $15,120, and an engineer in India receives $13,580. Thus there is clearly a wage disparity between engineers in different countries. However, based on interviews with engineering directors in several companies, the wages for qualified engineers in Mumbai, India, and some other locations are increasing significantly.
CURRENT OFFSHORING IN THE CONSTRUCTION INDUSTRY
Limited data are available to quantify the current value of work being performed in lower wage, offshore locations. At this time, no single source of data in the public domain documents either the dollar value of offshore engineering work or the amount of engineering time spent by engineers in lower wage locations. The best data sources available at this time are surveys and interviews with industry practitioners. Data collection from these sources has obvious limitations, however, including the potential for inaccurate self-reporting, poor response rates, and reliance on perceptions instead of quantitative data. With these limitations in mind, survey and interview data can provide insights into the current status and future trends in offshoring.
To date, the offshoring of engineering services to lower wage locations has primarily been focused in the EPC sector. Large EPC contractors, and the owners who hire these contractors, were the focus of the CII Survey. Administered in July 2004, the survey had a total response of 46 people representing 33 companies (20 construction companies and 13 large-facility owners) (Messner et al., 2006a).
Some large construction companies have been very active in international markets and have been offshoring engineering work for more than 15 years (Rubin et al., 2004). Compared to several other service industries, the construction industry as a whole has been slow to adopt offshoring, but larger companies, as well as companies in several niche markets in the industry, have started to offshore tasks for some 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 development of engineering shop drawings for trade contractors (e.g., mechanical and steel subcontractors).
The United States is a net exporter of construction, architectural, and engineering services. According to data compiled by the Bureau of Economic Analysis (cited in Nephew et al., 2005), the United States had a trade surplus in construction architecture and engineering services (CAE services) of $2,991 million in 20041 (see Figure 3). The
1
The export value in the Bureau of Economic Analysis data does not include merchandise exports or outlays abroad for wages, services, materials, or other expenses. The import value is a total value.
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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications
FIGURE 3 Trade surplus for construction, architectural, and engineering services, 1992–2004. Source: Bureau of Economic Analysis, cited in Nephew et al., 2005.
annual values vary widely depending on the number and type of large projects in any given year. It is interesting to note that the United States still has a trade surplus in CAE services with low-income countries that are known for providing low-cost engineering services to the EPC and AEC sectors of the construction industry. In 2004, the United States exported $107 million of CAE services to India (the location of many offshoring centers used by EPC companies) and imported $42 million in services. This trade value does not include company employees located in India, but does include contracted services by Indian companies. Therefore, the value reflects only contracted offshoring, not all architectural and engineering offshoring. For large EPC companies, many of the offshore offices are sole ventures that are not included in the import data. Nevertheless, it is clear that the volume of CAE services performed under contracts with companies in low-income countries is not great, and the United States has maintained a net surplus of services.
Offshoring in the Engineering, Procurement, and Construction Sector
Offshoring in the EPC sector of the construction industry is not new. One survey respondent to the CII study stated that “the use of low cost engineering centers has emerged as a common practice among many large engineering, procurement and construction (EPC) companies. This has primarily been driven by the realization that a large portion of the detailed engineering-design work can be treated as a commodity.”
Large capital facility projects in the EPC sector often require many hours of engineering work, much of it related to detailed engineering, including the sizing and routing of piping; the design and location of electrical conduits and wiring; and the detailing of structural elements. This type of repetitive, detailed engineering work makes offshoring more attractive than in some other design practices because it is easier to systematize this type of work and less direct communication is required between the designers.
Of the companies that participated in the CII survey, 74 percent had international offices that were participating in multi-office execution strategies for the delivery of projects. Many had offices in low-cost engineering locations, such as India, China, Czech Republic, Russia, Romania, Poland, Mexico, and Taiwan. Some of these offices were established specifically to provide low-cost engineering services for company projects. Others were developed to perform specific design tasks for domestic construction projects. Large projects in low-wage countries often require that some design work be done locally. In addition, it is sometimes necessary to use engineers in the local environment for code verification and other engineering work that requires a detailed understanding of the local environment. It is important to note that many companies have international engineering offices in high-wage countries, such as England, Finland, and United Arab Emirates, to develop global virtual teams.
One goal of the CII survey was to determine the factors that influence companies to establish global engineering teams for the execution of projects. Table 1, which shows survey results for EPC-sector companies, indicates that the top five factors that drive engineering firms toward the offshoring of engineering work are (1) the need to reduce the costs of engineering services, (2) competition, (3) global customers, (4) the need to locate services close to a project, and (5) the
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TABLE 1 Factors Affecting Global Virtual Teaming in the EPC Sector
Drivers of Offshoring
Average Score (1 = low, 5 = high)
Ranking
Need to reduce engineering-services costs
4.3
1
Competition
3.2
2
Global customers or local customers
3.2
3
Need to locate services close to the project location
3.1
4
Need to shorten engineering schedule
2.9
5
Need to expand detailing work for the same cost
2.8
6
Country, client, or funding source requirements
2.8
7
Need to understand/comply with codes and standards
2.7
8
Company policy (e.g., global procurement of services)
2.6
9
Need to balance engineering workload among multiple offices
2.5
10
Developments in technology
2.4
11
Availability of engineers
2.4
12
Need to improve engineering quality
2.3
13
Need to maintain consistency of products/services
2.3
14
Changing education/demographics
2.1
15
Sources: EPC and owner data, Messner, 2006b.
need to shorten the engineering schedule. Of these factors, the need to reduce costs, with an average score of 4.3 out of 5, ranked significantly higher than the other factors.
Companies in the EPC sector face several significant challenges, including an aging engineering workforce. In the EPC sector, there is a growing shortage of engineers with 10 to 25 years of experience. In a study by Gibson et al. (2003), 69 percent of the workforce was 40 years of age or older. The study also concluded that the supply of new engineers would be “insufficient to replace departing engineers and to support the level of growth desired by some owners and nearly all contractor firms.”
Offshoring in the Architectural, Engineering, and Construction Sector
Offshoring in the AEC sector primarily affects two professional groups, engineers and architects. Until very recently, very little work on U.S. projects was performed by offshore architects or technicians. This is changing, however, as companies are looking for opportunities to offshore lower skilled technicians’ jobs to lower cost markets. An example of this type of service is the transformation of hand-drafted documents into 2D CAD or 3D CAD models. This straightforward task, traditionally performed by CAD technicians or young architects, can be performed without extensive knowledge of a project. Other tasks being outsourced include the development of intelligent building information models and the creation of design details for a completed conceptual design. Little reliable data are available about the extent of these services being performed offshore, but the current perception is that the number of jobs currently performed offshore is relatively small. However, a few companies with larger offices in lower income countries present a different scenario.
The other primary professional services that can be provided offshore are engineering tasks for a building project, such as engineering design for the foundation, structure, mechanical system, electrical system, storm-water management, lighting, and other technical systems. The design of these technical systems requires expertise in both design and analysis. Again, there is no reliable source of data on the size or scale of offshoring in building engineering disciplines. Some companies offshore work, such as steel detailing for fabrication, wood-truss detailing, and mechanical-ductwork detailing; and based on survey results, the number of these companies is growing. Companies that are offshoring are typically not interested or not willing to share detailed information about their initiatives. However, the range of services being offshored is believed to be relatively limited.
Several reasons have been provided for the limited offshoring in the AEC sector:
Most AEC firms are small, which make the economies of scale for offshoring less attractive when considering an initial investment.
Some projects involve secure or sensitive information the owner does not want distributed to non-U.S.-based service providers.
Design professionals must have significant interaction with the owner and other design professionals, which can be challenging when offshoring a project.
Local knowledge about the project conditions is important (e.g., soil conditions, local codes, standard construction practices, standard materials, and architectural norms in the country).
Under current market conditions, design professionals can get reasonable fees with their existing labor force, which limits the incentive to reduce costs.
Service providers in low-wage countries are organizing to provide design services with offshore labor to architecture and engineering companies. To date, no large offshore companies, such as Tata Group, Wipro, or Infosys in information technology, have had a significant impact. As more foreign companies and domestic consulting companies provide and manage these services, it will become easier for architectural and engineering companies to become involved in offshoring on a smaller scale (Bryant, 2006). At that point, the primary issue will be how much work companies will be willing to perform with offshore labor. Most architectural and engineering companies are small, and offshoring large parts of their business would be a significant undertaking.
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Many architects and engineers are also very aware of their responsibility as service providers to the facility owner, as well as their legal responsibilities for the final design. Therefore, many may hesitate to begin offshoring because of a perceived loss of control over the design process and challenges in communication and oversight. It is much more likely that detailed analysis and modeling work will be performed with offshore labor, because these tasks have traditionally been performed by technicians and lower level engineers who are just starting their careers. Consistent procedures have been developed for these well defined tasks that can ensure quality performance with little oversight. It is interesting to note that these same tasks have increasingly been replaced by software tools that can perform them automatically. For example, the detailing of steel continues to get easier as new computer applications automate the sizing and detailing of steel members and connections and new 3D modeling software makes it easier to develop detailed 3D information models for facilities.
EFFECTS OF OFFSHORING ON ENGINEERING COST
In the previous section, the primary driver for offshoring was shown to be cost reduction. Therefore, a critical question for the future of offshoring is if or how much offshoring reduces engineering costs. Several indicators suggest that offshoring, when properly executed, can reduce overall engineering costs, at least for large-facility projects and specific, well defined tasks for smaller projects.
The CII survey included questions about respondents’ perceptions of how some offshore engineering work affected the cost, time, and quality of projects. For any project, one must consider not only initial engineering-design cost, but also the total delivered-facility cost. Therefore, the survey asked about the effects on engineering and construction costs, as well as on time and schedule. Table 2 shows that most of the contractors who felt that offshoring could reduce costs projected the cost savings to be more than 10 percent. In addition, they believed this reduction could be achieved with no increase (and a potential decrease) in construction cost. Opinions differed markedly about potential savings in time, with the average response being that there was no effect. Most participants felt that engineering quality was the same or slightly lower with offshoring but that construction quality was the same or better.
Cost is one of the main concerns in facility design, and the cost of architectural and engineering-design services varies widely as a percentage of the cost of a project. Typically, these costs are from 7 to 18 percent of the total capital cost of a project, depending on its complexity and size. The cost of design services is impacted by labor rates for design professionals and productivity of the workforce. Even though engineers in lower income countries earn significantly less than U.S. engineers, some costs increase with offshoring,
TABLE 2 Perceived Effect of Offshoring on Cost, Time, and Quality by CII Respondents
Performance Metric
Impact on Metric
More than 10% increase
0–10% increase
Same
0–10% reduction
More than 10% reduction
Engineering cost
4%
2%
7%
39%
48%
Construction cost
—
4%
75%
17%
4%
Engineering time
2%
18%
48%
24%
8%
Overall project delivery time
—
9%
59%
30%
2%
Engineering quality
6%
11%
65%
18%
—
Construction quality
2%
19%
72%
7%
—
Source: Messner, 2006b.
such as added travel, planning time, and information-system costs.
A detailed study of projects by one large owner illustrates the potential savings on large capital facility projects based on the use of low-cost engineering labor. The study analyzed five projects completed between 1992 and 2001. The owner was able to reduce engineering costs on all projects from an average of 16.9 percent for a typical facility to a design cost of only 10.2 percent. This means a total reduction in designservice costs of 40 percent compared to the typical costs (Messner, 2006a). The project team did not notice specific negative impacts for construction costs, although the company had to overcome many challenges in the execution of the projects with engineers from different locations.
This information is not meant to justify offshoring of engineering services or to convince a company to pursue offshoring. It is intended to present findings based on opinions and some quantitative analysis of the impact of offshoring on the cost structure of large capital facility projects. Like many other industries, the construction industry is extremely cost conscious. Therefore, economic factors must be considered when predicting future trends. If design and construction firms can consistently reduce their overall engineering costs through offshoring without negatively impacting quality, then they will certainly continue the current trend of offshoring engineering work to countries that maintain a supply of low-cost engineers.
Different construction industry participants reaped different benefits from offshoring. Facility owners, for example, may attempt to lower the cost for engineering services on a project. During an interview, one executive stated that “some projects become viable due to outsourcing, thereby creating more jobs once the project is complete.” Thus offshoring might not only benefit the owner, but might also increase employment in the local economy.
There are also potential costs of offshoring for U.S. citi-
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zens, such as a decrease in engineering and architectural jobs in the U.S. market and downward pressure on the salaries of U.S. engineers. Another potential cost is a decrease in tax revenue paid to the U.S. government for services subcontracted to offshore companies. But it is also important to note that if companies get more work because their design costs are lower, the overall tax revenue may increase. One thing is clear—if U.S. companies lose contracts because of their higher cost structure for engineering, they will also lose engineering and architectural jobs and bring in less revenue. In addition, fewer U.S. products will be incorporated into designed projects.
THE FUTURE OF OFFSHORING IN THE CONSTRUCTION INDUSTRY
Predicting what the future holds for the construction industry is difficult, especially because of the limited data on offshoring. There is a clear and consistent perception on the part of executives that the level of offshore outsourcing will increase. When asked about plans for their companies, 92.5 percent of contractors in the CII survey said they plan to increase offshoring. Many interview subjects said they believe an increase in offshoring in the industry is inevitable because of the need to reduce the costs of design services and the limited number of engineers in the U.S. market who can meet the industry’s needs.
Some interviewees felt that the increased offshoring would be detrimental to the quality of design services in the industry. As one survey participant put it, “Eventually, all owners will get what they want—low cost designs—high cost problems.” Many engineering disasters have been caused by poor coordination, communication, and understanding of design responsibilities. The possibility for these kinds of problems increases when engineering work is done by global virtual teams. Many who had already established operational, low-cost engineering centers abroad believe that they can develop quality engineered solutions and documentation at a lower cost in their design centers, provided the design teams are properly structured and managed. Some even use the lower cost structure to create more detailed designs than they would typically develop in the United States. Because design costs are lower, they argue, they can save in construction costs with added detailing and coordination.
Much of the quality debate associated with offshore outsourcing depends on the industry perspective and industry segment. For example, if you consider the construction industry a service industry, then it is more difficult to provide good service to a client when separated by distance and culture, which cannot be avoided with global engineering teams. But if you view engineering services as well defined tasks (more like a commodity), then you are more likely to consider a low-cost engineering center a viable option for performing cost-effective design services with little impact on quality. Both opinions are predicated on a widely held perception by U.S. practitioners that engineering services performed in low-cost centers is of lower quality. However, a few believe that the quality differential is generated not by lower quality engineering but by poor communications and management.
ADDRESSING THE ISSUES RAISED BY OFFSHORING
Because offshoring in the construction industry will continue to increase, it is important that steps be taken to minimize the negative impacts of offshoring and take advantage of possible benefits. In the following sections, some of these steps are described briefly.
Preparing Engineers for Global Team Responsibility
One very important step that can be taken is to ensure that engineers who enter the construction industry, no matter what their discipline, are prepared to work toward a global design management role. This will require that students learn about global issues along with the managerial skills they will need to manage a global virtual team.
Recent changes in the assessment of education outcomes by the Accreditation Board for Engineering and Technology (ABET) reflect the change in focus from input (or teaching) to outcomes (or learning) (ABET, 2000). Since the implementation of Engineering Criteria 2000 (EC 2000) by ABET, the emphasis on professional skills has increased (Lattuca et al., 2006). International travel by students and participation in study-abroad programs have also increased in the past 10 years (Lattuca et al., 2006). It is critical that these activities continue to be supported and expanded.
Efforts are also under way to add four outcomes for students in civil engineering programs to the 11 EC 2000 criteria. These outcomes, “the knowledge, skills and traits necessary to become a licensed professional engineer,” are described in The Civil Engineering Body of Knowledge for the 21st Century: Preparing the Civil Engineer for the Future (ASCE, 2004). In this report, outcomes related to business, public policy, the understanding of the role of a leader, and leadership principles are defined and described. These additional criteria would expand the range of knowledge of engineering graduates and help prepare them to participate in global engineering teams. The recommendations in this study are consistent with recommendations developed by the National Academy of Engineering in The Engineer of 2020 (NAE, 2004).
Leadership and Research by Professional Societies
Professional societies have the opportunity and the resources to analyze offshoring and point the way to changes that will help the U.S. construction industry and other industries address the effects of increased offshoring. Some
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professional societies have issued policy statements to address the issue. The American Society of Civil Engineering, for example, has approved the following policy statement on offshoring of engineering services (ASCE, 2005):
The American Society of Civil Engineers (ASCE) believes that the offshoring of engineering services should be accomplished in a manner that protects the public health, safety and welfare. ASCE believes that A/E [architectural and engineering] services must address the following criteria:
Appropriate homeland security requirements;
Licensing laws related to responsible charge;
Principles and/or requirements of Qualification-Based Selection using full disclosure of staffing and location; and
Fair trade agreement practices which apply.
In January 2004, the National Society of Professional Engineers (NSPE) Board of Directors approved a much more restrictive position statement:
… the outsourcing of engineering should be done only when the talent cannot be found in the US. If outsourcing of engineering work is done, it should be done using the same rules, regulations, and laws that employers and employees are subject to in the US.
In addition, NSPE says that outsourcing should not jeopardize national security and that all parties should be aware of the location of offshore work and the conditions under which it is performed (Boykin, 2004).
These policy statements differ significantly. For professional societies to accurately analyze the impact of offshoring and provide guidance for engineers and companies in the construction industry, they will need additional data to support these policy statements. Professional societies have an opportunity to provide accurate information to their constituents on this topic that could lead to the development of recommendations for public policy.
Government-Imposed Trade Barriers
One thing is clear from surveys and interviews with executives in the construction industry. Whether or not they support increases in offshoring, none of the respondents for this research wants the U.S. government to intervene by establishing trade barriers that would impact the flow of trade in engineering services in the industry. Executives in companies that already use lower cost engineering centers feel that limiting the use of offshore engineers would negatively impact their ability to compete on a global scale. Executives in companies that do not offshore engineering services believe that government restrictions would simply not work over the long term.
Retraining to Meet Changing Demand
As offshoring increases, the demand for engineers, architects, and technicians with particular skills in the industry will change. For example, some technicians are specifically focused on the development of 2D CAD or 3D models from existing paper-based drawings or sketches. This type of work is easy for companies to offshore. Unless these workers are taught some new skills, they risk losing their jobs. Companies and the government should consider providing programs to support the retraining of technical employees in areas that are in higher demand in the U.S. market. As offshore engineers gain expertise (move up the value chain), U.S. engineers will have to continually outpace their lower cost counterparts in productivity or knowledge. It is important that these engineers be provided with guidance and retraining to enable them to remain active participants in the U.S. market.
Government Support for Exporting Engineering Services
For the long-term competitiveness of design professionals in the U.S. market, U.S. firms must remain competitive on a global scale. This will require that the U.S. government facilitate the entry of U.S. engineering and architectural firms into foreign markets. The more work they do in international markets, the more overall work will be managed and executed by U.S. employees, even if some of the design work for these projects is performed by an offshore workforce. The U.S. government already provides some support for the export of architectural and construction services, but not at the same level as some foreign governments (Vonier, 2006). The continued expansion of markets and revenue for companies is critical to maintaining a thriving international and domestic construction industry.
Ensuring Information Security
For national security reasons, data related to U.S. and sensitive facilities abroad must be appropriately managed. This does not necessarily mean that work cannot be performed in international locations, but additional security measures must be implemented when sensitive information is involved. Facility information related to infrastructure systems and building projects in the United States should not be readily available to all people throughout the world.
Recruiting and Retaining Engineers in the Construction Industry
Finally, we must send a realistic message to potential engineering and architectural college students. Many factors, including salary and the image of the industry, impact a student’s decision to pursue engineering in the construction
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industry. Prospective students and their parents receive many negative messages through the media about the potential impacts of offshoring on engineering jobs in the United States. Unfortunately, media stories rarely distinguish between the types of jobs being offshored. Although offshoring will clearly have long-term effects on the structure of the construction industry and the way engineering work is done, there will continue to be a strong domestic demand for well educated, motivated engineers.
We should aggressively encourage young people to enter engineering disciplines that support the construction industry, and universities must continue to work hard to retain students in engineering fields by putting more emphasis on career progression, career coaching, salary comparisons, and even the intangible benefits of seeing the results of a project. Prospective students should be presented with an economic picture of the industry that makes sense, and the industry should find ways to provide more support to students and develop a more robust talent pipeline.
CONCLUSIONS
Offshoring in the construction industry will clearly have an impact, but it may not mirror the trends in other service or manufacturing industries. To date, most offshore outsourcing has been done for large capital facility projects that require many engineering hours. These projects are undertaken only by large engineering companies in the United States and other high-income markets throughout the world. Most U.S. companies are currently aggressively hiring new engineers in the U.S. market, even as they expand their engineering workforces in lower income countries. Therefore, to date offshoring has not had a significant impact on the employment of engineers in the U.S. construction industry, although some lower level engineering technician and engineering work has been relocated offshore.
The fragmented nature of the AEC sector of the construction industry, combined with the sheer complexity and unique qualities of each project and the necessity of understanding owners’ requirements, make offshoring on a large scale more difficult in the construction industry than in some other industries. Some companies have focused on the systematization of global virtual teaming processes to benefit from offshore engineers, but many have not yet revised their standard business practices to use lower cost engineers to provide services. A significant number of executives are concerned that the use of lower cost engineers will have a negative impact on the quality of engineering services, thereby decreasing, or even cancelling out, the benefits of reducing engineering labor costs.
So far, employment prospects for new college graduates or experienced engineers in the U.S. engineering workforce in the construction industry have not been much affected by offshore outsourcing. This does not mean that this situation will remain as it is. The construction industry is dependent upon the capital-project spending of other industries (e.g., the oil, housing, and transportation industries, and privatesector companies, etc.) Therefore, construction spending in any particular segment of the industry is constantly changing. If spending declines in market sectors with high rates of offshoring (e.g., the power market), employment by companies in those sectors could easily be impacted.
The United States is a net exporter of design services (architectural, engineering, and construction services) in the construction industry, and the export of these services provides significant benefits to construction companies and suppliers to the construction industry, as well as some other companies. When U.S. design firms perform a project design, they tend to use materials and equipment that are familiar to them, which are likely to be produced by U.S. suppliers, and they tend to support the use of U.S. contractors, who often have working relationships with the U.S. firms. Thus other 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 competitive in the low-margin environment typical of engineering projects in the construction industry. Some argue that using lower cost engineers in international locations, such as India, Mexico, and Eastern Europe, gives them an advantage in winning engineering contracts. Without this cost advantage, they argue, those contracts might be awarded to competitors in other countries, thereby impacting the U.S. engineering community, as well as other construction companies and suppliers in the U.S. market.
While offshoring is not currently causing a decline in engineering employment in the construction industry, it is very important that the industry and the country focus now on fundamental changes to address the clear trend toward offshoring. Recommendations for preparing for the future include expanding the range of engineering education to improve teamwork and leadership skills; increasing support for U.S. companies competing for work overseas; ensuring that national security and intellectual property are appropriately protected when companies use offshore design professionals; providing guidance to engineers in the industry; and supporting research to improve our understanding of offshoring and improve the quality of data. Finally, we must encourage young people to pursue careers in engineering in the construction industry.
ACKNOWLEDGMENTS
The author would like to thank the National Academy of Engineering and the Construction Industry Institute (CII) for their generous support of this research. We thank especially Samuel Florman and George Tamaro of the NAE Committee on the Offshoring of Engineering and the CII Project Team 211 members. The author would also like to thank survey and
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interview participants who contributed to this research. Opinions, findings, conclusions, and recommendations in this paper are those of the author and do not necessarily reflect the views of the sponsors or Pennsylvania State University.
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