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Engineering a crisis: what human capital shortages mean for American infrastructure

D is for ‘damning’. At least, it is in the context of the American Society of Civil Engineer’s widely cited report card on the state of American infrastructure; 2017’s D+ is the latest in a long line of similar verdicts. You have to go back to the inaugural report card in 1988 for the high watermark of C-.

The same society estimates this persistent failure is set to cost the US economy $3.9 trillion in lost GDP and 2.5 million jobs by 2025, meaning each American family loses upwards of $3,400 of disposable income every year.

Something has to change. But it will take more than dollars and cents. Since President Franklin D Roosevelt’s New Deal and the Works Progress Administration, the success of American infrastructure has been made possible by the hard work of those who built it.

The problem is, as investment has dwindled, the workforce has atrophied. Now we face a shortage of skilled labour which places pressure on the projects we need to revitalize infrastructure and boost the economy.

The investment is starting to come, but these workforce shortages could prove a major sticking point for engineering and contracting firms who aren’t prepared. In the longer-term, the industry will need to bolster the ranks of workers it can draw on, working in partnership with high schools and universities to bring more individuals into the sector. But, in the near-term, firms need to focus on strategic workforce planning and a smarter approach to the HR function.

Making the grade

The ASCE’s marks for American infrastructure:

1988: C-

1998: D

2001: D+

2003: D+

2005: D

2009: D

2013: D+

2017: D+

State of the nation

There has been less public investment into infrastructure as successive administrations sought to keep a tighter rein on spending. Private money has been limited too; unless linked to tolls, public infrastructure typically yields a low steady income over several decades, not the typical investment profile for an institutional investor or private equity firm. It’s no coincidence that one area of infrastructure which has thrived and attracted talent is energy, where returns can reach many times initial outlay within a few years.

However, times are changing. Individual states, historically accustomed to federal dollars making up the bulk of infrastructure spending, are now stepping up to fill the gap. For example, California has earmarked $2.4 billion from increases in the gas tax and vehicle fees for major transit projects. Other states such as Texas, Washington, Florida, Connecticut and New York have also made moves to raise revenues for civil engineering projects.

This change comes just in time. Much of America’s infrastructure is showing acute signs of age and certain states are suffering from an increased incidence of natural disasters. This damage overwhelms aging infrastructure; Hurricane Harvey saw a Houston dam overflow for the first time in history and the Oroville Dam crisis in California was caused by the 2017 floods. Already overdue upgrades are becoming urgent.

At the same time, America is showing ambition on new infrastructure mega projects, such as those tied to the 2028 Olympics, California’s high-speed rail and LAX’s $5 billion upgrade program. Together, these factors will drive a lot of investment and labor demand.

Workforce worries          

When it comes to the workforce, there is good news and bad. The good news is that, according to the Bureau of Labor Statistics, employment in heavy and civil engineering construction is increasing. In fact, preliminary figures for February and March 2018 see total numbers hit one million for the first time since before the financial crisis.

This is good news, but also illustrative of a wider trend. Employment numbers in the sector took a hit in 2008 when the crisis landed, as they did after those in the early 1990s and early 2000s. It has taken a decade to recover this time round. It is dangerous to make counterfactual claims, but we can see that the workforce’s upward trajectory has been repeatedly interrupted and it’s legitimate to wonder whether supply would be closer to demand had it not been.

This brings us to the bad news; there are two key workforce shortages which could seriously hamper the drive to upgrade America’s infrastructure.

One is a gradual loss of senior leadership across the industry owing to poor succession planning. The management layer immediately below the C-suite represents the crucial group of individuals that drive projects and grow companies. Many have deep and broad experience across the industry and truly understand the nuts and bolts. However, as more reach retirement age, that experience isn’t being replaced, leaving a shortfall in guidance.

This is partly driven by the second, arguably larger, workforce shortage affecting American infrastructure. Despite growing numbers overall, owing to market dips and underinvestment, the sector lacks enough people with the crucial five to 15 years’ experience. This bracket is the driving force of successful projects, and there are simply too few such workers to go around.

Traditionally, companies could manage this by poaching talent. The typical pattern would be to tender for a large project, win it, then poach the necessary employees from the unsuccessful bidders.

This isn’t ideal; it means last minute rushes to fill talent benches and paying over the odds to tempt contractors into moves. Those in the five to 15 year bracket also often have young families, making them more reluctant for cross-country relocations. But it could be done.

Now though, it’s becoming a positively dangerous approach. The ramp-up in new projects means that, even if Company A’s rivals lose out to them on one bid, they will probably win other lucrative contracts. As such, it’s much harder to lure away talent; Companies B and C can afford to pay to keep them, indeed they can’t afford not to.

The consequences; spiralling recruitment and relocation fees at best, failure to staff projects at worst. This could lead to anything from costly fees for delays, to significant project derailment. The recent history of CH2M is a cautionary tale; having won multiple major projects, it spread its experienced staff too thinly across them. Overstretched, each project hit significant issues as a result and resulted in the continued trend of consolidation within the market as they were acquired by Jacobs.

Actions required: immediate and long-term

Labor shortages are bad news; bad for the companies involved, bad for America’s infrastructure and as a result, bad for the economy as a whole.

What can the companies involved do to mitigate the issue?

There is no way to conjure trained, skilled people out of thin air. Especially ones with five to 15 years’ experience, that takes time. In the immediate future, the emphasis is on mitigation and taking the most intelligent approach possible to the workforce.

First, firms need to take a more strategic approach to workforce planning and talent mapping. Rather than a ‘win it first, staff it later’ approach, this means planning out potential talent needs and proactively building a bench of talent that can be mobilized when the time comes. It also means improving retention by engaging with current workers to ensure that they see a clear path forward for career development beyond their current deployment without leaving the company.

This is facilitated by the second immediate action; recognize and treat human resources as the strategic function it is. Human resources is much more than managing payroll, hiring and firing. It is the single place in the organization where all the knowledge and data related to the workforce is pooled, but it is too often siloed and decentralized. For a heavy civil engineering firm active across a number of states, it’s easy for individual offices to keep to their business. But if head office can collate that knowledge, they may find a greater depth of talent across the company than they had realized.

In the long-term, companies need to more actively engage in bringing in the next generation of talent. Many of the larger engineering and contracting firms are building sophisticated outreach program to university students and are active on college campuses. This is a great start, but only captures those who have already chosen an engineering or construction career. The next step is to extend that approach into high schools, to both encourage more students towards studying for engineering/construction degrees, but also to capture those students who don’t want or need to go to college to have a rewarding career in the sector.

Some companies such as Gilbane Building Company and Kiewit within the contracting space are already blazing a trail with in-house education institutions, but we need to see more from the sector as a whole to close the talent gap.

We’ve been engineering a crisis in America. Just as our need for new and upgraded infrastructure grows most pressing, chronic underinvestment comes back to haunt us in terms of workforce shortages. Rectifying the situation will take time, but in the meantime, we will see more firms and projects succeed with a more strategic, intelligent approach to workforce planning and management. By doing so, our next generation of infrastructure is more likely to be built on time and on budget; and maybe our next report card will make for better reading.

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August 9, 2018