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Today’s Skilled Labor Shortage: 3 Strategies to Manage Costs in Today’s Strained Downstream Labor Market

April 20, 2016 at 6:37 PM / by Wood Mackenzie Supply Chain

Downstream capital projects are in the midst of a renaissance. While the growth is exciting, the supply of skilled laborers is strained in today’s high demand market.

Today, we share three tactics to ensure your project costs remain on track in the midst of such pressure. Read on to learn about specific strategies... 


Major Imbalance: Skilled Labor Supply and Demand

The downstream industry is experiencing a number of convergent forces that are shifting the industry into investment mode: EPA regulations, cheap domestic feedstocks, and a new role as a petroleum-based product exporter. The result is an estimated $138 billion in chemical project investment—on the Gulf Coast alone. And let’s not ignore the expected $6.7 billion in refinery projects this year across the US and Canada.

The magnitude of investment has translated into a surge in demand for skilled labor, which we expect to peak this month. The supply is most strained among welders, pipefitters, electricians, and technical personnel such as engineers and process operators.

In addition to an immediate availability shortage, there is also a longer term challenge resultant from an aging skilled labor workforce:  the average age of skilled laborers in the industrial trades is 42, with 18% set to retire in the next five years and 29% in the next ten.


In order to respond proactively to the labor shortage, we recommend the following three strategies:

1. Improve labor efficiency through alliance contracting: The saying goes, “work smarter, not harder.” The same holds true in today’s labor market. Traditional labor contracting takes a transactional approach, hiring ad hoc laborers as need arises, with relative efficiency and quality an unknown. Conversely, strategic firms employ a different approach—alliance contracting.

This style of labor contracting is long term (> than 3 years) and aims to establish a deep and strategic working relationship to drive efficiency. In today’s labor market, establishing these long term contractual relationships provides a better opportunity to secure needed labor for the duration of your capital project, no easy feat with today’s demand.

Over the course of the engagement, contractors gain familiarity with procedures, understand policies, improve processes and ultimately reduce risk. Additionally, alliance contracting sets labor contracts with clear incentives and penalties aimed at ensuring contractors are invested in the success of a project.


2. Attract top talent from E&P and Midstream operations: While the downstream industry is bustling with activity, we all know that many upstream wells are coming offline and many midstream projects stalled. As a result, the pool of skilled laborers from those industries now faces fewer employment opportunities.

While not all laborers are interchangeable to downstream, there are definite synergies. For more specialized laborers such as welders, offering training programs to orient them to the specific practices needed for downstream projects can help fill the gap. Simply offering competitive wages for laborers during this drilling slowdown can attract an entirely new labor pool to the downstream market, eliminating unnecessary downtime and the resultant costs. 


3. Manage the cost components that aren’t demand-constrained: In the midst of rising labor rates, we recommend addressing material costs to offset the pressure and ensure project budgets remain on track.

One key strategy for driving down equipment costs is to develop cost models for each of your major project inputs—from construction materials to equipment rentals and everything in between. Cost models break down all the input costs to the materials you buy and enable you to determine how your purchases are impacted by the market.

For instance, the cost model below shows each of the component costs of a storage tank and highlights that tanks have high exposure commodities that have recently declined, such as steel. This model can then be leveraged in negotiations to drive costs down based on recent market movements.


In concert, these three strategies are highly effective responses to today’s strained labor market. They provide both immediate relief and long term strategy to ensure projects are completed on time, and most importantly, on budget.

For further insight of how to navigate rising project costs from today’s skilled labor shortage, speak with one of our experts today.


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