College grads – trouble finding a job? Think welding….

We recently worked on a study examining the market for pipeline construction services.  Across North America, projects like Keystone are only the beginning of growth for pipelines in oil and gas.  The market for pipeline construction is growing, and there will continue to be competition for capable suppliers in the marketplace.  In areas such as the Oil Sands in Canada, labor rates for trained, certified welders are exceeding $100 an hour!

 Unfortunately for pipeline companies, the skilled labor pool for gas pipeline construction is shrinking.  People aren’t lining up to be welders.  Although demand for skilled trades like welding and pipefitting slowed somewhat in 2010, short-term demand for labor has leveled off but will continue to grow at a rapid pace. In the face of these trends, finding qualified workers to meet new construction projects will be increasingly difficult. Oil and gas pipelines companies are now beginning to recognize this, and are explicitly considering the importance of a stable labor supply in evaluating construction service suppliers and developing sourcing strategies.

 Our research found that pipeline companies are using lump sum bid (LSB) unit rate contracts as the dominant contractual mechanism. This is largely due to risk aversion and the unpredictable nature of pipeline project forecasts.  Because the nature of many pipeline projects are subject to the whims of the customer, pipeline construction companies are subject to the unpredictability of customer demand, and are not willing to commit to long-term multi-project relationships with construction suppliers.

This may change.  Our research also suggests that companies who do commit to long-term project relationships are able to derive significant benefits.  First, they have access to labor and profit rates, and are better able to control costs.  Second, they can drive productivity initiatives that can reduce project delays.  Third, longer term relationships enable suppliers to make investments in workflow management systems and other technologies that improve efficiency.  Fourth, and most importantly, stable project work leads to a more stable workforce, as skilled workers are happy to stay in one location for awhile, and may be willing to give up higher pay for that stability in lifestyle.

Companies may also want to give some thought as to developing a talent pipeline for skilled trades.  Trade schools would be a good place to start.  Will your college degree guarantee a $100 an hour job on graduation?…