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Key considerations for closing the Canadian infrastructure gap
November 30, 2021
Authored by RSM Canada LLP
Kirby W. Houle, CPA, CA shared this article
INSIGHT ARTICLE |
Driving transformational infrastructure projects with innovative solutions
What is the most effective way to close the infrastructure gap in Canada? We believe it starts with new ways of thinking. As discussed in our recent engineering trends podcast with the Association of Consulting Engineering Companies’ (ACEC) President, John Gamble, and RSM Canada’s Engineering Sector Leader, Jeff Lutzak, closing the infrastructure gap will require a focus on projects and programs that are holistic, innovative and future looking. Currently, the public procurement process for infrastructure projects presents a barrier to innovation because it rewards the lowest bid and minimally interprets the scope of work. The result of this race-to-the-bottom mentality is that there is downward pressure on margins at engineering firms resulting in fees that are too low to cover the true scope of work. To compound this, the changing economic landscape is making it increasingly challenging to retain skilled professionals. Meanwhile, the infrastructure gap remains.
To encourage the types of projects that will be most effective in closing the infrastructure gap, engineering firms can think about quantifying the value of taking on risk and spurring innovation in their pricing models – while finding ways to work with all the service providers and appropriately sharing risks and rewards with all parties involved. In addition, government bodies can consider ways to focus on qualifications, rather than pricing during the public procurement process.
Table of contents
- Understanding the Canadian infrastructure gap
- Talent retention
- Capturing value through the procurement process
- Collaborative contracts
- Innovative procurement models
Understanding the Canadian infrastructure gap
Despite governmental financing commitments through programs like the Investing in Canada Plan and the Canadian Community-Building Fund, an infrastructure gap in Canada still exists.1 However, the government of Canada acknowledges the need to quantify this gap and actively reduce it.
In a recent RSM article exploring how the public-private partnership model links infrastructure and ESG, “data from the Organisation for Economic Co-operation and Development shows that Canada spends a larger share of its GDP on infrastructure than most developed countries. Current estimates from an April 2021 article from the Council on Foreign Relations put the U.S. infrastructure gap near US$2 trillion, while the maximum estimated infrastructure gap in Canada is near CA$570 billion according to CanInfra. Adjusting for GDP, infrastructure spending in Canada was about 1.14% of GDP, 30% higher than the 0.9% figure in the United States” says Alex Kotsopoulos, Partner, Projects and Economics at RSM Canada.2
On July 29, 2021, the government of Canada introduced the National Infrastructure Assessment, which will evaluate Canada’s infrastructure needs and establish a roadmap up to the year 2050. The engagement report cites several large-scale changes including climate change, population growth and aging, and fast-paced technological advancement, as reasons for why the infrastructure serving Canadian communities today is not sufficient for the future.3
Despite the government’s current commitment to assessing Canada’s infrastructure needs, historically there has been a tendency for governments to promise investments on the back end of a program cycle, notes Gamble. Therefore, it has been difficult for the parties involved in infrastructure projects to hire talent and procure the appropriate materials and technology all at once. Moving forward, it will be important to flatten the investments over a longer period to help firms manage their resources. According to Gamble, the other issue is that project approvals often happen one by one rather than as a sum— reducing the ability to assess how all the projects fit together.
However, the infrastructure gap is not all about the financial return on investment; there are several other factors that need to be considered, as every community has differing needs such as aging populations, population growth, priority industries, etc. Since each community’s needs are intricate and constantly evolving, approving projects one by one is not an efficient way to close the overall infrastructure gap. It’s important to understand the bigger picture and see how all the projects fit together to add the most value. The key to addressing the infrastructure gap will be to tackle the priority projects first and then execute on future looking, transformational projects.4
In the engineering trends podcast with ACEC, Gamble notes that the younger generation is entering the engineering field with diverse skill sets and have more interest in the well-being of society overall. Engineering is thought to be the nexus between science, technology and societal needs. However, occasionally, the profession can neglect the societal portion while increasingly focusing on the science aspects.
Currently, engineering firms are switching from hierarchal organizational structures to flatter ones where senior leaders are collaborating with junior staff on a regular basis. The younger generation is also adept at utilizing technology with a desire to focus on interesting, innovative, dynamic projects.
To close the infrastructure gap, it will be vital to retain the talent of the younger generation of architects and engineers who are increasingly able to integrate the societal aspects into their work. However, without transformational projects in the pipeline, it will be challenging to engage and properly compensate young talent, which can lead to turnover and higher cost to retain talent. In the time of “The Great Resignation,” where 11.5 million people quit their jobs during the 2021 months of April, May, and June in the United States,5 there is more urgency than ever to overhaul the procurement process to motivate firms to take on transformational projects and retain talent.
Capturing value through the procurement process
When it comes to engineering consulting for public clients, there are relatively few buyers, but many service providers. The higher ratio of supply compared to demand reduces fees for services. As is currently done within the industry, valuing projects based on time spent does not take into consideration the cost of a firm for taking on risk. This pricing method can work for basic commoditized jobs, but it is a poor metric to measure value creation and the burden of taking on risk.
As Gamble points out in the podcast, there are several factors that can impact risk such as complexity, scale, nature of the job, litigious level of a certain jurisdiction and the personality of the client. Once the project is finished and accounts are settled, the client reaps benefits of the asset for years to come such as through financial benefits, satisfying an objective, advancing public policy and mitigating risk, etc. The client is often the prime beneficiary of the innovation that was created by the external engineering firm, as seen in intellectual property (IP).
Engineering firms often will turn over all IP to the client once they have completed the project. The client needs the IP to maintain their asset for things like reproducing drawings for a renovation. In our engineering podcast with the ACEC, Gamble points out that there is a lot of value in the IP, which the client capitalizes on for years down the road. An alternative discussed was for engineering firms to build in a royalty free license into the project contract where the client can benefit from the IP with an upfront fee instead of spending per use; there is also an opportunity for firms to keep ownership of the IP – to capture additional value.
The infrastructure gap can also be decreased through innovative project delivery methods like collaborative contracts – a delivery method, which is gaining traction with large-scale, complex, infrastructure projects. At the 2021 ACEC Virtual National Leadership Conference, integrated project delivery (IPD) was mentioned as an effective way to allocate risk between parties involved in the project and to stabilize cost variances. IPD is a project delivery approach that integrates all aspects of a project in a collaborative fashion to harness the talents and insights of all participants. The goal of IPD is to create harmony with the various stakeholders, who by nature, are more focused on individual goals than the overall project goals.6
Another similar collaborative contracting approach is known as alliance contracting. In this approach, owners, contractors and consultants work collaboratively as an integrated team with a common alignment on commercial interests and objectives of the project. This type of contracting approach is less common in North America although it is popular in Australia where one-third of the total value of public sector infrastructure is delivered through alliance contracting; it is also commonly utilized in New Zealand and Europe.
Alliance contracting stemmed from the realization that in the typical two-party contract between client and service provider, there is often an adversarial relationship with the parties involved in the project due to the transfer of risk from one party to another, with one party maintaining a larger portion of the reward. Alliance contracting attempts to create an environment where risks and rewards are shared equally among stakeholders.7
Innovative procurement models
Further, the government has a role to play in providing opportunities to firms. Gamble uses an example of a Canadian municipality that was known for having a slow permit issuance process. The municipality produced an innovative solution and created an express line for permits, with the caveat that firms had to “seal” (assume responsibility for) their drawings. Although engineering firms were taking on more risk to “seal” the plan, they were creating value for their clients, who in turn would finish the job sooner and see returns on investment at a quicker pace. At first glance, this new system seems to be disadvantageous for engineering firms since time spent would be reduced (back and forth time with permit issuer), lowering the firms’ overall project fees since less time can be billed. However, looking at it through a value-capture lens, the engineering firm is taking on more risk and adding value to the client, which can be shared between the client and the firm.
Another solution Gamble brings up is qualification-based selection (QBS). Variations of QBS have been adopted and implemented in the U.S. by 47 states.8 Currently, the common method used for public procurement in Canada is price-based competition, where price is the determining factor for accepting proposals. The process for QBS starts at understanding the needs of the client and then works backward to determine the overall scope and budget of the project. Pricing is not discussed until bidders understand the needs of the client, and the client holds discussions with the bidders to see if their qualifications, culture and vision are aligned with their needs.9
A study done by the University of Colorado and Georgia Institute of Technology determined that QBS-based projects exhibit better measures than the national average in terms of lower construction costs (cost of change orders as a percentage of final construction costs) and lower schedule growth (actual time spent on project compared to budgeted time allotted to a project). In the study, QBS projects exhibited 3% construction cost growth compared to a 10% industry average. QBS projects had an average of 8.7% schedule growth compared to the industry average of 10%. The study also found that QBS procurements were more likely to address emerging societal needs, impacted more stakeholders and promoted a higher level of innovation. The study also confirmed that design firms were satisfied that the intellectual property (IP) included in the innovative projects was properly protected. Furthermore, 93% of clients surveyed on QBS projects rated the success of their final project as high or very high.
“From the client’s perspective, the up-front cost should be thought not as a cost to be minimized (but) as an investment to be leveraged”—John Gamble, President, ACEC
Although, the up-front costs are higher with QBS due to the larger amount of design and operational discussions during the procurement stage, clients will experience savings on the smaller delta between budgeted costs vs. actual costs. From the client’s perspective, the up-front cost should be thought “not as a cost to be minimized (but) as an investment to be leveraged,” says Gamble. From the design firms’ perspectives, the reduction in the delta between budgeted and actual time and cost will improve the quality of their projects, and it should also reduce stress on the professionals working on the projects since the scope of the project is appropriately defined.
In conclusion, the infrastructure gap is being recognized as a serious policy priority in Canada. Closing the gap will require deep collaboration between an enormous number of stakeholders and industry players. It is vital that the industry leverages different procurement methods and collaborative contracts to spur smart, innovative projects that will benefit society in the short and long term. To execute on these projects, engineers will need to be as engaged and motivated as ever and prioritize an innovation-first mindset.
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Source: RSM Canada
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