AI and the Time & Materials Contract
A question we’ve received from some firms interested in adding AI to their capabilities relates to the way that a lot of NEPA documents are contracted. This applies mostly to consulting firms (engineering and environmental). Federal and State agencies and clients paying for NEPA services have different incentives. Although some environmental contracts are lump sum (where you do a set scope of work for a set fee), many are time & materials. A time & materials contract sets rates for the people who will be working on the contract and the company then bills the client at those rates for the hours spent completing the project.
The rates include the hourly wage of the employees, but also overhead costs (equipment, health insurance, office space, and all the other things that go into running a company). They also include a certain profit margin, often a little over 10% in the engineering industry.
Because the profit margin is built into hourly billing rates, environmental and engineering companies are incentivized to use all of the hours included in their scope because every hours reduction also reduces the total amount of profit (although not the overall profit margin).
AI tools promise to reduce the number of hours environmental professionals need to spend on any particular project. Oak Canyon AI’s tools have the potential to deliver substantial increases in productivity, and some firms worry that this will result in a loss of profits. We don’t believe that will be borne out by experience for two reasons:
Reason 1 - Increased Productivity means Increased Value
The hourly rate that a firm charges its clients for employee time reflects the value those employees are providing to the client. This value is a combination of education, experience, and efficiency. Ideally, increased education and experience lead to increased efficiency as employees who know the NEPA process are able to more quickly address issues and produce documents. Additional increases in efficiency come as employees become managers and coordinate a team of less-experienced professionals to produce documents at or near the level they could on their own, but at a larger scale.
If those experienced employees are suddenly able to be much more productive, through the use of AI tools, and are able to complete more documents more quickly, does their value decrease? Not at all. Whatever job I’m doing, if I can do it twice as fast or twice as productively, my value has pretty much doubled. What does this mean for the environmental industry? Those firms that adopt AI tools and increase their employees’ productivity will be able to charge higher rates for those employees’ time. This will allow overall profit to remain consistent even as overall hours go down.
Reason 2 - A NEPA Boom and Staff Shortages
In a world where environmental review projects were scarce, the increased value of more productive employees could be tempered by a limited amount of work to do. Like law firms, one of the metrics environmental and engineering firms use to measure their employees is the percentage of their work hours spent on billable projects. Depending on the firm and the other duties of the employees, these percentage goals can range from around 50% all the way up to over 90%. If a firm is completing its environmental documents in half the hours it had previously taken and then their employees are idle the other half of the time, there’s a cause for concern.
However, for a number of reasons, there’s a NEPA boom right now. There is so much work that existing firms are unable to complete all of it. This has led firms to serious competition for employees in an attempt to keep up with the demands from their clients. Wages are rising rapidly in the industry, but experienced staff are still difficult to find. The shortage of archaeologists, for example, threatens to delay many infrastructure projects. This means that firms that are able to complete existing projects more quickly have the capacity to take on additional projects. Their staff will not sit idle, they will bill just as many hours at higher rates. The overall profit for environmental and engineering companies is likely to increase in this scenario.
Reason 3 - Competitive Advantage
Ok, we said two reasons, but here’s a bonus third. Price is not the only factor in winning NEPA projects as a consultant, but it is an important one. Firms that are quick to adopt AI tools will gain a competitive advantage in the marketplace because they can, if they so desire, undercut their competitors on price. Some agencies holding the purse strings may hold out for a while for the existing boutique model of NEPA compliance, but taxpayers will eventually demand efficient use of their money on infrastructure projects. Consulting firms really face the existential question of changing markets: are they a buggy whip maker or a car company? Don’t fall prey to marketing myopia. Reach out to Oak Canyon AI today to get a jump on the competition.