For exp Global, growth is a matter of flexibility. “You have to have a growth scheme where people can move from one market to another to take advantage of opportunities,” says Ivan Dvorak, executive vice president of U.S. operations for exp Global. However, he says business development is a constant challenge. “It is like mowing the grass. You let it go for one week and things start looking bad,” says Dvorak.
Many design firms are expanding their array of services. For example, AECOM acquired Tishman Construction last summer for $245 million. “We always thought of ourselves as pure designers, but everything is changing, and we found we needed to get into the construction side,” says AECOM's Dionisio. He notes that AECOM has no plans to do any self-perform construction and will stick to the construction management side. He says the Tishman acquisition allows AECOM to bring both construction and design perspectives to a client.
SSOE is another firm that is exploring new services. “For the past two years, SSOE has a new focus on construction and program management,” says Vince DiPofi, senior vice president of the SSOE Group. He says the firm now can provide clients a full range of project services, including construction and program management as well as planning and design. “It is now 20% of our business globally.”
Many firms have been able to adapt their organizations to deal with the sluggish markets. “We have been able to grow a bit in this market,” says Eric Keen, executive vice president of HDR. He attributes this growth to HDR's ability to share work.
The Competition Is On
The soft market means that competition remains tough. “Some firms are taking jobs at cost or even below cost,” says Dvorak. “The competition is very strong, and we are seeing some clients driving costs below what is sustainable,” says Glen Bell, CEO of Simpson Gumpertz & Heger Inc. He says clients increasingly are looking for more ways to shift risk.
An executive at one large firm is more blunt. “Engineering firms continued to reduce fees for engineering services, resulting in an erosion of respect that the rest of the world has toward the profession. We have to stop hurting ourselves and sell our hours for the true value we bring to our clients. Unfortunately, engineering firms are signing up for that additional risk without additional fees to compensate for it,” says the executive, who asked not to be identified.
Contractors also are taking advantage of design firms' competitiveness. “Contractors are seeing us as a commodity,” says Dvorak. He says architects particularly are vulnerable to this competitive pressure in design-build projects. “They treat all architects as the same, except perhaps for the star-chitects.” He says some designers are so desperate that they are willing to do preliminary design work on bids for free, and contractors and developers are more than willing to take advantage of that fact.
For midsize firms, teaming with contractors on design-build projects can be frustrating. “If you are working on a bid, some contractors expect you to work on ‘sweat equity' in preparing the bid,” says Britt of Modjeski and Masters Inc. Contractors often will tell designers to limit their pre-bid work to just basic engineering on a “least cost” design, rather than what may be the most appropriate for the project, he says.
The recent softness in the public markets has added to the competitive pressures, drawing more firms into the private sector. “With the huge decline in the federal market, I would not be surprised to see big firms in that market start moving into the private sector, where we are focused,” says Chris Vincze, CEO of TRC Cos. Brown and Caldwell's Goehring admits his firm's presence in the private sector is growing. “The private side has always been about 30% to 33% of our business, but it now has pushed above that level.”
Where Is the Money?
The general building markets have taken their lumps during the recession as developer financing dried up to a trickle. Project financing has eased a little, but not by much. “Domestic conventional financing is very conservative, with lenders looking for a lot of equity before financing a project,” says Perkins. “There is a lot of money on the sidelines from banks, insurance companies and pension funds that want to invest, but you have to show that the project makes sense.”
To go forward, building projects must show clear evidence of a return on investment. “[Clients] are looking for metrics that support their decision-making about particular project or designs. They are looking for scientific proof that the money will promote their strategic mission,” says Elizabeth Meek, principal at Sasaki Associates.
Roehling of SmithGroup agrees. “The market is getting better slowly, incrementally,” he says. However, he cautions that public-sector building work, which buoyed many firms in the general building market, may be in for a big correction, citing the current debate in Congess over the deficit and the budget.
The soft market in the building sector is leading to rethinking existing facilities. “Our strongest market is in existing buildings, in adaptive re-use, renovation and rehabilitation,” says Bell. He says the building stock in many regions is so overbuilt that owners are desperately looking for new uses.
Spikes in energy prices have opened up a secondary market of energy retrofits. “Anything to do with energy efficiency is hot right now, whether it is in energy conservation on new projects or in retrofits,” says Bell, noting an increasing emphasis on the building's skin. “That is where a lot of a building's systems converge. This is where an integration between the designer and the contractor can provide a more integrated approach to energy savings,” he says.
However, many firms say clients are interested in results, not in appearances. “You have to be able to demonstrate that the retrofits will give a return on investment within two years to make an impact on the market,” says Dvorak.
Increasing emphasis on the provable value of sustainable design has boosted the market for green building, but it may have an impact on how sustainability is measured. “I don't think sustainable design has lost any momentum,” says Perkins.
But it has lost some its luster, due in part to the cost certification by the U.S. Green Building Council's Leadership in Energy and Environmental Design standards. “LEED did a great job in setting the standards for green building, but now owners are looking at other standards to use to measure sustainability,” says Perkins.
Several designers say they are surprised to see that LEED is losing some of its appeal. “I am really surprised that there is not as much demand of LEED certification on the commercial side except for Class A buildings,” says Cryer.
“LEED and sustainability are still the price of entry for major building projects,” says Roehling. However, he says sustainable design now is moving beyond LEED and focusing on net-zero buildings. “That is the next threshold.”
Lack of Funding Takes Its Toll
During the beginning of the recession, boosts in federal and state funding for infrastructure helped soften the blow for many construction firms. But, with the budget and deficit debates in Washington and increasing budget squeezes at the state and local levels, purely publicly funded projects may begin to dry up. “I heard that only two states are not currently dealing with deficits,” says Yarossi. That kind of atmosphere is not conducive to a robust public market.
The biggest question for infrastructure firms is whether federal funding bills will be passed. “With all the dialogue in D.C., we are afraid that the focus will be on spending only what comes in,” says Keen of HDR. “All these continuing funding resolutions have had a devastating effect on infrastructure. No one can make long-term plans, so public agencies are focusing on basic operations and maintenance,” says Giorgio.
No one seems to be willing to predict whether there will be a transportation reauthorization bill this year. Some firms are concerned whether any major funding bill will be passed this year. “I am not confident that major bills will be passed in the current political situation,” says Martin. “We as an industry have to provide a united front to make sure the funding is there to preserve our aging infrastructure,” says Yarossi.
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