(IND) The 2014 Top 500 Design Firms Overview: A Recovery in Need of Speed

The design profession has been hit hard over the past six years. By some estimates, as many as 40% of architects were unemployed during the height of the recession, in 2009. Engineers fared better but not by much. Everybody did more with less. Now, after several fits and starts over the past few years, the market finally is in recovery mode. It's no bull market, but strength is building. Still, many "lean and mean" project delivery methods born of the recession remain in place.

This slow recovery can be seen in the data from ENR's Top 500 Design Firms list. Taken as a group, the Top 500 firms had design revenue of $92.69 billion in 2013, up 2.7% from $90.24 billion in 2012. This marks the third consecutive year the Top 500 experienced revenue growth since the recession began.

Market growth was modest on the domestic side. The Top 500 did see a 3.7% gain, to $64.13 billion, in revenue from projects in the U.S. in 2013, from $61.86 billion in 2012. This figure still has not reached the record $68.14 billion in domestic design revenue generated in 2008. The international market was even softer: Revenue from projects outside the U.S. rose only 0.6%, to $28.55 billion, in 2013.

Domestically, public-sector markets did not fare well. Revenue from water-supply projects fell 5.6% in 2013 from 2012, and revenue from sewer and waste projects fell 5.1%. Hazardous-waste project revenue also was down in 2013, dropping 1.8%. Transportation was a bright spot in the U.S. market, rising 7.5%, to $14.31 billion, fueled by a series of megaprojects.

AECOM once again topped ENR's Top 500 Design Firms list, where it has reigned for the past five years. In a major development, Michael S. Burke was named CEO on March 6 and continues as president. Burke succeeds John M. Dionisio, who becomes executive chairman of the firm.

Jacobs moved up to No. 2 on the list, powered by a series of major acquisitions over the past three years. In 2011, Jacobs acquired Aker Solutions' process-and-construction business, which consists of approximately 4,500 employees in the metals and mining markets. It also acquired KlingStubbins, a 500-person architect-engineer based in Philadelphia.

Industry consolidation continued apace in 2013. CB&I acquired Baton Rouge, La.-based Shaw Group in February 2013. Shaw ranked at No. 13 on last year's Top 500. Conestoga-Rovers & Associates, Niagara Falls, N.Y., which ranked at No. 33 on last year's Top 500, declined to participate in this year's survey as it was in the process of being acquired by Australia's GHD. And Jacobs acquired Houston-based Eagleton Engineering LLC, which ranked at No. 198 last year.

"We continue to see large-scale industry consolidation through mergers and acquisitions and are watching that trend carefully," says Greg Graves, CEO of Burns & McDonnell. "We have done a couple of small acquisitions in recent years but still believe the best path for [us] is through organic growth."

Many firms are making acquisitions to "buy into markets," says Chris Vincze, CEO of TRC Cos. He cites as examples the U.K.'s WSP acquiring Alberta, Canada-based Focus Group Holdings, a 1,700-person engineering firm, on March 12, and Australia's Cardno Ltd. acquiring Houston-based PPI Group, a 760-person firm, on March 17. "Both the acquired firms were in the oil-and-gas sector," he notes. Vincze says TRC also is on the acquisition trail. "We are growing both internally and through acquisition. We have acquired eight companies in the past three years."

Overall, the market is recovering, but many firms are hoping for a more robust recovery. However, most firms are not expecting a sudden surge in activity. "I see a slight acceleration in the market, but we shouldn't expect a snap-back recovery," says George Pierson, CEO of Parsons Brinckerhoff.

Pierson says a more robust recovery may not be good for the industry, citing the potential for spikes in materials prices and possible labor shortages. "Plus, if the recovery is too quick, we risk another sudden downturn," he says.

The Drive Toward Alternate Delivery

For some firms, the transportation market is thriving. "Transportation is solid for us, to a great extent because we are in the large-project market," says Robert Slimp, CEO of HNTB Corp. He cites projects such as the Bay Area Rapid Transit Warm Springs extension project in California, the Crenshaw-LAX Transit Corridor Project in Los Angeles and the $2-billion state Route 99 Tunnel Project in Seattle.

Slimp says many major projects now have multiple funding streams, such as tolling or public-private partnerships. "P3s are growing, and the states now authorizing them should be commended."

However, many public transportation agencies continue to experience budget uncertainties. To make up for funding shortfalls, more states are resorting to alternate project delivery. "We see alternative funding sources continuing to be the norm at all levels of government," says L. Joe Boyer, CEO, Atkins North America. He says he expects a recovery in the housing market that will generate more tax revenue, which will allow an increase in funding for municipal infrastructure projects.

"Design-build and P3s, as alternative delivery methods, are changing the landscape of transportation engineering," says Mark Acuff, president of ICA Engineering. He says the effort to deliver projects more efficiently is a trend "that is rightfully challenging the traditional design-bid-build industry." Acuff says design firms will be successful if they can maintain separate relationships with the client and the contractor but also work as a team with both.

However, alternate project delivery is having an impact on smaller infrastructure design firms. "It is good for larger players as they are better positioned to assume that level of risk," says Pierson. He notes that preparing bids on design-build transportation projects is not cheap. "There is a greater risk, but there is also the prospect for greater reward," he says. But Pierson admits that smaller firms may not be positioned to assume that level of risk.

Slimp says smaller firms have to be able to assess the amount of risk they are willing to assume when bidding on design-build projects. "But there still is plenty of room for smaller firms through joint ventures, teams and other vehicles. For example, we have 150 engineers on the Crenshaw line project," he says.

Not everyone agrees that design-build is always the answer. "Alternate delivery is being introduced to the infrastructure market as the panacea for all ailments," says Tony Mardam, vice president of Stanley Consultants. He says design-build, P3s or design-build-operate project delivery may offer benefits in some cases, but "the medicine is not universal to solve all the challenges."

For many designers, design-build and other delivery methods can put pressure on designers that are not used to working in teams. "With lower levels of funding, contractual relationships are constantly tested," says Boyer. "That being said, our client relationships are generally solid in spite of contractual pressures."

With the scramble by clients for funding alternatives, some larger firms are getting more actively involved in assisting them in securing project financing. "We're noticing an uptick, especially in the United States, of clients who are looking to engineering and construction firms for guidance on financing for projects," says Vahid Ownjazayeri, group CEO, global civil infrastructure, for AECOM. "In addition to our work advising clients on public-private partnerships and other forms of alternative delivery, we launched our AECOM Capital operation in early 2013 to help provide direct investment in certain projects to help get them started—projects that can also benefit from AECOM's other offerings."

Ownjazayeri says AECOM Capital investments have helped enable the start-up of more than $900 million in projects that are currently under way, including high-rise residential mixed-use projects in New York City and Los Angeles. "This model also could enable more activity at the construction joint-venture level on infrastructure design-build projects."

Slimp and other firms in the infrastructure market are excited about states assuming a greater role in funding transportation programs. "Some states are seeing rewards for local funding of transportation programs, and there hasn't been much fallout from the new taxes and fees to support them," says Slimp. He cites Pennsylvania and Virginia as two states that have been at the forefront of such programs.

Federal Funding Needed

However, most designers in the transportation market say a federal funding bill is necessary to ensure adequate funding levels for long-term projects. "I really can't predict it, but I would suggest that we are better positioned for a federal transportation bill now than the last time it came up," says Pierson. He says there is more bipartisan support in Congress as members realize investment in infrastructure is necessary for the nation's economic health.

Failure to do long-term planning and construction of infrastructure projects could have a devastating impact. "The transportation business keeps rumbling along, but it is truly time for a comprehensive strategy to address the chronic underfunding of our nation's infrastructure," says Ruth Bonsignore, senior vice president at Vanasse Hangen Brustlin.

Bonsignore says engineers are problem solvers who figure out ways to keep the system going even with inadequate resources. "I sometimes wonder, in working so hard to patch things together, if the planning and engineering community is being an accessory to the demise by neglect of our infrastructure system," says Bonsignore. The industry must come together to articulate the full needs of a 21st-century transportation system and educate the public on this topic, she says.

On the water-and-wastewater side, firms have seen their clients struggle. "It has been a very difficult few years for the U.S. public sector, and many agencies are still working on improving their balance sheets, prioritizing deferred investments and returning cash to reserve funds," says Alan J. Krause, CEO of MWH Global. He says funding pressures will result in a shift from asset creation to asset optimization, "integrating sophisticated data modeling to creatively improve service levels and operational efficiencies of the existing system."

Many firms believe the growing concern over climate change is spurring activity. "On the water- resources side, we expect that, with climate change and extreme weather patterns like droughts or floods, cities and regional water agencies will revise their planning," says Mardam of Stanley Consultants. "Whether we are looking at flood mitigation in the Midwest or drought-response measures, including needs for more water in the West, America needs to recalibrate its water-resources strategy."

Failure to fund the water sector may have wide-ranging impacts. "The drought in the western U.S. could have some negative effects on the overall economy if hydropower cannot keep up and there are electrical shortages," says Eric Keen, HDR vice chairman.

Uneven Building Sector

The general buildings market has been growing but unevenly. "Corporations have an enormous amount of pent-up capital that we are seeing released in new projects," says Mark Chen, senior vice president at Heery. He says health-care spending has been cautious as clients are retooling for the future, which requires changes to their physical plants.

However, state-funded work, especially higher education, remains relatively slow, and larger health-care capital projects are relatively less common due to health-care client concern about their future business, says Phil Harrison, CEO of Perkins+Will. "The health-care market has moved away from the mega-projects and into more renovation and repositioning of current space," says Carl Roehling, SmithGroupJJR CEO. Further, one of the hottest building markets, multi-unit residential, may be nearing the saturation point, says J. Peter Devereaux, president of Harley Ellis Devereaux.

Sustainability continues to be a major factor in the market. Callison recently introduced Matrix by Callison (Matrix.Callison.com), a free, online sustainability design tool. "With easy online access and user-friendly navigation, Matrix by Callison evaluates more than 80 specific strategies for design performance, serving to identify the top strategies for any given project anywhere in the world," says John Jastrem, CEO.

Jastrem says the firm has used the tool internally for the past six years on more than 90 projects— accounting for more than 18 million sq meters. "We are sharing it with the industry because we believe this is a key tool that can have a big impact on the sustainable-design industry globally," he says.

Another trend with commercial clients reflects changes in work-space planning. "Increased density within office buildings continues to be a factor in the office market," says Steve M. Smith, Cooper Carry principal. He says companies are reducing their real estate costs by putting more people in less space. "Owners will need to keep an eye on the increasing populations within their office buildings because the increased densities can impact the performance of building systems, such as elevators and mechanical, electrical and plumbing systems."

This trend also means more opportunities for redesigning and rehabilitating existing facilities. "Instead of creating office space, many developers and owners are looking at repositioning their existing portfolio. In our D.C. office, we are currently involved in projects that repurpose older office buildings for educational, hospitality and residential uses," says Smith.

Alternate project delivery has become an increasing presence in the buildings markets. Some design firms are reacting to take advantage of this trend. "Burns & McDonnell created [in 2013] a department within our construction group that is focused on commercial projects such as retail, office buildings and similar facilities, and we believe our ability to dedicate integrated design teams of architects, engineers and construction managers will be very important," says Graves.

"Integrated project delivery continues to grow as the preferred delivery method for owners, so it is important that we continue to strengthen our design and construction capabilities and build strong partnerships with contractors, financiers and other consultants," says Keen of HDR. "We must bring additional value to the team, outside of traditional design expertise."

But for many architects, this trend toward design-build means fighting to maintain their role in safeguarding the design against budgetary pressures by the rest of the team. "Page is fiercely determined to advocate for the quality of the built environment through our vital leadership role of the design process on these 'conglomerate' teaming arrangements, regardless of the manner in which that quality is measured," says James M. Wright, senior principal of Page. Wright says design firms with experience in design-build and P3 teams in the buildings market are best positioned to safeguard the design.

In the wake of several natural disasters, especially the flooding and blackouts in the New York City metropolitan area that came in the wake of 2012's Superstorm Sandy, building designers are becoming more focused on building resiliency. "Designers will focus on creating buildings that account for the possibility of natural disasters," says Harrison of Perkins+Will.

Boomtown

The U.S. shale oil-and-gas boom has drawn many design firms, but the market is not for the faint of heart. "The opportunities in this sector develop quickly, move fast and require a certain entrepreneurial streak," says Krause of MWH Global. "This approach to growth and risk management has created some exciting opportunities for us, and we continue to have a bullish view on opportunities in this sector."

The oil-and-gas boom in the U.S. is making an impact on the international market, too. "India has announced a portfolio of LNG import terminals in the planning stage," says Dean Oskvig, CEO of Black & Veatch Energy. He says these terminals are designed to take advantage of the opportunity to import cheap gas from the U.S. "I believe at least five of these terminals will be built in the next 10 years," he predicts.

The pipeline market also is booming. "We are still waiting for word from the [Obama] administration on the Keystone XL pipeline project," says Vincze of TRC. "However, considering the amount of pipeline projects that are in the permitting stage, if they all get approved and funded, there will be a serious shortage of people to do the work in two to three years," he says.

The oil-and-gas revolution in the U.S. has led to an increase in industrial and manufacturing projects as more corporate clients see low energy prices as a spur to expansion in this country. "We are seeing increased activity in manufacturing, industrial and oil-and-gas work," says Jim Moos, Leidos Engineering Solutions group president. He says manufacturing activity in consumer-product and food-and-beverage projects is particularly high, and industrial work continues to increase in the chemicals market.

"Our clients are demanding much more flexible solutions as the fracking boom continues to keep feedstock pricing low," says Bill Wasilewski, executive vice president, CDI Corp. "We've seen double-digit revenue growth as clients look for ways to boost production from existing facilities."

International firms also are moving to the U.S. to establish manufacturing and industrial facilities to take advantage of low energy prices. "We've also seen an influx of European firms establishing facilities in the U.S., leveraging our abundant feedstock supplies and superior distribution infrastructure," says Wasilewski. He says this influx is reshaping the entire industrial-process market and creating unprecedented mid-stream design demand. "This also flows over into the chemicals markets as owners seek to create value-added products for use in domestic U.S. production as well as for export. Engineering creativity and flexibility is at a premium in this environment," says Wasilewski.

Plugging In

One of the more uncertain major markets is power. Capacity demand has not expanded as fast as many expected. Also, federal environmental regulations are putting pressure on coal-fired plants. "The U.S. power demand is still close to pre-2008 levels. Until the U.S. economy gets into full gear, engineering-services companies will continue to focus on well-targeted power-generation engineering opportunities," says Keith Roe, chairman of Burns & Roe Group.

"Power providers are having to react and respond to a number of threats [that] are causing a number of structural changes," says Graves. He says these threats range from physical and cyber attacks to preparation for weather events to economic threats caused by large energy consumers leaving the system. "That certainly creates a market opportunity for us as we help our utility and energy clients work through these challenges."

Nuclear power showed signs of a major expansion five years ago. But the market now is in flux due to the growing availability and low cost of local natural-gas supplies as well as concerns stemming from the Fukushima nuclear-plant meltdown.

The soft market for nuclear power and the increasing emphasis on cheap, gas-fired plants has some firms in that sector refocusing their strategy. For example, approximately 40% of Altran North America's revenue traditionally came from the nuclear-powerplant sector, says Thomas Foley, CEO. "We have had to aggressively compete to increase market share within nuclear and also quickly adjust to increase efforts in the oil-and-gas and power-delivery sectors, which we believe will be the primary growth areas over the next decade."

However, many firms in that market predict nuclear power will continue to be a factor in the U.S. "We do a lot of planning and consulting for existing nuclear plants," says Oskvig of Black & Veatch Energy. He says there are a lot of plans on the boards for new plants, but utilities are waiting to see how the new nuclear plants currently under construction work out before committing to any more new plants.

But Oskvig says he is confident in the future of U.S. nuclear power. "Keep in mind, nuclear plants provide about 20% of the total U.S. generating capacity. To maintain that ratio as demand continues to rise, another 15 to 20 new plants will have to come on line in the next 20 years."

Project delivery changes also are affecting the power market. "During the past 10 years, the power-generation project-delivery approach gradually shifted to turnkey [engineer-procure-construct]. Now, almost all new generation projects are executed on an EPC basis," says Roe. "In the past, owners hired Burns and Roe as their detailed design engineer. We are now aligning ourselves with selected EPC contractors."

Transmission and distribution (T&D) continues to be a hot market. "There is a lot of capital spending on T&D and utility infrastructure," says Vincze of TRC. He says the Federal Energy Regulatory Commission is opening up numerous corridors for T&D.

"We are seeing the advent of microgrids, which might draw capacity during parts of the day but then be positioned to feed excess capacity back into the grid at other times," says Oskvig. He notes that this is a throwback to when the power industry consisted of a loose and disorganized collection of microgrids, before the power industry evolved into a centralized T&D system managed by large utilities. "The problem is that traditional utilities do not have a business model to manage a smart grid. That is what we and many other firms like ours are working on," he says.

Oskvig also notes that the current regulatory environment is not prepared to deal with a smart grid. "There are several thousand utilities in 50 states, each with their own regulatory regime. There are also federal, state and local cooperatives. Their response to the new smart gird will be shaped by the complexity of the regulatory environment," he observes.

Techno World

The pressure on productivity from the recession has continued to the drive toward finding technologies that will help firms do more with less. "I'm seeing the fine-tuning of existing technologies that have the ability to pay dividends in both the design and construction processes. Easier-to-use tools that are more mobile, faster and cloud-based are changing the market," says Moos.

Younger designers are helping to drive much of the technology revolution. "The new generation of consulting professionals thinks in a different mode than the consultants of just 15 years ago. They think in terms of the 'technology insert,' " says Kurt Bergman, CEO, Michael Baker International. He says his firm encourages creative thought, lets them push new technology inserts and supports them with its application development team.

However, this increasing reliance on technology is reshaping the role of the designer in the project delivery process. "We continue to be involved in an increasing amount of design-build projects, integrated-project-delivery projects and projects with negotiated contracts with general contractors [that] come aboard during the design phase," says Devereaux of Harley Ellis Devereaux. "The conventional delivery method of design-bid-build seems to be diminishing."

Contracts Are Behind the Times

For many designers, building information modeling is a big advance in the construction process, but many worry it poses unforeseen legal or contractual snags. "The legal profession hasn't shifted [its] thinking to three-dimensional digital models yet but, rather, continue to draft contract language that focuses on contract documents as represented by two-dimensional sheets of drawings and the accompanying books of specifications," says Devereaux.

Devereaux says design content and specifications that exist only in the 3D model must be duplicated into separate 2D specification books, which is inefficient and could introduce the potential for errors. "We simply won't reap the full reward of increased efficiency from BIM until such time as [owners and contracts] accept the digital model as the primary conveyance of information," he says.

Another concern is the level of design detail that can be incorporated into a BIM model raises an expectation that designers will increase their level of design coordination of all these details, "of course, all within the same fee structure as when we designed in 2D," says Clay Seckman, senior principal at Smith Seckman Reid Inc. He says the best approach is to create buy-in on the level of detail and coordination in deliverables. Explaining responsibilities beforehand "seems to be more impactful to managing liability than having the right contract language," he notes.

Many designers urge the adoption of a common legal understanding of design standards in contracts. "The standard of care has to be reasonable, not perfection, because BIM will not result in perfect drawings," says Anjanette Bobrow, an attorney with Syska Hennessy Group Inc. She says owners need to understand that a contingency for construction coordination issues during construction is still going to be necessary. "Ownership of the BIM model is also an issue, so an electronic data transfer and use agreement should be utilized setting out how and who can use the model," she says.

"The contractual vehicles that facilitate the BIM process have not kept pace. Integrated-project-delivery methods and guiding concepts emerging from [American Institute of Architects'] contract documents begin to establish fair and reasonable expectations for those pursuing BIM as a process," says Charlie Williams, design director of information and technology at LPA Inc. "These methods and concepts need to be an integral part of contractual vehicles used by designers, builders and owners."

However, once the legal and contractual issues are ironed out, BIM could go a long way to avoiding disputes. "As we see BIM being used more and more, theoretically, there could be a decline in professional liability claims over the next few years because of the ability to discover design errors and omissions prior to the start of construction," Bobrow says.

Worried About a Lost Generation

The recession could not have come at a worse time for design-firm staffing purposes. At a time when many baby boomers are considering or entering retirement, industry firms were forced to lay off people, usually from the younger and less experienced staff members. Many of those laid off have left the industry, creating a lost generation of talent. Now that the market is beginning to turn around and more baby boomers are closer to retirement than they were in 2008, when the market cratered, demand for experienced staff and young people is becoming more urgent.

This has caused many design firms to worry about the future of the profession. "There is a dearth of professionals, and we expect a battle for talent for very few fresh graduates and also for mid- and senior-level engineers," says Mardam of Stanley Consultants. "We anticipate a shortage of project managers with solid and successful experience with integrated project delivery," says Keen of HDR. "We are putting an emphasis on providing our budding project managers with top-notch learning experiences."

But some design firms say now is the opportunity to put their best foot forward in recruiting young talent. "The drive to find, hire and retain top talent can't be viewed as an added burden in this rebounding economy. It is an opportunity for firms that can differentiate themselves and become a magnet for the best engineers," says Wasilewski of CDI Corp.

Source: ENR