Top 500 Design Firms 2016: Most Markets on the Rise
Top engineers and architects eye developments abroad, the U.S. election for hints about 2017
The market for construction design services is healthy, with a few exceptions. The buildings market continues to grow at a measured pace, and the passage of the federal Fixing America’s Surface Transportation (FAST) Act, as well as progress in Congress on other federal infrastructure funding initiatives, have many designers in the infrastructure markets optimistic. While low oil prices have depressed the markets for big-ticket oil and gas work and the power market seems sluggish, most U.S. design firms are in a good frame of mind.
However, there is concern about the future. The U.S. economy is not robust, and there are concerns about what impact the outcome of the presidential election will have on regulations and the market. Also, economic and political turmoil abroad could have a significant impact on the domestic market. And within the design profession, there are trends that have many designers concerned about their role in the construction process.
Some design firms are beginning to see signs of a pending slowdown. “There seems to be more uncertainty in the market as the volatility of the stock market, apparently, has had a negative psychological impact on the ability to obtain finance,” says Henry L. Lucas, CEO of ECS Corporate Services. “Clients in the private sector are concerned about the economy [and] job and population growth impacting their projects. Contractors in most areas are hungrier for projects than they have been in 2014 and 2015,” says Calvin T. Ladner, president of LJA Engineering.
The evidence of the market trends 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 $91.81 billion in 2015, down 0.5% from $92.30 billion in 2014. Market growth was up on the domestic side, rising 4.4%, to $69.07 billion, in 2015, from $66.16 billion in 2014. However, revenue from projects outside the U.S. fell 13.0%, to $22.74 billion, in 2015, down from $26.14 billion in 2014.
The overall downturn in revenue is largely a result of a drop in design work in the oil-and-gas sector, which fell 8.1%, from $18.1 billion, in 2014, to $16.7 billion. This drop-off can be attributed to a sagging international market as, surprisingly, revenue from the domestic oil-and-gas market actually grew by 12.6%.
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Mergers and acquisitions were a major story in the industry in 2015 and continue to be in 2016. While none were on the scale of AECOM’s acquisition of URS, WSP’s acquisition of Parsons Brinckerhoff or the merger of Amec and Foster Wheeler in 2014, there were several significant transactions in 2015.
One of the biggest and most wide-ranging moves was the October acquisition of Professional Service Industries (PSI) by U.K.-based Intertek Group plc for $330 million. “Intertek’s building group works predominantly with building-product manufacturers to test and certify their products to make sure they are up to code,” says Gavin Campbell, global senior vice president of Intertek. He notes that PSI plays a similar role, inspecting, testing and certifying products and site conditions once products get to the jobsite. “Although we do similar work, there was little overlap between the two companies, which made it a perfect fit,” he says.
For PSI, this acquisition provides an entry into international markets. “PSI will not be just a U.S.-based firm now, but a global presence,” says Doug Dayton, president and COO of PSI. He says many PSI clients work around the world, and now PSI can follow them. Also, the merger allows the firm to do all inspections and materials testing, from a product’s development and use to installation and decommissioning, says Dayton. He also notes that PSI brings to Intertek new expertise in fields such as consulting and geotechnical work.
Another big acquisition, also in October, was TRC Cos.’ purchase, for $130 million, of the professional services business segment of Willbros Group, an 850-person unit working in the oil-and-gas pipeline market. “We believe the long-term outlook for the pipeline industry is strong, especially with respect to midstream activities,” says Chris Vincze, CEO of TRC. He says that, despite the downturn in the oil-and-gas sector, pipeline work continues to be strong. “The product has to get from the source to the user, so pipelines will continue to be an active market.”
Utilities and oil-and-gas companies are looking for just a small group of vendors that can provide multidisciplinary services, Vincze observes. “If you aren’t a major player nationally in those markets, you will have to settle for trickle-down work from those that are,” he says. That was part of the motivation behind acquiring Willbros’ service group. “Your ability to assume risks, your size and your skill sets are all differentiators in those markets,” he says.
The M&A scene got another jolt on March 29, when Canadian design giant Stantec Inc. announced plans to buy MWH Global Inc. for $795 million (ENR 4/11 p. 13). Up until now, Stantec has had little contracting capacity, while MWH has been venturing more into the contracting realm. “When industry changes, we adapt—thanks to our diverse business model,” says Bob Gomes, president and CEO of Stantec. “We’re also responsive to marketplace opportunities that will allow us to better service those clients with new services.” Gomes says that, once closed, the MWH Global deal will help Stantec to grow into new markets and geographies while building a global leader in water and infrastructure markets.
For many designers, being bigger is a necessity. “We are just one of the larger firms that are bulking up—building highly specialized service- and building-type capabilities at the same time as we are opening more full-service offices,” says Brad Perkins, chairman of Perkins Eastman. He says many clients around the world are demanding world-class expertise combined with local delivery. He says that, 15 years ago, a 500-person architectural firm with three or four offices was a large firm and could compete in most markets. “Now, the business model for that firm might be 1,200 people in 15 offices,” he says.
The growth of these megafirms is having an impact on midsize designers. “On large-scale or specialized work, these firms dominate the market for their perceived experience and potential for added value, especially to equally large international clients,” says Philip M. Davis, senior vice president at Fishbeck, Thompson, Carr & Huber Inc. He says local firms can leverage their position with existing clients as trusted advisers or they need to specialize in order to compete for value-priced services. “However, this makes them targets for acquisition,” he says.
Not all big firms are eager to gobble up smaller firms. “The competitive landscape is shifting with all the recent mergers and talk of more mergers, but, really, the quality of competition has never been higher,” says Greg Graves, CEO, Burns & McDonnell. “What has kept Burns & McDonnell competitive is to avoid growing just to keep up with megasize firms. We try to grow at a pace that is comfortable for an employee-owned firm,” he says.
In contrast to the recent spate of large-scale mergers, one company is breaking up: Hatch Mott MacDonald (HMM), the U.S. joint venture between the U.K.’s Matt MacDonald Group Ltd. and Canada’s Hatch Group, has split into two separate North American subsidiaries of their respective parent companies (ENR 12/7-14/15 p. 19). Mott MacDonald, North America CEO Nick DeNichilo says the joint venture worked well, but it was often difficult to get sign-off from both parent companies for major HMM growth initiatives. Effective April 22, Mott MacDonald, North America will assume responsibility for most HMM U.S.-based work, while Hatch will assume responsibility for most HMM Canadian work.
Many firms are reorganizing or repositioning to serve their markets more effectively. For example, Parsons launched a restructuring initiative to streamline its reporting structure, simplify its layers of management and improve its administrative processes, says Virginia Grebbien, Parsons’ chief of staff. “A key feature of the reorganization plan was the creation of five business units headed by members of our senior administrative team,” she notes. This strategy puts Parsons team members closer to customers and specific business sectors. “A lot of our competition appears to be going through similar changes,” she says.
Other firms are placing greater emphasis on some of their offerings. For example, Arcadis North America is strengthening its consulting group. “We definitely see many of our private clients taking a new approach to their property portfolios to determine what to do with their assets,” says John Jastrem, CEO of Arcadis North America CEO. He notes that mergers and acquisitions can result in clients having a mystery portfolio to manage. Arcadis can help them to understand the cost of property cleanup, the potential for sale or development, and ways to be better at their business, Jastrem says.
There is a growing trend in the industry, especially in the public sector, to move toward alternative project delivery (APD). The demand to expedite project schedules without sacrificing quality continues to increase within the engineering and construction industry, forcing designers to consider alternative means of providing service to clients. “We see great opportunity in the application of design-build and [public-private-partnership] project delivery methods. For this reason, one of our recent acquisitions was a company that specializes in design-build, adding to our portfolio of services and capabilities,” says Joseph Viscuso, senior vice president at Pennoni.
Many firms are excited by the move toward ADP. “We are a big proponent of [ADP’s] integrated delivery model,” says Fred Werner, president of design and consulting services for AECOM. He says AECOM’s purchase of URS helped AECOM’s capacity to design, construct, operate and finance major projects.
Werner goes on to note that the move to ADP is changing the role of the designer. “We no longer just draw up a set of plans to hand over to the contractors to tweak and build. Now, we are at the forefront of assessing the client’s needs, deal-making to finance a program and planning its execution,” he says
The move to alternative project delivery has caused a shift in the scale of some infrastructure projects. “To capitalize on the inherent savings associated with APD, Owners are increasing the average size of their projects. These two trends are drawing much more international competition for larger, more complicated projects,” says Grebbien.
However, there often can be a cost to these ADP methods: a greater assumption of risk by the designer. Some firms are prepared to assume these risks. “Our clients are quite risk-averse and like the idea of shifting some of that risk back on us, particularly for large projects with firm schedules and not-to-exceed budgets,” says Graves of Burns & McDonnell. He says the firm is quite comfortable taking on that risk. “We have the project teams, processes and standards in place and have established a good track record of results,” he says.
However, many design firms point out that assuming risk can result in problems. “On a more frequent basis, clients are requesting higher insurance limits from design professionals. These limits result in higher premiums, and yet competition and the resulting fee structure are not sufficient to offset the higher premiums,” says Gary Loesch, COO of H2M Architects + Engineers.
Some clients also are requesting that the design firm execute a contract that often includes uninsurable terms, Loesch further notes. He says clauses that require the design professional to indemnify the owner for the firm’s negligence are acceptable, whereas contracts that include a defense obligation that is not tied to the firm’s negligence is uninsurable. “When firms accept this contract language, not only are they putting their corporate entities at risk, they are making it more difficult and riskier for the entire design community,” he says.
“Infrastructure” has become a trending term in North America. “Infrastructure is front and center in the media and political world. There is also no doubt that infrastructure will be a prominent issue during the upcoming U.S. elections. However, the question remains: How do we pay for it?” says DeNichilo of Mott MacDonald, North America.
One answer is public-private partnerships. After years of fits and starts, P3s finally are beginning to take off in the U.S. public sector. “Government budget constraints are forcing more opportunities into alternative delivery methods like P3 and [design-build]. This means that stronger relationships with contractors, concessionaires, the financial community and other stakeholders are no longer an option but a requirement,” says DeNichilo.
A few of the largest design firms now are beginning to take their own equity positions in P3 projects. For example, Parsons was awarded its first P3 contract as an equity partner under the concession and design-build contract for the Regina Bypass Project in Saskatchewan, Canada, says Grebbien. Parsons Enterprises has a 25% stake in the 30-year concession to design, finance, construct, operate and maintain the 61-kilometer bypass.
Parsons is not alone in taking the plunge into project equity investment. AECOM is perhaps the biggest equity investor in P3s in the design industry. “There is no limit on how much money there is out there to invest in projects,” says Werner. “Right now, we are looking at perhaps 15 to 16 projects in North America [in which] AECOM is considering making an equity investment.”
Over the past few years, the question of consistent and long-term funding infrastructure has forced states and localities to work out other ways to finance their own needs. Many firms in the infrastructure market say these efforts already are paying back dividends. “Lack of a long-term federal surface transportation bill has precluded state and local governments from reinvigorating their aging and undersized infrastructure, but it has also kick-started funding and delivery alternatives for transportation and water-wastewater infrastructure projects,” says Grebbien.
The passage of the FAST Act, coupled with many of these state funding initiatives that were advanced in 2015, have many firms saying the infrastructure market should be solid for several years. “Some markets can dry up quickly, but infrastructure is a different beast,” says Werner. He sees a strong market at least through 2018.
However, not all states have been quick off the mark now that long-term federal funding is in place. “It is still a matter of the haves and the have-nots with many of our clients. Those that have moved aggressively in recent years to increase funding at the state level have robust programs, while those that have not are definitely struggling,” says John Grow, chief strategy and marketing officer for TranSystems.
Autonomous vehicles have created a great deal of buzz in the transportation sector. Firms such as Google and many auto companies, including Nissan and Audi, are investing billions of dollars in driverless-car technology. Further, President Obama is trying to pass $4 billion in additional funding to test this technology, and several Depts. of Transportation are initiating studies and pilot programs, notes Jastrem. “This will change the face of infrastructure, design and human behavior and has major implications in safety and intelligent transportation systems.”
Once widespread, these new vehicles will change how firms design roads and transportation signaling. “As an example, we could see capacity improvements at signalized intersections by as much as 50% just by eliminating driver reaction time,” says Michael McArdle, senior vice president at VHB. He says highway departments and transportation designers have to start preparing for potential changes now. “As we know, major infrastructure projects can take up to more than 10 years to deliver. With the billions [of dollars] of privately funded research and development going into autonomous vehicles, we will begin to see the impacts of them before then.”
Many firms already are participating in studies about the impact of autonomous vehicles. For example, WSP | Parsons Brinckerhoff was the infrastructure lead in the so-called Connected Vehicle Safety Pilot, in which nearly 3,000 vehicles communicated with roadside infrastructure and other vehicles on the streets of Ann Arbor, Mich. It also worked on the Ann Arbor Connected Vehicle Test Environment, another study conducted by the University of Michigan Transportation Research Institute, says Gregory Kelly, CEO.
Kelly says state, regional and local governments must develop policies to regulate driverless vehicles and address the changes that will result from their widespread use. “With that in mind, my firm has developed a guide for government officials in preparing for the advent of driverless vehicles, available for download on our website,” Kelly says.
For designers, one of the biggest trends is that cities are taking a more holistic approach to urban development. This development is forcing designers to take a more integral approach to their own designs. “With these urban centers, the systems and communities continue to become more complex, requiring solutions that are collaborative and integrated in approach and require greater levels of technological innovation,” says Michael J. Carragher, CEO of VHB.
Further, the U.S. population is more willing to change jobs and locations and cities are being forced to sell themselves to potential and current residents, giving urban planners and designers a new source of business. For example, quality of life is becoming a competitive advantage for cities and their economic development efforts. Opportunities to live in a healthy environment are influencing what people want in their homes, workplaces, schools, public spaces and communities. “Public health is no longer solely the business of health professionals. There is a relationship between our built environment and our health,” says Ken Schwartz, senior vice president of VHB.
The oil-and-gas sector has taken a pounding over the past year and a half as oil prices cratered, which has caused many firms to rethink their positions in that market. For example, Rettew Associates, which had a big share of the fracking market, now is refocusing on its other core markets, including transportation, industrial, development and regulated energy. “We expect this diversification to be healthy for our company. But in the short term, it’s a very large challenge to replace the lost oil-and-gas revenue. These circumstances really highlight the need for a well-balanced market portfolio,” says Mark Lauriello, Rettew’s CEO.
Stantec is another firm that is being cautious during the oil-and-gas downturn. It has reduced its exposure in the petroleum and mining sectors but is “maintaining a core expertise in oil and gas and mining—and we have a long-term commitment to these businesses. We believe they offer strong future contributions to Stantec,” says Gomes. “When prices improve, we will be very well positioned to benefit.”
Burns & McDonnell also has seen some projects canceled or delayed, but its customers in the oil-and-gas sector “know we are standing by and ready when they are ready to move forward,” says Greg Graves, CEO. But some petroleum sectors are holding up well, he says, adding, “Our pipelines group had a big growth year last year and is building up a good backlog, mostly due to the need for expanded natural-gas transmission infrastructure.”
Parsons is one designer that is bucking this trend away from oil and gas. It has reentered that market for the first time since 2004, when it sold its Parsons E&C Corp. to Australia’s Worley. “In the United States, our oil-and-gas customers’ capital spend has been severely reduced, which is impacting our environmental and industrial offerings. However, there is a sharp contrast between Parsons and our competitors. Our competitors are under strain and are focused on shrinking, while we are relatively new to the market and are focused on growth,” says Grebbien.
In March 2015, Parsons acquired T.J. Cross Engineers Inc., an oil-and-gas professional services firm headquartered in Bakersfield, Calif. “Through this acquisition, we’ve established a strong platform in the heavy oil market, and our Bakersfield team continues to gain market share through execution excellence,” Grebbien says.
Lower oil prices have made some indirect impacts. Some designers say the resulting lower energy costs will discourage customers from pursuing sustainable design as there is little early payoff from their green investment. “Decreased energy prices have made it more difficult to advocate for systems with higher energy efficiency. This has a ripple effect of making alternative energy sources and more innovative systems more difficult to incorporate into projects,” says Rick Hombsch, principal at HGA Architects and Engineers.
Not all designers see this as a major concern. “The fall in oil prices … is a relatively minor blip in the larger patterns. No one is saying, ‘Stop being green and stop innovating because of the price of oil went down,’ ” says Kevin Hydes, CEO of The Integral Group.
The traditional power-generation market continues to be sluggish as regulatory uncertainty and a soft demand for new capacity has constrained producers from making heavy investments in new plants. “The U.S. is a stable, mature market, with limited demand for new capacity. Energy conservation efforts have cut down on capacity demand,” says Ed Walsh, president of the power business for Black & Veatch. He says a lot of the work now is driven by regulations.
Walsh says the U.S. Supreme Court’s June ruling, which forced the U.S. Environmental Protection Agency to reconsider the costs of its Clean Air Act enforcement regulations, has caused the regulatory uncertainty to ramp up. “After the ruling, people at utilities are asking, ‘Now what?’ ” he says. “And now that the EPA has set its sights on methane, utilities are reassessing decisions on the retirement of existing plants.”
Walsh says the real activity is in renewables. That work has been a boost to Black & Veatch, he says. “When a group invests in solar or wind plants, they want an experienced firm to ensure that the resulting design is up to utility-grade standards to safeguard their investment,” he says.
Many firms in the power sector see renewables as a good market. “We continue to see strength in the power-generation and transmission markets, particularly with renewable energy sources,” says Kevin Langwell, senior vice president of Terracon Consultants Inc. He says the technological advances, combined with falling prices and production tax credits, are very favorable to overall market expansion.
The market crash of 2008 still is having an impact on the design profession. There were estimates that as many as 40% of U.S. architects lost their jobs in the deep recession. Many never returned, which has led to a skills shortage today.
“Engineers are being drawn to other creative fields. On the architecture side, there is a shortage of experienced staff. There are a lot of older staff and younger staff, but there is a vacuum in that middle range of architects with 15 or so years of experience. We need to bridge that gap and bring more people into the industry,” says Roy L. Follmuth, vice president of Leo A Daly.
Further, pricing pressure is forcing design firms to scramble to stay within budgets. Many firms say the commoditization of design is taking its toll on employees. “As more firms merge or are sold, staff levels and employee benefits are being reduced to lower overhead and drive down perceived costs. This cost-driven focus reduces employee satisfaction and commitment to excellence while increasing staff turnover”—all of which negatively impacts performance, according to Brooks Peed, chairman of Kimley-Horn.
Peed says Kimley-Horn is focused on providing an outstanding work environment and exceptional benefit packages in order to attract the strongest professionals. He says the firm’s success at this was shown early this year, when Kimley-Horn was ranked No. 7 among all companies in the U.S. on the Fortune Magazine 2016 list of the 100 Best Companies to Work For. Only one other design firm, Burns & McDonnell, (No. 16) made that list.
Syska Hennessy Group has developed a long-term training program to attract and retain young people. Its engineering development program exposes young staff to the firm’s leaders and technical experts, says Cyrus Izzo, co-president. After a couple of years, young staff members graduate into the Syska Employee Network of Support and Education (SENSE) program, which develops staff and talent management by sharing technical knowledge and fostering communication and culture across the company, he says.
Izzo says the training program gives young people the ability to set the agenda for initiatives that are important to them and gives them a powerful voice in the direction the firm is heading. “The very act of self-leadership creates a dynamic [in which] crucial skills are developed and nurtured, thereby providing training and guidance as our future leaders develop very organically from within,” Izzo says.
Technology is allowing firms to work more efficiently and quickly. However, many firms are looking at larger technological issues that are beginning to impact not how they design, but what they design. An example of this is the “internet of things,” which promises to interconnect all systems and devices.
The internet of things hasn’t yet fully shown its overall impact on the design industry. “What is probable is the deployment of more sensors, the need to account for bandwidth and prioritization of the data, and the ultimate harvesting to provide actionable insight, maintenance tasks, or actual building performance,” says Stephen W. Held, vice president of Leo A Daly.
“We are already seeing the profound impact of the internet of things. As it migrates from early adopters to broad acceptance around the globe, it will engage everything we own, from appliances and electronics to vehicles and building controls. Our ability to manage and optimally control all of these elements has the potential to be very positive for our health,” says Izzo.
However, the faster technology evolves, the more problems arise. “The capacity of our tools are now very far ahead of our ability to maximize our use of them,” says Troy Thompson, managing partner at SmithGroupJJR. BIM, data visualization tools and social media are reshaping how the design and construction industries relate to one another. “But, until we creatively tackle the 20th-century legal, liability and insurance limitations of our industry, our tools will always fall short of maximizing the value that is added through integrated design and construction,” he says.
But for many designers, the technology is simply a tool that people must be willing to embrace. “There are a lot of new technologies out there. But technology is not about a gadget or new software. It is a whole way of thinking,” says Werner.