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For large design firms, the construction market finally began to break out of recession in 2004 after three tough years. Among executives of many top firms, there is a growing sense of optimism that business is picking up and will continue to do so in most industry segments for at least the next year or two.

Prosperity was broadly shared in 2004 by ENR’s Top 500 Design Firms. The group’s total revenue rose 7.8% to $52.99 billion, topping 2003’s mark of $49.18 billion. Top 500 domestic revenue rose 7.9% to $42.10 billion in 2004 while international revenue grew 7.3% to $10.89 billion. A startling 77.9% of all firms appearing on this Top 500 survey and the one published at this time last year showed increases in revenue. Half rose by double digits.

"The market for us is outstanding," says Mark Wilson, CEO of Kimley-Horn and Associates. "This is the kind of market we all hoped for when we got into the profession." Mervyn Sambles, vice president of strategic development for Fluor, agrees. "This is a cyclical business with a series of cyclical markets. It is surprising to see so many of these markets on the up cycle at the same time," he says. Robert Giorgio, president of CDI Business Solutions, adds, "We’ve grown in the past by grabbing market share. Now, we are growing because the market is."

The new boom in mergers and acquisitions, after a bit of a lull, is one indication of an "up" market. Parsons Corp. and Parsons Engineers & Constructors finally split up. The latter firm was spun off under an employee stock ownership plan two years ago and in October 2004 was acquired by Worley Group Ltd., Australia. "We had continued to report our combined revenue for the past two years, although we were two separate companies," says James McNulty, Parsons Corp. CEO. "The acquisition only affects our reported ENR revenue and has no impact on the operations or earnings of Parsons Corp. It was basically a non-event for us."

For many firms, expansion by acquisition has accelerated. One of the largest to take hold last year was CH2M-Hill’s acquisition of Spartanburg, S.C.-based Lockwood Greene at the very end of 2003. But not all buys are huge. Jones & Stokes, an environmental and natural resources management firm, acquired three firms in the past year. The largest was Mooney & Associates, a 40-person San Diego-based environmental firm.

J&S hasn’t stopped the trend this year, on March 1 buying Mobrand Biometrics, Seattle. "Our strategy is to diversify geographically," says CEO John W. Cowdrey. "We intend to continue to seek out additional firms to broaden our scope." He claims that many smaller firms welcome mergers as a respite from the hassles of company administration.

Heery International is looking for larger purchases that bring additional talent and new markets. Last fall, it acquired HLM Design, a Denver architectural and engineering firm, and in February bought JCM Group, a Los Angeles construction and program manager. "HLM brings a strong presence in the health care and criminal justice market," says James Moynihan, Heery CEO. "JCM brings a portfolio of blue-chip private- sector clients." Heery also set up HeeryAmerica, a separate unit that provides planning and consulting services to clients needing security clearances.

Security work also was the motivation behind VHB’s purchase of Fortress Inc. in August. The acquired firm specializes in emergency preparedness and security planning. "We’re finding more agencies factoring security into their infrastructure plans," says Albert Samano III, president of Fortress and VHB’s director of homeland security. "The first round of funding by the U.S. Dept. of Homeland Security was focused on gear, biosuits and equipment. Now, more long-term planning is being done," he says.

Many design firms are heeding clients’ calls for more in-depth help on the planning and financial side. Malcolm Pirnie recently bought Rick Giardina & Associates, an Aurora, Colo., management consulting firm that specializes in financial planning for public utilities. "This acquisition will help differentiate us from our competitors by bringing a broader array of services to customers," says William P. Dee, Pirnie’s CEO.

HDR has taken a similar step, on March 8 acquiring HLB Economics, a Washington, D.C., risk management, investment and finance consultant. "With more public-private partnerships out there, public agencies are going to need more help on the financial planning side," says Dennis C. Hirschbrunner, executive vice president of HDR.

Black & Veatch also has gone looking for talent outside the design field to strengthen client relationships. On Jan. 20, it acquired R.J. Rudden Associates, a Hauppauge, N.Y.-based economic and management consulting group with electric utility clients, and Lukens Energy Group, a similar Houston firm that specializes in the oil and gas industry. "Now we are getting into the program planning portion of the process to serve our clients," says Kim Mastalio, president of Black & Veatch’s strategic sales and marketing group.

Many in the industry see an increasing trend toward consolidation in the industry. But not all see growth by acquisition as the optimum path. "This is a fragmented industry, which begs for acquisitions," says Wilson of Kimley-Horn. "But there may be a better way to retain your entrepreneurial employees by giving them the freedom to grow internally, rather than seeing them leave to form their own firms." Wilson says top performers should be rewarded with ownership opportunities, not just raises and promotions.

International Intrigue

There is an additional concern about consolidation in the industry related to the dollar’s falling price against foreign currencies. "You’re going to see more foreign entities coming to the U.S. to buy firms because the dollar is so low," says Stephen Q. Whitney, CEO of Albert Kahn Associates. "Firms in the U.S. are a bargain for foreign firms. If you can buy a brand name, it’s instant credibility in the market."

Some impact of foreign firm acquisitions can be seen on the Top 500 list. Australian Worley’s purchase of Parsons E&C is one example. Another is the purchase of Paragon Engineering Services Inc. by U.K.-based AMEC. Bureau Veritas, Paris, also purchased Berryman & Henigar and U.S. Labs. And early last year, Canadian-based Stantec acquired Sear-Brown Group.

U.S. designers also are wondering about the impact of foreign investment in U.S. construction programs. "We’ve seen the movement by off-shore companies with large construction arms and huge war chests, such as [Spain’s] CINTRA and Dragados, into the U.S.," says Michael Schneider, executive vice president of Parsons Brinckerhoff. He cites CINTRA’s recent successful bid to pay the Texas Transportation Commission a $1.2-billion concession fee to build the $6-billion, 316-mile Trans-Texas Corridor-35. "I think we’ll be seeing more and more of this in the future," Schneider says. "I just worry that the seduction of money may outweigh sound planning."

Another sign of market rebound is personnel shortages among firms. "We are about 100 people short right now," says M. Arthur Gensler, chairman of architecture firm Gensler. "We are about as busy now as we were in 1991-92." And things will get more intense, with the firm budgeting for 14% growth this year. "Right now, we have 20 advertised openings, but we could probably use 70 new people to accommodate growth," says David Evans, chairman of David Evans and Associates. "This translates to skyrocketing salaries and pressure on bonuses."

As a result, many firms are considering more technology to create smarter and more efficient design. "Technology has finally taken hold," says Carole Wedge, president of Shepley Bulfinch Richardson and Abbott. She notes that new graduates are bringing in a lot of new technology from the classroom. "We are finding a sort of ‘reverse mentoring’ going on as the younger people are teaching the more senior staff how to optimize these new technologies," she says.

Design firms are hopeful that technology will continue to be the differentiator as engineering is considered more and more as a commodity. Even as the market improves, executives lament that clients are squeezing fees. "If there is one thing I hope that happens in this market, it is that some firms stop selling themselves short and negotiate and sign contracts that are more appropriate and fair," says Kimley-Horn’s Wilson. "Too many people out there are negotiating out of fear."

Ben Watts, president and CEO of Carter & Burgess, notes that increased use of design-build in the public sector fosters the commoditization attitude, especially where the contract gives a contractor the duty to oversee design. "If they can shop an excavation contract, what’s to stop them from shopping a design contract?" he asks.

But some say company growth and industry consolidation are driving the need to "feed the machine" by forcing more firms to bid for volume rather than for profit. "As firms get larger, they need more big projects to maintain the work force," says Dee of Malcolm Pirnie. "These are often large, price-driven jobs." If a firm has nothing to bring to the table but size, its work will be treated as a commodity, he says.

This has led many firms to use an ever broadening array of services to distinguish themselves. "In the past, front-end work was the entry level toward the plum–the design contract," says Watts. "Now, it is program management that’s the plum with design work being treated more and more as a commodity."

But for some firms, commoditization is nothing new. "It’s always been out there," says Evans. "You have to be able to distinguish yourself from the crowd. If you’re competing only based on price, you are in for a painful experience."

THE TOP 500 DESIGN FIRMS AT A GLANCE
VOLUME      
 
DOMESTIC 
INTERNATIONAL 
TOTAL 
 
$BIL.
% CHG.
$BIL.
% CHG.
$BIL.
% CHG.
REVENUE
42.1
7.9
10.9
7.3
53.0
7.8
PROFITABILITY      
 
NUMBER OF FIRMS REPORTING 
AVERAGE % OF 
 
PROFIT
LOSS
PROFIT
LOSS
DOMESTIC
447
20
9.1
NA
INTERNATIONAL
130
31
9.5
NA
PROFESSIONAL STAFF      
 
NUMBER OF FIRMS REPORTING 
AVERAGE % OF 
 
DOMESTIC
INTL.
DOMESTIC
INTL.
INCREASE
292
53
11.2
24.2
DECREASE
68
13
9.4
17.3
SAME
124
79
NA
NA
BACKLOG      
 
NUMBER OF FIRMS REPORTING
AVERAGE %
HIGHER
295
20.7
LOWER
61
14.6
SAME
92
NA
MARKET ANALYSIS  
TYPE OF WORK
REVENUE
$MIL.
PERCENT
OF TOTAL
BUILDING
11,718.0
22.1
MANUFACTURING
1,141.3
2.2
INDUSTRIAL
2,709.2
5.1
PETROLEUM
7,182.8
13.6
WATER
3,541.5
6.7
SEWER/WASTE
3,907.2
7.4
TRANSPORTATION
10,799.5
20.4
HAZARDOUS WASTE
6,166.6
11.6
POWER
3,025.9
5.7
TELECOMMUNICATIONS
903.2
1.7
OTHER
1,896.2
3.6
INTERNATIONAL REGIONS   
 
NUMBER
OF FIRMS
REVENUE
$MIL.
PERCENT
OF TOTAL
CANADA
92
1,470.5
13.5
LATIN AMERICA
121
700.1
6.4
CARIBBEAN ISLANDS
92
234.3
2.2
EUROPE
127
3,950.1
36.3
MIDDLE EAST
96
896.0
8.2
ASIA/AUSTRALIA
137
2,981.5
27.4
AFRICA
67
653.7
6.0
OTHER
1
0.7
0.0

Reauthorization Blues

Designers in the transportation market continue to wait for a final reauthorization bill for federal funding. "All our markets are looking very good except for transportation," says Parsons’ McNulty. "It all has to do with the failure over the past two-and-a-half years of Washington to act on the bill." He expresses the frustration of many...