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The U.S. economy is strong and so is the construction market. No one knows this more than designers who are at the leading edge of the boom. But just as the recent recession brought new issues and concerns to the design profession, so has prosperity. A lack of people to do the work, the drive for greater efficiencies in light of technological developments and the personnel squeeze, and new and subtle threats in the future have many thinking hard about where the design profession is headed.

From a pure numbers standpoint, the ENR Top 500 Design Firms had a huge year in 2005. Total design revenue for the Top 500 rose to $59.25 billion in 2005, up 11.8% from $52.99 billion in 2004. The domestic growth was even larger, with the Top 500 registering a 12.6% growth rate, to $47.40 billion in design revenue from projects in the U.S., over 2004’s figure of $42.10 billion. The Top 500 also saw an 8.9% growth in revenue from projects outside the U.S., to $11.85 billion, up from $10.89 billion in 2004.

For most firms, this prosperity is continuing and there aren’t major signs of a let-down any time soon. If anything, there may be a continuing ramp-up in work. “It’s not exactly news that most of the markets are expanding,” says Lee McIntyre, president and COO of CH2M Hill Cos. “It’s a target-rich environment,” adds Steve Wirtel, partner with Carollo Engineers. “The problem is to find enough people to do the work.”

With the tight market for people, design fees are rising. “After 30 years in this industry, I’ve finally seen the laws of supply and demand actually working,” says Bob Giorgio, president of CDI Business Solutions Group. He says engineering firms in the industry are becoming more savvy in their pricing and that clients, while not generous, are recognizing that squeezing fees isn’t necessarily in their best interest. “After all, you aren’t seeing any more of those reverse auctions that everyone was in a panic about a couple years ago,” he says.

One thing the active market has done is rekindle enthusiasm for mergers and acquisitions. Among the major acquisitions during the past year was ENSR International by AECOM in September 2005 and Blasland Bouck & Lee Inc. by Arcadis, also in September. And many firms remain in the market for acquisitions. However, some are taking a very cautious approach. “We are very careful in who we acquire,” says McIntyre. “We want to make sure the firm we acquire matches our corporate culture.” He says that CH2M Hill is not looking to acquire services or for geographic reach as much as simply looking to add talent.

HDR is one firm that is acquiring small firms to fill in specific needs, but is relying on internal growth to build size. “Size is important for firms such as ours,” says Dennis Hirschbrunner, director of marketing. For example, he notes that in the wake of Hurricane Katrina, the federal government sought out firms to mobilize large numbers of engineers to address recovery needs quickly. “If you can’t mobilize those numbers, they are not going to call you,” he says.

One interesting move this past year was the merger of SchenkelShultz and CSO Architects. “We worked together on the Midfield Terminal at Indianapolis International Airport,” says Tom Chandler, CEO of SchenkelShultz. Finding common interests and cultures, the firms decided to merge. But it was not a typical acquisition. “While we are now one company, we both maintained our equity positions in our firms. It’s more like a partnership than a merger,” he says.

Conceding to Concessions

The final enactment of the federal Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users has led to more sighs of relief among designers than celebration. “In the past, when a highway bill passed, the industry would feel that happy days are here again,” says Ben Watts, CEO of Carter & Burgess. “But with this new SAFETEA-LU Act, we generally just feel like it’s time to get back to work.” Bruce Johinke, director of global markets at Parsons Brinckerhoff, agrees. “I don’t think [SAFETEA-LU] will open the floodgates,” he says. “It’s more business as usual. But if it hadn’t passed, we would all be feeling it right now.”

The passage of SAFTEA-LU now is allowing state departments of transportation to define their programs. “Now they know what they are getting, but also what they can’t afford,” says Johinke. This is why more DOTs are now looking to alternate sources of funding for major needed projects, he says. This is making public-private partnerships a more attractive alternative for these agencies.

There are many design firms that are wary of highway concessions as a means of financing highways, particularly as much of the financing comes from abroad. “The international investment community is used to investing in infrastructure,” says Johinke. “But the U.S. is slow to look at concessions in public infrastructure.” That’s why such players as Spanish contractors Ferrovial and Dragados and investment banks like Australia’s Macquarie Bank have been active in highway concessions here in the U.S.

One thing privatization and concessions has done is change the nature of the client. “You are now working for contractors or the lead elements of the privatization group, rather than dealing directly with the DOTs,” says Terry Neimeyer, CEO of KCI Technologies. He wonders how the economics of concessions will work out. “It’s an easy way for a state to make money on a fixed asset,” he says. “But will states save money in the the long run?”

Not all private financing is on a grand scale. “We are seeing more transit-oriented development,” says Mike McArdle, director of the rail practice at VHB/ Vanasse Hangen Brustlin Inc. In these cases, developers site their investments along existing or planned public transit lines and invest in transportation upgrades. For example, Spaulding & Slye Colliers and Guilford Transportation Industries are developing a 45-acre NorthPoint tract in Cambridge, Mass., across the river from Boston, and are investing $35 million to build a new train station along the rail line passing through the development. VHB is working on the design. “More public agencies are looking to developers to help finance related public infrastructure,” McArdle says.

For other types of infrastructure, privatization is less of a concern. There have been a few attempts to privatize water and waste systems on a local level by international groups that have not been successful. “We still have some pretty large privatized water systems here in the U.S.,” says Ed Wetzel, executive vice president of the water and waste resources sector for R.W. Beck Inc. But he notes that even some of the more successful European privatizing entities may be rethinking things. For example, Germany’s RWE AG March 24 announced its intent to spin off its American Water subsidiary through an initial public offering of stock.

Some designers worry that lessons haven’t been learned about safeguarding infrastructure from recent disasters. “We need to design our infrastructure to be disaster resilient,” says Chris Poland, CEO of Degenkolb Engineers. He points out that the scale of some recent disasters like Hurricane Katrina or 9/11 show that infrastructure should be hardened so that when there is a major problem, the system can continue functioning while the damage is being repaired.

“We are not very good at planning for low-probability events. They happen, we throw money at the problem, then we forget about it until the next time,” Poland says. For example, despite Hurricane Katrina, New Orleans recently announced relaxed requirements for elevating residences in the flood zone, to 3 ft (see story, p. 14). “The model codes with disaster provisions are all there in the International Building Code. We just need local authorities with the will to adopt them,” Poland says.

For firms involved in designing buildings, the market remains bullish although some see softness in a few sectors. “We think the condo market reached its peak about the middle of last year,” says Carl Roehling, CEO of SmithGroup. “I think it’s nearing the saturation point.”

For some firms, demographics is the key. The K-12 school market continues to be vital in California. “The state is continuing to grow in population from people moving here,” says Jerry Eick, managing principal at HMC Architects. “And now, the state has passed a regulation to reduce class size, which is putting pressure on school districts to expand their facilities.”

Further, California’s seismic code continues to fuel a hot healthcare market. “All hospitals are struggling to comply with the seismic requirements, even though the legislature extended the compliance date to accommodate them,” says Eick. Now, there is a bill in the legislature to further extend seismic compliance for hospitals that decide to build replacement hospitals rather than upgrade existing facilities. However, Eick worries that the development of private hospitals may be curtailed in the state by strangling regulations and bureaucracy.

The airport market remains strong, if tenuous. Many designers in that market are concerned that the recent bankruptcies and threatened bankruptcies among the major airlines may threaten the market. “But the number of passengers has increased rapidly since the 9/11 drop-off, so the need is there,” says Chandler of SchenkelShultz. He says that airlines’ financial woes may actually spur new construction. “Airport authorities see these airlines in trouble and want to make sure they can attract as broad a variety of carriers as possible, so they are doing upgrades and adding facilities,” he says.

Transportation isn’t the only market that is seeing more privatization. “We are finishing a design-build job at Oak Ridge that was done on a public-private partnership, which a private developer financed,” says Jim Moynihan, CEO of Heery International. He also notes that the Veterans Administration has been inquiring about private financing of hospitals. “We are comfortable in that area,” he says, noting that Heery’s parent company is the U.K.’s Balfour Beatty, which is one of the leading builders under that country’s Private Financing Initiative.

Risky Business

For many firms, design-build is proving a double-edged sword. “We are doing more design-build projects,” says Moynihan. Heery has been moving more toward the old master builder concept for several years. As part of that move, the firm announced on April 3 that it had acquired Charter Builders, a Dallas-based specialist in construction management at-risk. “There still is a place for the pure designer, but chances are they will simply be part of a larger team,” he says. Heery is contemplating further expansion and is in the due diligence stage on two more potential acquisitions.

Some design firms still are finding owners falling into old habits. “Design-build is a very effective delivery process, but it is beginning to follow the same old design-bid-build pattern,” says Ray Messer, president of Walter P. Moore and Associates. “They are beginning to bid out design-build work instead of negotiating based on qualifications.” This means teams are forced to remove contingency money in their bids, putting pressure on all parties and hoping for no unexpected changes in the project, he says. “This is going to ruin design-build for a lot of people,” he says.

Several firms are concerned about increasingly risk-averse clients. “With the litigation boom, owners are allowing their attorneys to dictate contract provisions pushing the standard of care to a standard of perfection,” says Messer. This means that design firms are being forced to fall back on the most conservative designs and practices, rather than what may be the best for the project. “This practice stifles any creative design solutions and hurts the client,” he says.

The solution to innovation in an increasingly litigious environment often depends upon an owner willing to step in to be the first, say several design executives. R.W. Beck’s Wetzel notes that there are a few public owners willing to go with the best solution rather than the most conservative, making innovation more palatable to future clients.

Invasion of the Body Snatchers

In an informal email poll by ENR of the most significant issues facing Top 500 Design Firms, the one most cited by far was the lack of trained personnel. A comment by Mike Patton, senior vice president of ENGlobal, is typical: “We have...