The string had to end sometime. For the first time since Engineering News-Record began measuring performance among environmental consulting and contracting firms eight years ago, the total for the Top 200 has declined. The difference is not much$32.7 billion in environmental revenue for 2002 compared to $32.8 billion the year beforebut it is still down.
It was hard to sympathize with those who bemoaned the passage of the boom years of the late 1970s and early 1980s, even while the Top 200 revenue line was growing from $19 billion in 1995 to $32.8 billion in 2001. Somehow the tune rang false. Now, the numbers suggest that those still in the game finally have a right to sing the blues.
The numbers also suggest that it may take a while to turn the corner. Roughly the same number of firms claimed to be making a profit: 141 in 2002 compared to 144 the year before. But only 79 companies reported an increased backlog; in 2001, there were 106. The high-flyers of a few years ago, telecommunications and technology, took their lumps early and led the country into recession while clean-up firms continued to squeeze out profitability. The industry "was a long time getting into this [situation], and it may take a while to get out," says Dick Fox, president of CDM consulting engineers. The firm saw revenue slip by $20 million last year, to $590.6 million. That still was good enough to move up a notch on the Top 200, to 13th position.
Private-sector work has been slow, Fox notes, "but there are a lot of projects moving on the public side." The sorry state of municipal and state finances is worrisome, but local user fees make water and wastewater projects less sensitive to economic downturns. "The public sector has shown time and time again that it wants high-quality water and sewer service and is willing to pay for it," he says.
Still, the state budget crisis will continue to erode prospects, says John Somerville, CEO of Metcalf & Eddy, a water-wastewater arm of AECOM Technology Corp. For his own firm, he projects a net revenue growth of 11% this year, slipping to 6 to 7% in 2004. "Forty-six states will face deficits this year, according to the National League of Cities," he says. "Officials are reluctant to proceed with projects because its not politically expedient now with cuts they are having to make."
Washington, D.C.-based Center on Budget and Policy Priorities reports state budget deficits now total $189 billion and are likely to add another $89 billion in 2004. California alone is wrestling with a $35-billion deficit.
"There is $1.5 billion in sewer reconstruction coming," says Andrew Swank, vice president of estimating with W.L. Hailey and Co. Inc. But when is anybodys guess. It may be 2005 before beaten-down margins return to normal, he says. "The five months from December to May were the slowest I can remember in 10 years," says Randy Houston, Hailey vice president of business development. "The market is so slow it is almost comatose. There is nothing to bid."
MWH President and CEO Robert B. Uhler also sees a rocky road ahead. "I believe were headed for major recession in the water market because of states financial problems," he says. "But were setting the company up for that now." He notes that municipal owners can often be "inflexible. They like the status quo." Uhler says the firm does not see many large jobs on its horizon. "The list is lower today than it was a year ago," he says. He cites "bad forecasting from too many optimists." But he adds that "winning large jobs is critical to us. This is the time to change your place in the marketplace."
Patrick Cairo, executive vice president of United Water, insists that despite the dissolution of the much publicized water privatization deal between his company and the city of Atlanta, the market is not over for United Water or anyone else (ENR 2/10 p. 14). "Reports of our death are premature," he told attendees at the Farkas Berkowitz Forum for engineer-contractor CEOs last month in Washington, D.C. The firm, like No. 70 ONDEO Degremont, is a unit of French parent Suez. Cairo says 40% of the firms business is still in privatization while the remaining 60% is for regulated utilities. The latter niche will "remunicipalize and wont grow," he says. Cairo claims that anti-privatization "activists" are influencing officials against the approach and pushing to have more privatization contracts put to a public vote. "Its a troubling trend," he says. "Deals now are extremely complicated and can take months and even years to complete."
He told conferees that on one privatization contract proposal in Massachusetts worth just $2.5 million, "the contract document is 2,000 pages long." Cairo wonders if "the public is ready for this type of long-term partnership."
BYE-BYE. One public official who decided she could no longer commit to a long-term partnership, at least in the work place, is Christine Todd Whitman, who last week decided to leave her post as Environmental Protection Administration head to return to private life in New Jersey. Under Whitman, EPA managed a few impressive victories: forcing General Electric to clean polychlorinated biphenyls from the Hudson River, getting Midwestern utilities to add pollution controls to coal-burning powerplants and pushing ahead on diesel emissions.
But overall, her tenure was widely portrayed as weak on pollution control. Critics claim it was business as usual under a Republican administration. "Whitmans biggest failure was her unwillingness to help construct a compelling Republican platform for environmental protection," says Jerry Taylor, the director of natural resources for the Cato Institute, a Washington, D.C.-based think tank. "The GOP is desperately in need of a clear vision for how it would protect environmental quality .For far too long, Republicans have been hobbled by the impression that theyre happy with whatever the Democrats want to do on the environmental front as long as its done on the cheap."
Still, there are opportunities to succeed in the federal market, even if environmental money has been slow in coming this year, says Sam Moore, vice president of business development and marketing in Parsons environmental and planning division. Defense Dept. work "is a place to provide innovation and technologies that give a customer increased quality and cost effectiveness," he says.
A DOD contract to dispose of unexploded ordnance on the Hawaiian island of Kahoolawe gave the firm a chance to field test software technology that is now being applied on a similar project at Fort Ord, Calif., Moore says (ENR 5/12 p. 17). High-tech solutions work well on DOD projects because "the government says it is looking for a way to cut down on [operations and maintenance], which cuts down the cost," he says. "Budgets arent growing, so they are more cost conscious."
The war on terrorism and the war in Iraq have taken their toll on federal contractors, says Joseph W. Craver, vice president of the engineering and environmental management sector for Scientific Applications International Corp. When SAIC calls on defense clients these days, Craver says, often there is nobody home. "The moneys there," he says. "But theres nobody there to spend it. A whole lot of our traditional customers are overseas."
John Schmerber, vice president of business development for Washington Group International Inc., says that government contracts continue to evolve to a performance-based standard, especially at the Dept. of Energy, which is "looking for more bang for [its] buck." The Rocky Flats cleanup in Colorado signaled a change in attitude on the part of the agency, he says. The new policy shifts the risk more toward contractors. "Weve seen it carried through some very tough negotiations."
Martin S. Tanzer, executive vice president of URS Corp., calls the federal remediation market "essentially flat" and voices concern over procurement changes that he says will shift the risk of guaranteeing cleanup to contractors.
"We see the federal market as having some room for growth, but probably minimal growth, most likely in the 5% range," Tanzer says. The private sector offers even less potential. Any growth there will come from taking market share from others, he says.
In the federal market, MACTEC Inc.s Bruce Coles says, "The administration is pushing to clean up quickly. Were working at Oak Ridge, Savannah River, Fernald, Rock Flats and Hanford."
The firm bagged an Air Force Center of Environmental Excellence delivery contract along with 15 other companies. The total amount to be spent on them is about $2 billion. Companies that perform will get more tasks and those that dont perform will get fewer. If a company has a relationship with a particular base then the contract can be used to do the work there. The concept enhances your ability to do work, says Coles.
Along with the Air Force, the Army Corps of Engineers and the Navy are exploring different methods of contracting cleanup work. The Corps is looking to limit liability in its next round of Total Environmental Restoration Contracts by including environmental insurance as part of the package, according to Schmerber. "We need to be able to understand the statement of work and constraints," he says. A successful contractor should be able to quantify the risk profile to meet performance measures "and put our fee against performance milestones. Were always being challenged by DOD and DOE to beat our schedule and costs," he adds. Rewards are there for superior performance.
One thing that is not helping get work done is the startling rise in surety costs. Major contractors havent been complaining too loudly yet, but subcontractors are starting to feel the pinch. Still, "We havent lost any subcontractors yet," says Mike Hughes, president of Bechtel Hanford. "We have been working with some subs and with DOE to find ways to work around performance bonds."
The agency is accelerating deadlines across its major installations, including Hanford Oak Ridge and the Idaho National Engineering and Environmental Laboratory. "At Idaho, the old baseline plan had cleanup running through 2070. The accelerated program has all of the Idaho cleanup being completed by 2035," says Sue Steiger, vice president of Bechtels Idaho Completion Program.
The acceleration strategy "also includes more effective ways of getting work done," says Steiger. "The cost of cleanup is coming down. But there will be a measurable increase in funding to support the acceleration," she says.
That means a lot of work over the next five to 10 years. It also has cleanup firm executives wondering how massive remediation contracts will be replaced when they are gone.
At both its Hanford and Fernald, Ohio, sites, Doe renegotiated contracts "with the common theme of a 2006 closure date," says Ronald Oakley, president of the federal business arm of Fluor Corp. The transition "shifted focus from cost to schedule, all under the umbrella of safety and security." The agency is successfully creating "an understanding that these missions have to close," he says. Click here to view chart
Sam W. Box, president of Foster Wheeler Environmental who stayed at the helm after Tetra Tech Inc. bought the unit in March, laments that the Bush administrations push to award or steer more work to small businesses is affecting work for larger prime contractors such as his. "Theres no question that the small business pressure is greater than ever," he says. "It has reduced the size of our programs. Were burning up contracts faster and have to compete more often."
On the commercial side, business "is regulatory-driven," says Washington Groups Schmerber. "If regulation is strong then business is strong, and were just not seeing that."
A softer commercial market helped push down 2002 earnings for Washington Group and others at the top of the list. Last year, eight firms topped the $1- billion mark; only six firms made those numbers this year. Shaw, Washington and EARTH TECH slipped below the threshold. Tetra Techs acquisition of Foster Wheeler Environmental enabled it to join the billionaires club.
"What were seeing is that all government services are under continuing financial pressure. There is a need to do more with a lot less," says Jerry Frieling, Malcolm Pirnie Inc.s board chairman and managing director of the firms Red Oak Consulting unit. As a result, "Theres no money coming from anybody in the short run."
Shortfalls are having an impact and have bred caution among owners. "Many clients are hesitant to be very aggressive with some of their infrastructure projects," notes John Shearer, the Orlando, Fla.-based executive vice president and national director of environmental services for PBS&J.
Other firms continue to tinker with portfolio balance. Eighty-nine percent of St. Louis-based Alberici Corp.s 2002 environmental revenue was derived from air-pollution work, up from 37% the year prior. But that is an aberration due to three large projects to install air-pollution control equipment, says Steven E. Olson, senior vice president of business acquisition.
But clean-air work "has been less of a funding priority for most of our clients than it was a year-and-a-half ago," Olson says. That means the firms portfolio is likely to, again, become more balanced.
"Our backlog, compared to a year ago, is substantially lower," Olson says, and the remainder of this year will continue to be "hand-to-mouth." He believes that it may be two years before backlog and revenue recover. Alberici now is turning its focus to water, but recent events in the firms hometown show that market is also tough. "Here, in St. Louis, we watched the local water board make two or three runs at a tax increase to fund water projects, but they have been turned down every time," he says.
"We continue to see more activity on the wastewater side than on the water supply side. That, too, is different than what we saw a year or two ago," he says.
Olson joined Alberici in October, moving over from BE&K Corp.s Northstar division, the companys telecommunications group. Telecommunications arguably has been the industrys most disappointing market segment. By comparison, it makes even the moribund environmental market look relatively prosperous.
The Shaw Group, ranked seventh again this year, is trying to capture more market share in a mature market. "Just 60 days ago we acquired Envirogen," says George Bevan, executive vice president. "One of the technologies it has can be used to remediate rocket fuel contamination, which could be a huge market. The numbers are staggering, but its very speculative at this time."
The market, and potential profits, could make a cleanup firm executives mouth water. Bevan says some published estimates peg the market potential at $40 billion or more. But "it depends on what EPA decides to do, where it sets the limits," he says.
Another more conventional area that Shaw is developing is the brownfields area. In a practice called land-banking, the company takes title to depressed or abandoned sites in need of remediation, so that the prior owners can clear the liabilities off their books. The company cleans the property and develops it, assuming the risk of receiving a clean certification from state and federal regulators. "We do it through a series of liability sharing, between us and insurance companies. We feel comfortable taking title," says Tom Horst, executive vice president.
In the same vein, MACTEC is working with a private developer at the New Jersey Meadowlands to build a high-profile golf course on a closed landfill. "Were going with a guaranteed price with cost cap insurance," says Coles. "We do the investigation and give a lump-sum price for the design and construction." The price is backed up with insurance that caps the cost to the customer and indirectly to the contractor. If the cost is higher the contractor pays a deductible before the insurance comes in.
The project could be the first of many more. "We see this becoming more and more prevalent. It puts a good envelope on risk. Like any good job, if it is scoped properly you always get a better job," Coles says.
On the commercial side, brownfields have also drawn some attention from the Washington Group. "Its not a key area for us, but a niche market," says Schmerber.
Overall, executives remain cautious at best. "The market clearly has softened for our services over the last year; our rate of growth has declined," reports Emil C. Herkert, chief executive officer of Hatch Mott MacDonald Groups infrastructure and environment unit, reflecting the opinion of many executives. "Its not flat, its still growing, albeit at a slower place."
The infrastructure and environment units chief operating officer, Nicholas D. DeNichilo, predicts that "were not looking at a significant shift over the next few quarters. I think that even though we are projecting some modest growth . . . were going to be in for a softening market." Herkert isnt looking for help from federal economic policy, either. "What were doing is coming up with tax relief which will be felt more on the consumer end of the business," he says.
FLAT. The market for services such as remediation, hazardous waste management, air quality, and other issues "has been flat or [demonstrated] very small growth," says John Deal, California-based chief executive officer of North American operations for The ERM Group, which does about 95% of its work for private-sector industrial clients.
In the past year, firms focusing on traditional environmental services such as remediation, hazardous waste and air quality have been weathering "a perfect storm," says Bob Goldman, CEO of Blasland Bouck & Lee Inc. Firms have been hit simultaneously by the U.S. economic slowdown, war and international instability, "a political structure that has not emphasized the environment," and municipal and state budget shortfalls, he says. "In my tenure, there havent been four compounding effects at the same time, all that will diminish the environmental business, and were in it now. Work is steady but not much more than that."
Goldman says hes seen more emphasis on design than construction. A significant change continues to be "much more emphasis, post-9/11, on health and security issues generally."
"An awful lot of traditional hazardous waste/remediation [work] depends on the economy," says David C. Rosenblum, senior vice president for CH2M Hills energy, environment and systems services. "You dont see any change in the volume of work other than for economic reasons."
In economically leaner times, "I think were seeing more and more cost pressure," Rosenblum says. Stressing cost could turn into a double-edged sword, however. "Many customers are just trying to see how cheap they can get it. Until there are some dramatic failures, thats probably going to continue."
With tens of thousands of chemical manufacturing facilities in the U.S., Goldman predicts that "were going to see much more chemical-related security work for the next couple of years." For confidentiality and security reasons, Goldman cannot discuss specific clients or programs. But he says, "Weve done some pretty significant work" with clients in handling biohazards and preparing for biohazards incidents.
ERMs private-sector clients in oil and gas, chemicals and pharmaceuticals, and manufacturing, which account for over 90% of the companys customers, have all trimmed capital spending, he reports. "Overall, I would say that the market has been flat or [shown] very small growth," agrees ERMs Deal.
Even though the overall outlook seems bleak, many executives seem confident, if still cautious. "The sky is not falling," declares Craig Goerhing, chief executive officer for Brown and Caldwell. On the contrary, he characterizes the market as "surprisingly steady." Goerhing estimates that his firm is on a pace to grow internally "about 9%," and is having a "very, very strong year."
Moreover, Goerhing believes his firms performance is not unique. "I think we have enjoyed a steady performance and an optimistic momentum just on the basis of the clients were serving and the line of business were in," he says. Responding to corporate citizenship and regulatory influences, even clients that are selling off assets or restructuring "are going through with their programs because they made the commitment," Goerhing says.
Tom Sullivan, chief executive officer of Greeley and Hansen LLC, which primarily serves the municipal water and wastewater markets, says, "I think there will be a construction slowdown." But he adds that "up to right now, our market is still very strong. We are seeing a lot of sewer infrastructure projects."
Low interest rates make bond-financed projects more attractive to agencies, who "can save half the financing cost by doing it now," Sullivan says. New York Citys $1-billion Newtown Creek wastewater treatment plant project will keep a joint venture team that includes Greeley and Hansen, Malcolm Pirnie and Hazen and Sawyer busy with three to four years of design.
Design or planning continues for a number of massive treatment facilities, as districts continue to replace outmoded facilities, plan for population growth and comply with consent decrees or regulations. "If your focus is on big cities locked into" large-scale projects, "theyll carry through for a long period of time," says Herkert of Hatch Mott MacDonald.
For King County, Wash., Brown and Caldwell and CH2M Hill are designing the $500-million Brightwater wastewater treatment plant, a greenfield facility that will serve metropolitan Seattle when it comes on line in 2010.
Malcolm Pirnie and Greeley and Hansen are providing program management services for the city of Phoenix in the 80-million-gallon-per-day first phase of the new Lake Pleasant water treatment Plant,. The project is one of the largest current design-build jobs of its kind in the U.S. In April, city officials selected a team led by EARTH TECH, which proposed a $286.7-million price for a 15-year design-build-operate contract. But the project may be an exeption.
While there are big-ticket projects moving forward, "There dont seem to be as many [large infrastructure projects] out there as there have been in the past," says PBS&Js Shearer. Instead, he says, "There seem to be a number of small to medium and large-size projects . . . .They might not be the larger megaprojects of the recent past but there are certainly enough projects out there to keep us active and growing."
IN THE PIPE. Fred Elwell, CDM senior vice president and a former president of the American Water Works Association, believes that there are still some big projects coming through the state and municipal pipeline. "The stormwater and combined sewer overflow work is not moving on as fast a pace as wed like, but its radiating out from the big cities to the second tier. Some cities, like Detroit, are pushing the states to move forward on implementing their programs," he says.
EPA will turn more attention to arsenic and other pollutants as detection technologies improve, Elwell predicts. He expects to see continued improvements in membrane technology. As manufacturers drop production costs and produce membranes that are more robust, he expects to see a push for more membrane treatment on the wastewater side, in conjunction with ultraviolet treatment.
Given the current economic conditions, Sullivan of Greeley and Hansen sees owners priorities shifting. "In the past five years, clients have really been pushing schedule," he says. But he predicts that over the next several years, "rather than pushing schedule, theyre going to be pushing cost because of all the red ink."
THE 2002 TOP 200 AT A GLANCE*
OF FIRMS REPORTING*
% OF PROFIT/LOSS
NUMBER OF FIRMS
|INCREASED BACKLOG|| |
|ADDED STAFF|| |
|ADDED OFFICES|| |
|TYPE OF WORK||REV. ($ MIL.)||% TOTAL|
*Numbers have been rounded up or down. Not all firms provided profit-loss information.