The U.S. construction slump that has been lingering for two years finally began to take its toll on the leading domestic designers in 2003. Only a spurt in international results among ENRs Top 500 Design Firms last year prevented further damage.
Total revenue for the Top 500 in 2003 fell 1.8% to $49.18 billion, from $50.11 billion in 2002. But the fall-off in revenue from U.S.-based projects was steeper. After nearly a decade of rising numbers, the groups domestic revenue sagged 4.9% in 2003 to $39.03 billion, down from $41.02 billion in 2002.
International markets, which continue to regain ground lost in the wake of the Asian and Latin American fiscal meltdowns of 1997-98, came to the rescue. The Top 500 garnered revenue of $10.15 billion in 2003 from projects based outside the U.S., an increase of 11% over 2002s mark of $9.06 billion.
What may be surprising to engineers is that the usual suspect linked to the domestic revenue declinethe general building marketwas not the prime culprit behind last years drop. That market actually was up 3% overall and 2.5% domestically. Power-related design more than any other market pulled down 2003s revenue. International power work fell 12.9%, but the sector in the U.S. plummeted 42%from $4.22 billion in 2002 to $2.44 billion in 2003. 
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The downturn has many design firms re-examining their businesses. "We are consciously trying to consolidate and simplify our internal processes to make sure we are as efficient and cost-effective as possible," says Thomas J. ONeill, chairman and CEO of Parsons Brinckerhoff. "We arent focusing as much on growth as on the bottom line." PB claims a healthy profit last year, helping to add to its $67.3 million in cash on hand as of last October, according to its annual report released in early April. But the document also reports that payroll dropped from 9,370 in 2002 to 8,975 in 2003.
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PB isnt the only firm focusing on results. "Our interest is not so much in growing our top line as in growing our bottom line," says Stephen G. Hanks, CEO of Washington Group International. While this may be a mantra for many firms facing tough markets, it seems to be working for WGI. Corporate revenue dropped in 2003 to $2.5 billion from $3.3 billion in 2002, but operating income and net income each rose by better than 10%. But Hanks admits that WGI also is "looking to grow the top line, too."
One firm that made a major move in 2003 was CH2M Hill Cos., which improved its competitive design position in key power, technology and manufacturing markets with its acquisition of Lockwood Greene last year. "We have good synergies between the companies," says Ray Topping, CH2M Hill senior vice president. "There is some overlap in markets but we have a common culture. Were now playing off both companies."
The transportation market remains in flux as everyone waits to see the final form of the federal transportation reauthorization bill. "I think everyone is conceding at this point to a $275-billion funding level in the bill," says Michael J. Carragher, senior vice president of VHB. He believes that a final, veto-proof bill should be ready by Memorial Day. "We are just now hearing that some of the states were working in are beginning to make more optimistic funding projections," he says.
Carragher sees state and local transportation agencies coming under increasing pressure not just to maintain existing roads but to expand transportation networks to meet the increasing demand for capacity.
"Departments of transportation are looking to be good environmental stewards, to develop systems as a whole and not just look at roads and highways in isolation," Carragher says. Thats why DOTs increasingly are looking for firms that can provide not just transportation design, but also environmental and land-use planning.
For CH2M Hill Cos., the transportation market will remain "tentative," says Mike Kennedy, president of its transportation business group. "We saw 15 to 20% growth in previous years, but only 3% last year," he says. "Once funding is solidified, it should be back up there."
Skyrocketing materials prices, particularly steel and fuels, could create problems for design-build firms. "On everything with steel, were looking for alternative methods and means," says Kennedy. "States are willing to listen. This is a crazy situation." But he anticipates the pressure could lessen in six to nine months. "Theres already some improvement in many states."
A few designers in the transportation market expressed frustration with the current legislative logjam over federal transportation funding reauthorization. "We spend so much of our political capital on one thingthe transportation bill," complains James H. Suttle, executive vice president of HDR Inc. He believes that the design profession needs to become more politically savvy and involved in issues of interest to legislators on all levels outside of the core funding bills. Then, lawmakers might be more sensitive to questions critical to designers, Suttle contends.
But firms still remain generally optimistic about the funding bill now before Congressional conferees. "The bill going forward in Congress is not much different from what we got under TEA-21, and TEA-21 was the biggest funding package ever," says PBs ONeill. "And if the economy continues to improve, state and local funds will rise accordingly."
The same fiscal constraints on transportation projects arising from shortfalls in some state and local budgets apply to water and sewer projects. "You almost cant start talking about water, wastewater and stormwater without acknowledging the fiscal crises our clients are facing," says Paul R. Brown, president of the non-federal public-sector services group for CDM. One problem he sees is that projects for water, waste, sanitation and utility districts have always been looked at in isolation from all other local agencies and funded by individual agency budgets.
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| The Top 500 Design Firms List |
| Alphabetical List of the Top 500 |
| List of number of firms working or have worked in 140 countries or regions around the globe |
Brown says that design firms can provide "integrated planning programs" where several agencies can be brought together to work out solutions for common or related problems. "This is a management consulting function where we work to get water departments to talk to other departments, break the agencies out of their silos, gain public support and encourage cooperation on multi-function programs."
Bringing agencies together could enable cities to find multiple sources of funding for projects. "The management consulting business provided its own revenue stream, but more important, it can lead to projects that wouldnt come about any other way," Brown says. CDM is working with CH2M Hill to develop such an integrated resources plan for the city of Los Angeles.
"Corporate customers are spurring demand for water and wastewater disposal for industry," says Steven Helms, president of CDMs industrial services group. Some environmental work comes from local and regional environmental agency enforcement, "but there is a strong push among corporations to gain ISO 14000 environmental certification," he says. Corporate clients also are concerned about managing legacy sites, both from a liability standpoint and with an eye toward future sale prices, Helms says.
The revenue uptick in the general building market for the Top 500, both domestically and abroad, follows years of significant drop-off in the business. "After several shocks to the system in 2001, its been a tough time for the entire general building market," says Patrick MacLeamy, HOK president, whose firm recently has enjoyed an upsurge in business. "In January, we set a record for backlog and topped that in February. And revenue follows backlog," he says. "Were as busy as weve been since 2000."
HOKs new-found growth is not coming from the commercial sector. "Theres not a whole lot of commercial space being built right now," says MacLeamy. But government building projects have surged and health care continues to be strong, he says. "And theres a lot of new aviation projects for the first time since that market fell off the table in 2001."
Prison work has fallen off, but MacLeamy sees more courthouse projects now being let. Others see a pickup in health-care facilities in the criminal justice system, a market that is often overlooked. "We have an aging prison population and its medical needs have to be addressed," says HDRs Suttle.
| THE 2004 TOP 500 DESIGN FIRMS AT A GLANCE | ||||||
| VOLUME | ||||||
| DOMESTIC | INTERNATIONAL | TOTAL | ||||
| $BIL. | % CHG. | $BIL. | % CHG. | $BIL. | % CHG. | |
| REVENUE | 39.0 | -4.9 | 10.1 | +11.0 | 49.2 | -1.8 |
| PROFITABILITY | ||||||
| NUMBER OF FIRMS REPORTING | AVERAGE % OF | |||||
| PROFIT | LOSS | PROFIT | LOSS | |||
| DOMESTIC | 448 | 22 | 8.5 | NA | ||
| INTERNATIONAL | 125 | 36 | 10.3 | NA | ||
| PROFESSIONAL STAFF | ||||||
| NUMBER OF FIRMS REPORTING | AVERAGE % OF | |||||
| DOMESTIC | INTL. | DOMESTIC | INTL. | |||
| INCREASE | 212 | 43 | 10.9 | 20.2 | ||
| DECREASE | 142 | 21 | 11.1 | 14.9 | ||
| SAME | 125 | 19 | NA | NA | ||
|
BACKLOG | ||||||
| NUMBER OF FIRMS REPORTING | AVERAGE % | |||||
| HIGHER | 253 | 15.4 | ||||
| LOWER | 75 | 12.7 | ||||
| SAME | 118 | NA | ||||
| MARKET ANALYSIS | ||
| TYPE OF WORK | REVENUE $MIL. | PERCENT OF TOTAL |
| BUILDING | 10,544.5 | 21.4 |
| MANUFACTURING | 1,103.4 | 2.2 |
| INDUSTRIAL | 2,834.6 | 5.8 |
| PETROLEUM | 6,995.9 | 14.2 |
| WATER | 2,978.6 | 6.1 |
| SEWER/WASTE | 2,846.8 | 6.8 |
| TRANSPORTATION | 10,084.4 | 20.5 |
| HAZARDOUS WASTE | 5,429.5 | 11.0 |
| POWER | 3,076.3 | 6.3 |
| TELECOMMUNICATIONS | 845.2 | 1.7 |
| OTHER | 1,945.3 | 4.0 |
| INTERNATIONAL REGIONS | |||
| NUMBER OF FIRMS | REVENUE $MIL. | PERCENT OF TOTAL | |
| CANADA | 82 | 1,098.8 | 10.8 |
| LATIN AMERICA | 110 | 523.4 | 5.2 |
| CARIBBEAN ISLANDS | 84 | 302.5 | 3.0 |
| EUROPE | 125 | 4,115.7 | 40.5 |
| MIDDLE EAST | 91 | 906.4 | 8.9 |
| ASIA/AUSTRALIA | 128 | 2,387.7 | 23.5 |
| AFRICA | 62 | 815.4 | 8.0 |
| OTHER | 1 | 0.1 | 0.0 |
"The majority of our corporate clients are trying to grow in productivity, not real estate," says Bill Karst, CEO of Callison. That has led to an increase in renovation and interiors work, but at the expense of greenfield projects. "We are now about 50% focused on renovation in that market," he says. The commercial and corporate downturn has led Callison to focus on its more active markets. Hotel work has remained surprisingly stable "and weve doubled our health-care practice in just the past year," Karst says.
Another firm that has benefited from health-care growth is BSA LifeStructures. "Since our founding in 1975, we have focused on our core markets of health care, research facilities, pharmaceuticals and life sciences," says Monte L. Hoover, chairman. The health-care boom has led to dramatic growth. "We tried to target for 20% growth, but we actually grew 27% in 2003."
One growing market is being propelled by cities trying to develop underutilized urban space. "These arent brownfields with heavy clean-up requirements," says Sandy DElia, principal and director of development for EDAW Inc. "Theyre more like grayfields, under-utilized areas that may be on waterfronts or railways that can be developed into commercial, retail or residential areas."
DElia notes that EDAW has grown from its roots as a landscape architecture firm and now provides design, environmental, economic development and planning services. "We are heavily involved in the militarys Base Realignment and Closure [BRAC] program and large revitalization efforts such as the redevelopment of land around [Denvers] Stapleton Airport."
Another growing market niche in general building is increased emphasis on building scientific research parks. Many design firms see cities that want to develop their commercial bases beginning to seek out public-private partnerships with corporations, universities and public agencies to develop these parks and lure investment.
"This has been going on for a while," says Suttle of HDR. His firm has done a lot of design of nanotechnology laboratories. HDR is working on an eight-story research tower as part of the University of Nebraska Medical Center in Omaha, with level-3 containment labs. The facility is equipped for level-4 for the most dangerous toxins, according to Suttle.
BSA LifeStructures also sees more work in the development of research parks. "The state of Indiana has traditionally been looked at as a rust-belt state, but there is a large university community and major pharmaceutical companies and medical equipment manufacturers in the state," says Hoover. He notes that BSA is working on Indiana Universitys Research Institute No. 3 in Indianapolis, the third such building in the university hospital complex.
On the manufacturing side, there may be a bright spot of hope on the horizon after some gloomy years. "The weaker dollar is helping to stir exports of American goods," says Lockwood Greene President Fred Brune. "It also is attracting European and, particularly, Japanese companies to investigate building manufacturing facilities to help establish international brands here in the U.S." Brune says hes seen more evidence of this in the past three to six months. "It will be interesting to see if this translates into major capital investment."
There is little optimism about the stagnant U.S. industrial process and petroleum markets. On the petroleum side, "the trend in the U.S. and Western Europe is on getting more productivity from existing assets," says Khalid Farid, executive vice president of ABB Lummus Global. "That means smaller jobs, but it does give an advantage to companies that can provide proprietary technologies."
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Things are looking up in electronics work, says Randy Smith, vice president of IDC, CH2M Hills high-tech, telecommunications, energy and industrial services business unit. "Last year marked the tail end of a bad downturn in the electronics business," he says. "The forecast is for a 20 to 50% growth." Smith says the demand for flat-panel screens will push some design and construction activity. "The television industry expects a big boom in flat-panel demand by 2005-06," he says. "Most of our work is for manufacturers in Taiwan."
The pharmaceutical market, which had been booming for several years, may be leveling out. "For the first time since the uncertainties of the mid-1990s over Hillary Clintons health-care committee, we saw a leveling out of health-care market," says Robert Giorgio, president of CDI Business Solutions. While biotech companies continue to build, major pharmaceutical companies have pulled back on their capital spending plans, he says.
One trend among big industrial customers is to increasingly squeeze design fees. "For alliance-type contracts on smaller jobs and general maintenance work, major industrial clients assume vendors have the expertise to do the job. So they are looking more at the bottom linehow well you can drive down costs," says Giorgio. One troubling element he sees is that, on such contracts, design firms are dealing first with procurement departments on the corporate level. "Theres little interaction with the ultimate clientthe engineering departmentsuntil the field is narrowed."
Brune of Lockwood Greene worries that the increasing emphasis on fees is hurting the design profession. "The business continues to be competitive and theres not much you can do about irrational bidding by competitors except to be able to identify when bidding becomes irrational," he jokes.
On another high-tech front, telecommunications, signs also point to return of a more rational design market. "Were up 40% in revenue year over year," says Jeff Akers, president of Communications and Information Solutions, CH2M Hills telecom unit. "Wireless carriers were the first to come back. Were now seeing more sanity and little margin squeezing."
Akers sees a growing consulting niche in helping states comply with the new federal Health Information Privacy Protection Act, enacted in 2003. It mandates new health data security and privacy rules by May 2005. "States are scrambling to understand what compliance is," Akers says. "We do a complete analysis of where they have vulnerabilities."
As more competitive design pressures margins, more companies are seeking new ways to market their expertise. "We are investing in services beyond just engineering," says ONeill. "Clients are looking beyond design services to program management and the like," he says.
The move toward management consulting by design firms is a natural progression, says Giorgio. "On the IT side of our business, most projects fail because of a lack of ability to manage complex processes, something that we take for granted on the construction side," he says. "There is a huge untapped market out there for design firms to market their management talents in other fields."
Some firms are finding new markets and opportunities through upper management strategic planning, but also with their own design staffs entrepreneurial skills. "We have a relatively young staff at their peak earning potential," says BSA LifeStructures Hoover. Many are entrepreneurial and are looking for ownership opportunities, so BSA helps them establish their own "firms" within the firm. "We maintain a strong ownership position in the resulting affiliate firms, but this practice creates new ownership opportunities for staff," he says. BSA now has five "affiliate" businesses.
The international market has had its share of shocks over the past year or so. "Last year, business slowed down quite a bit for a couple of reasons," says Khalid Farid, executive vice president of ABB Lummus Global. "First, the Asian market took a pause after the SARS outbreak in China. Then, the Iraq war had a major impact on the Middle East, causing many projects to be put on hold."
But Farid says these were momentary bumps in the continuing road to recovery. The end of the Iraq war has meant more major projects getting the green light. "The Middle East is now not just very active in awarding new projects, but there are loads of plans for new projects on the boards." Saudi Arabia and Qatar are particularly active.
The Iraq market continues to attract a lot of attention from the sheer size of the awards being issued to rebuild that country. For example, WGI has managed to win four major contracts in Iraq, worth up to $3.1 billion over the next five years. But Hanks cautioned that WGI is spreading its bets. "We dont want to get wrapped around Iraq." He points out that, due to the volatile nature of work in Iraq, those four contracts are not factored into WGIs advice to Wall Street analysts.
AECOM recently made a play for a bigger presence in Afghanistan and Iraq when it acquired PADCO Inc., a 200-person firm specializing in economic and land-use planning in developing countries (ENR 4/12 p. 7). "Its exciting to see all the rebuilding going on in Iraq and Afghanistan," says Ray Holdsworth, AECOMs CEO. "PADCO has worked with us in the past and we believe they will help us with work there."
In China, investment in electronics construction is picking up again, "but it has been slower to respond to the upturn now," says Smith of CH2M Hill. "China is more selectively investing in the industry and trying to entice offshore firms to manufacture there."
But some foreign-owned manufacturers are concerned about ownership of "intellectual property," says Smith. "Its tough for an industry on the leading edge to make leading-edge investments there. But everyone sees the market and realizes that they have to do something."
There are some changes going on in the Chinese market. "There is a new movement in China to try to even out the haves and the have-nots among the major cities," says Karst of Callison. Until recently, the bulk of the firms design work came from Beijing and Shanghai, he says. "Now less than 50% of our work is in those two cities."
Instead, regional and local governments are being given more leeway to encourage foreign investment, Karst says. "Now, we are seeing other cities sponsoring major mixed-use facilities. These projects are becoming almost like the new downtowns for districts or cities," he points out. Callisons experience in retail, residential and commercial work has been a real plus in winning such signature projects in China, according to Karst.
One design firm has been making great strides in China in an ironic way. "There are a lot of design institutes that can do the type of work that Western architects rushing to China are now offering," says EDAWs DElia. China has a long history of central planning, but not many firms can provide complex urban landscape, environmental and land-use planning services. "Weve gone from 25 people in two offices in China to 200 in six offices," DElia says.
Asia will drive growth in this market, with nanotechnology development an important focus. CH2M Hills IDC group designed a nanotechnology facility for Kaist, Koreas national research and development company, according to Smith. "Some design were doing is really nano," he says. "One hundred nanometersthis is the bar." Smith says Intel "is already driving to sub-100 nanometer delivery."
Europe remains a huge market for international design firms, but it is not a particularly dynamic one. "The European petroleum market is a lot like that in the U.S.," says Farid. "They are both mature markets and theres not a lot of new building going on."
But infrastructure improvements in Eastern Europe have generally begun to pay dividends in other areas, says Brune of Lockwood Greene. "Were starting to see investments in consumer product production in Eastern Europe, particularly in Poland, the Czech Republic and Russia, as consumers increase discretionary spending," he says.
But for some, Russia also poses a lot of uncertainties. "Russia is active, particularly in upstream petroleum projects as they are a major oil producer," says Farid. However, he says that international designers and contractors continue to be concerned about the political and legal uncertainties and risk in that tumultuous nation.
The international market for big-ticket projects continues to be fraught with peril. "The market still has a lot of competitors, and contracts continue to have a high degree of risk," says Farid. "And there still are people who are willing to assume that risk."
But Farid is seeing increasing resistance among the big engineer-procure-construct firms to accept onerous conditions in contracts. "EPC firms are now gaining more voice in the structure of contracts. Its not there yet, but clients are beginning to listen."
The design market remains uncertain, but some firms are starting to see a glimmer of hope. "We are now in the middle of the perfect storm," says MacLeamy of HOK. "We continue to have low inflation and low interest rates, the tax cuts are still in place and theres a large volume of pent-up demand." Thats a forecast for the turnaround that many designers have been looking for.
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