ENR 2018 Top 500 Design Firms: Worry Despite Strong Markets
The market for major design firms is growing and is poised to continue to grow for the foreseeable future, but the sense of euphoria seen last year has faded. One year ago, most firms expected a burst of new business from tax cuts, deregulation and a promised infrastructure bill in the wake of the election of President Donald Trump. Now, design firms are focusing more on their key markets and systems to deliver their services as efficiently as possible.
This more focused attitude among large design firms stems from disappointment that the major infrastructure package originally proposed by the Trump administration has not made any headway in Congress. Further, there is some doubt about how much a bill so heavily reliant on local public contributions and private funding will work over the long haul.
There also is concern about the impact that the administration’s tariffs will have on the cost of construction and worry that technology will not blunt the impact of looming staff shortages on both the design and construction sides.
However, the domestic market continues to grow, as can be seen in the data from ENR’s Top 500 Design Firms list. Taken as a group, the Top 500 firms had a record design revenue of $93.90 billion in 2017, up 1.1%, from $92.84 billion in 2016. Market growth climbed on the domestic side, rising 3.1%, to $73.97 billion in 2017 from $71.69 billion in 2016. However, revenue from projects outside the U.S. continued to fall, dropping 7%, to $19.93 billion.
The international downturn in revenue largely resulted from a drop in design work in the oil and gas sector, which fell 13.0%, to $4.7 billion in 2017 from $5.4 billion in 2016, and in the buildings market, which fell 8.1%, to $3.7 billion in 2017 from $4.1 billion in 2016. However, oil prices have now risen to nearly $70/bbl and there is speculation that they could eventually top $100/bbl, giving some hope to firms in that market.
ENR's 2018 Top 500 Design Firms Chart
Top 500 Design Firms 2018: Worry Despite Strong Markets PDF
The Big Get Bigger
The continuing consolidation among firms remained one of the biggest stories of 2017. However, the scale of the companies acquired grew exponentially compared to the past couple of years. Jacobs’ acquisition of last year’s No. 3 firm, CH2M, was enough to push it to No. 1 on this year’s Top 500, moving AECOM down to No. 2 for the first time in nine years.
The acquisition was motivated by Jacobs’ intent to expand and strengthen its position in the infrastructure markets. “Our CH2M acquisition brings a proven track record of delivering and operating world-class water systems, and we plan to leverage that to bring water to those who need it,” says Steve Demetriou, CEO of Jacobs.
In another big acquisition, Wood Group bought last year’s No. 7 design firm, AMEC-Foster Wheeler. The merger provides Wood with a broader geographical reach and gives it access to markets beyond its base market in oil and gas.
Canada’s SNC-Lavalin also made a splash, acquiring Atkins plc. While SNC-Lavalin had a presence in the U.S. market, Atkins North America broadens the scope and depth of that presence.
CB&I was active on the M&A market as well. In February 2017, it sold its Capital Services business to a private equity investment firm, New York City-based Veritas Capital, for $755 million in cash. The new company is now known as APTIM. And earlier this year, CB&I announced it would merge with Houston-based oil-and-gas engineer-contractor McDermott International. Shareholders of both companies will vote to approve the merger on May 2.
Many firms followed the acquisition trail. In 2017, over 70 companies on this year’s Top 500 Design Firms list acquired another design company, according to Morrissey-Goodale, a Newton, Mass.-based management consultant and M&A adviser. Further, eight companies from last year’s Top 500 were acquired.
The trend continues into this year. One firm on this year’s Top 500 already has been acquired. On April 6, the No. 398 ranked firm, Shafer, Kline & Warren Inc., was acquired by Clive, Iowa-based infrastructure engineering firm McClure Engineering Co. “The appetite of larger firms to grow through acquisitions coupled with small and mid-size firms’ need for ownership transition have fueled this continuing trend,” says Al Barkouli, CEO of David Evans and Associates.
“Our CH2M acquisition brings a proven track record of delivering and operating world-class water systems, and we plan to leverage that to bring water to those who need it.”
–Steve Demetriou, CEO, Jacobs
AECOM, one of the biggest acquirers in recent years, has been quiet. “We are always on the lookout for a brilliant company to add, but right now, we are making the most of what we have,” says Steve Morriss, group president for design and consulting services for the Americas.
AECOM did make news in February when it outsourced much of its IT group to IBM. However, Morriss emphasizes that the agreement affects mostly back-office networks. “We also hope to take advantage of IBM’s Watson data-analytics capabilities.” The bulk of the firm’s customer-based technology resources will remain in house, Morriss adds.
It is not just design firms buying other design firms. The demand for alternate project delivery is driving many firms to strengthen their contracting capabilities. AECOM’s acquisition of Shimmick Construction in July 2017 already is paying dividends for the firm with design-build infrastructure jobs, says Morriss.
A more recent example is Burns & McDonnell. It acquired Appleton, Wis.-based industrial contractor Azco Inc. in 2016. Now, “we just closed on the acquisition of Ref-Chem [Odessa, Texas], an open-shop contractor on the Gulf Coast,” says Ray Kowalik, CEO of Burns & McDonnell. He says the $100-million oil services contractor gives Burns & McDonnell the ability to provide design-build and engineer-procure-construct projects in both the union (Azco) and nonunion (Ref-Chem) arenas.
Equity investors also are taking note of the design profession. Several large design firms have been acquired in the past few years by equity investors. One of the biggest acquisitions in 2017 was when New Mountain Capital, a New York City-based investment firm, bought publicly held TRC Cos.
Chris Vincze, TRC’s CEO, says the experience was a positive one. “Our experience as a publicly owned company taught us financial discipline, but there was no value-add in the exercise,” he says. Working with New Mountain Capital allows the firm to focus on more long-term strategies, rather than shuffling paper quarter to quarter, he adds.
Growing From Within
Many firms prefer to grow organically. Langan is a good example. “We have acquired only one firm in nearly 50 years,” says David T. Gockel, Langan’s CEO. He says the firm made strategic investments in personnel to position Langan in the energy market. “And we also brought on a highly respected team of environmental health and safety compliance and management experts,” he adds.
Gensler is another example. “We are home-grown and have grown organically with 46 offices in 14 countries, working in more than 100 countries around the world. We believe in our unique ‘one-firm firm’ culture and so we will continue to stick to that moving forward,” says Diane Hoskins, Gensler’s co-CEO.
Some firms have found that putting together their unique services in new ways provides a major advantage without having to be all things to all people. “Although firms at our size and scale that offer a broad range of services typically fall into a generalist category, we’ve found that by bundling certain services, (e.g. geotechnical instrumentation and survey monitoring), we are able to create a niche market for certain types of services,” says Donald A. Benvie, CEO of Tectonic Engineering & Surveying Consultants.
Some design firms have found that packaging their expertise into new services has helped them penetrate new markets. In March 2018, GHD launched GHD Advisory in North America, offering services beyond design to include asset management; infrastructure investment and economics; and risk, assurance and regulation. “Whether that be making their assets better, coming up with financing options or organizing smart closure—it’s all about understanding the client’s pressures and helping them achieve success. Our vision for this initiative is to become a global business, extending our experience in Australia and New Zealand,” says CEO Ashley Wright.
The big question for much of the design world is whether there will be a major infrastructure or transportation funding bill passed by Congress this year. Without a guaranteed federal funding stream, state and local agencies are constrained from implementing major long-term transportation projects. Most design firms in the market say there is a consensus in Congress that a boost in funding is desperately needed, but they are worried that wrangling over the form it takes will stall any action this year.
Most firms in the infrastructure market are not optimistic about a quick approval. “With the fiscal year-end and midterm elections fast approaching, the lack of available time for the required debate to occur regarding passage of any major federal package does not present a positive outlook,” says Steve McElligott, transportation agencies market leader at VHB.
Further, the type of funding will be greatly influenced by how those midterm elections turn out. Seismic shifts in one or both houses of Congress could set up a situation where Congress is at loggerheads with the administration. “An infrastructure bill in 2019 looks like a more likely scenario,” says Nick DeNichilo, CEO of Mott MacDonald in North America.
Many design firms believe that a funding proposal dependent on state and local contributions and private finance will not fulfill the promise of a major boost across all geographic markets. Cities, counties and states lack sufficient resources for infrastructure improvements, and are already dealing with underfunded school systems, teacher pay and pensions. “The federal government has procrastinated far too long, and our national infrastructure is close to a very literal breaking point,” says Mike Medici, president of SmithGroupJJR.
“The reality is that [P3] revenue-generating projects that would interest investors are limited outside of urban and suburban areas and the resulting imbalance would penalize more rural areas.”
–Donald A. Benvie, CEO, Tectonic Engineering & Surveying Consultants
There also is a question of who will benefit from the administration’s private-funding proposal. “The reality is that revenue-generating projects that would interest investors are limited outside of urban and suburban areas and the resulting imbalance would penalize more rural areas,” says Tectonic’s Benvie.
Some firms believe that the kind of public-private partnerships envisioned in the president’s funding package will not be the sole route to boosting infrastructure spending. “There are a variety of financing approaches and P3 is not always the best tool,” says Morriss of AECOM. He notes that AECOM can leverage its size to work with groups of local agencies to assess and address their needs and find collective sources of funding for needed projects.
Public Support for Infrastructure
Many states and local governments continue to find ways to fund needed infrastructure. “Nationally, raising the gas tax is heresy, but locally, it is a different story,” says George Pierson, CEO of Kleinfelder. He notes that California passed a gas-tax hike. “The voters did it because they knew the money would be spent locally, rather than be sent back to Washington.”
Another local initiative, also from California, is Measure M in Los Angeles, designed to improve infrastructure and mobility, which was passed in 2016. “Prioritizing improvements and bundling solutions will allow them to be completed more efficiently. Infrastructure can effectively be delivered while maintaining safety, quality, and efficiency through integrated delivery as a service … what we refer to as IDeaaS,” says Michael W. Johnson, president of Parsons Corp.’s infrastructure business unit.
There were many in the industry who worried that the Trump administration’s Environmental Protection Agency would de-emphasize the environmental market. Some believe that is still the case.
However, others disagree. “We are seeing a lot of pickup in environmental permitting in the urban space,” says Vincze of TRC. Some of this is the result of pressure to ease the permitting process in environmental reviews. Further, “there is more Superfund work than in the past. The current attitude is to get the cleanup done and out the door rather than spend time in endless litigation,” Vincze says.
In the overall infrastructure arena, many firms are finding an active market, despite the lack of a major federal funding bill. Part of this surge has been brought about by a greater public awareness of the perils of deteriorating infrastructure systems. “A lot of the issues we deal with no one paid attention to,” says Bill Hadge, CEO of GZA. Not anymore.
“Cities can flood, dams can fail, drinking water can harm you. These are tangibles that the public can grasp and motivate them to support infrastructure funding.”
–Bill Hadge, CEO, GZA
“Cities can flood, dams can fail, drinking water can harm you. These are tangibles that the public can grasp and motivate them to support infrastructure funding,” Hadge says. He says this upsurge in public interest has resulted in new work and new opportunities. For example, GZA is working on aging dams in the Northeast.
Hadge says that the impact of the water contamination crisis in Flint, Mich., has spiked awareness of chemicals in the groundwater. “There is a new shift to checking drinking water for emerging contaminants—chemicals in water that may be at low levels but nonetheless spark concern.” He says many states are re-examining their current rules on groundwater and water supply management.
There are additional issues affecting the markets. One was the impact of the federal tax reform bill. Many firms believe that the reduction of the corporate federal tax rate to a flat 21%, from 35%, will induce companies to locate or invest in facilities in the U.S. However, few industry firms have seen much work from that yet.
On the other hand, some firms are beginning to see signs that the tax cuts may be having an impact. “The lower corporate tax structure has a lot of energy and chemical companies talking about bringing their projects on shore again,” says Kowalik of Burns & McDonnell. He says that the tax cuts haven’t resulted in new work yet, but he says that two or three projects have suddenly begun moving toward the front-end engineering design phase.
New tariffs levied on various materials coming into the U.S. may have a more immediate impact on the industry. The December 2017 tariffs on Canadian softwood lumber became the most recent salvo in the continuing battle over lumber imports. “Canadian tariffs on lumber have increased multifamily wood construction costs. Thus, we will continue to see an increase in the use of steel, aluminum and modular construction methods,” says Mark Humphreys, CEO of Humphreys & Partners Architects LP.
The tariffs on steel and aluminum imports imposed by the Trump administration in March have even more of the industry worried. These tariffs could have an immediate impact on construction costs, resulting in construction inflation.
Many design firms already have seen the effects of these tariffs. “We are already seeing price increases for steel and other building materials. These price escalations are a direct result of the tariffs, and they will likely be one factor that slows down the design and construction market,” says Phil Harrison, CEO of Perkins+Will.
Harrison is not alone in seeing the tariffs’ effects. “It is clear that tariffs have already had an impact on the cost of steel. Some of what we are experiencing are opportunistic pricing increases, and I expect the market will self-correct within a few months,” says Ted Hyman, managing partner at ZGF.
The willingness of the Trump administration to impose tariffs has many business people, and those in the industry, specifically, on edge. The administration’s announcement of new tariffs on some 1,300 goods from China sparked immediate retaliation from China with new tariffs on selected U.S. goods. “My major personal fear is that a new series of tariffs will spark a trade war,” says Kowalik of Burns & McDonnell. He says that the tariffs imposed by the Trump administration have not caused a spike in inflation beyond what was already there in an active market. But he fears there may be more to come.
Despite the growing market, many design firms are surprised at the level of competition. “Competition is as sharp as ever, but we are seeing some, though not all, lessening of the irrational pricing and other pressures of the last several years,” says DeNichilo of Mott MacDonald. “Competition is still strong, but there are so many opportunities, you get to pick and choose your fights,” adds Kleinfelder’s Pierson.
Many firms say that clients chasing lower prices for design services may end up paying a steep price. “Lately, many small and boutique firms, which may consist of fewer than 10 people, have entered the market. This has sometimes created not only competition for work, but ultimately the design solutions provided to the market may be compromised due to their stability, viability, consistency and longevity,” says Vincent Liew, executive board member at Wilson Associates.
Some firms claim that despite the flourishing market, clients still treat design as a commodity. “Too often, we all get lumped together as licensed professionals who should all know how to get the job done. The fact of the matter is that we all have special experience, expertise and skill sets that separate us from one another,” says Rich Humann, CEO of H2M Architects + Engineers.
“The appetite of larger firms to grow through acquisitions coupled with small and mid-size firms’ need for ownership transition have fueled this continuing trend.”
–Al Barkouli, CEO, David Evans and Associates Inc.
For many design firms, design as a commodity is an old story and they blame competing firms for the problem. “Our profession never seems to learn; even with the work in design at all-time highs, firms are still coming in and lowballing fees when given an opportunity. This hurts all of us and is not a sustainable way to do business,” says Medici of SmithGroupJJR.
Federal- and state-mandated small business enterprise (SBE) participation programs on most public works projects also are becoming a problem for mid-sized firms. There is more direct competition from SBE firms going after projects as the prime designer. Further, on design-build projects, contractors are attempting to meet SBE requirements by bringing in small businesses to perform all design or construction engineering functions that they normally would not do in-house anyway.
Many firms are attempting to accommodate the SBE mandates without losing market opportunities. For example, “to offset some of the lost opportunities on design-build projects, we will approach the contractor and commit to bring in a sub-tier SBE firm at the same or greater level the contractor has to meet or at least partially help meet the contractor's SBE goals,” says Benvie of Tectonic.
One of the biggest issues among design firms, and the industry as a whole, is the shortage of qualified staff. Most major firms say they are not suffering from serious shortages yet, but finding qualified people is becoming more of a struggle each year.
For many firms, the struggle is tough. “The biggest trend right now is there is a shortage of qualified engineers in the Midwest. During the economic downturn, lots of engineers left the area or the industry, and the pool of qualified engineers went down,” says Woolpert Project Manager Brian Smallwood. “We’re paying more to try to draw more qualified applicants, and we’re doing more mentoring and fostering within the STEM [science, technology, engineering and math] community,” he says.
Many design firms are seeing some shortages for entry and mid-level positions as well as some specialized high level positions. These firms are using a variety of approaches to identify and recruit talent beyond the conventional methods. More design firms are reaching out to potential candidates through social media and professional organization memberships, and hiring interns and students from co-op schools with the goal of cultivating long-term relationships.
Tectonic Engineering & Surveying uses all of these methods. It also employs sign-on bonuses and a cash referral incentive program for current employees. But “most importantly [we are] hiring a candidate even when the need may not be there at the moment where the person shows not just a strong academic and experience background, but exhibits the people skills that are needed to work as part of a team,” says Benvie.
Architects were particularly hard hit in the wake of the industry meltdown after the financial crisis of 2008. Architectural firms were forced to lay off thousands of staff members to stay afloat. It was estimated that at the height of the building recession, the unemployment rate among architects was over 40%. This caused many architects to give up the profession and seek employment elsewhere.
This has resulted in a lost generation of architects. Architectural firms are responding by accelerating the responsibilities of younger architects to fill in for those who left. “This provides a great opportunity for increasing responsibilities and contributions for younger staff to fill the available expertise gap,” says George E. Temple IV, executive vice president for LS3P.
“Our experience as a publicly owned company taught us financial discipline, but there was no value-add in the exercise.”
–Chris Vincze, CEO, TRC
This lost generation has forced many firms to focus their training on helping younger people to become leaders. “As managing principals approach the end of their careers and new leaders emerge … our firm has made significant strides in closing this gap through a series of strategic and intentional leadership development programs that accelerate professional growth and contributions,” says Chad Cousins, COO of McMillan Pazdan Smith.
Most large design firms offer competitive salaries. Given the state of the economy today, it is very easy for people to find a job that will pay the bills. But younger employees are looking for more than the basics. “They are looking for exciting, challenging and inspiring opportunities, recognition for accomplishment, opportunities for personal development and meaningful work that helps them make a difference,” says Barkouli of David Evans and Associates. “At DEA, we work hard to create an environment conducive to people loving their jobs. This includes optimizing all the elements I just described.”
More often than not, high salaries are not the key to attracting young design staffers. “We offer … intangibles that encourage a more sustainable and enjoyable work/life balance such as wellness incentives, flexible hours, community engagement, meaningful opportunities to do great design work and a supportive workplace culture,” says Temple of LS3P. “It certainly doesn’t hurt that all of our offices are in vibrant downtown locations in very appealing cities.”
Many firms say that there is not necessarily a price war going on for young talent. “Salary is important, but as long as people are not being underpaid, they stay for the company culture, the training opportunities and the willingness of their managers to listen to them. Having access to management and having their voices heard is important to today’s employees,” says Pierson.
One important intangible for retaining young designers is the willingness of management to listen and, if warranted, act on their concerns. This means providing a vehicle for young peoples’ voices to be heard. For example, AECOM has an innovation challenge where teams offer ideas for solving common problems. “We have hundreds of entries each year. We have implemented many of these ideas, even if they didn’t make the top 10 finalists,” says Morriss.
For some firms, the acceleration in the consolidation of the industry is actually helping staffing concerns. “Whenever you have a major merger, the technical and management talent in the affected firms start getting scared,” says Pierson. “We’ve picked up a lot of talent from firms like AECOM and CH2M who came to us, rather than wait for us to recruit them.”
Many companies have programs to encourage interest in engineering and architecture. One such effort is Burns & McDonnell’s “Battle of the Brains-Kansas City.” The program helps fund programs and contests in K-12 schools to stir interest in STEM as a career. “We had 7,000 entries this year, and this year had our first participant graduate college with a STEM degree,” says Kowalik.
Another firm trying to reach out to young people is Mott MacDonald. “The Calculus Project, an initiative of our Cambridge Education division, is giving even younger students a solid grounding in the math they will need to pursue their education in STEM,” says DeNichilo.
The program started at Brookline High School in Massachusetts. It engages African-American, Latino, and low-income students enrolled in math classes as early as the seventh grade to reteach or tutor students in math skills, provide after-school and recognition programs, show historical accomplishments of STEM professionals of color, provide interactions between the students and successful STEM professionals of color and provide college planning. “We expect the Calculus Project to benefit not only our company but the profession as a whole,” DeNichilo says.
Many firms are involved in diversity programs to bring more minorities and women into the industry. For example, Terracon is supporting STEM-related organizations, such as the National Society of Black Engineers and Society of Women Engineers, to increase the diverse pool of young people choosing the field, says John Prutsman, senior vice president for human resources.
And WSB & Associates Inc. is focusing on “building an employee base that is reflective of the clients we serve,” says Jon Chiglo, vice president. “As our clients become more diverse, we need to be more diverse. New ideas, opinions and thoughts come from people of different genders, races, generations and backgrounds, and we’re creating an environment that believes everyone should have a voice.”
The tools for design advance rapidly. A design that was once done by the seat of the pants now is being done using nearly limitless variables to produce the most efficient, cost-effective facility.
For example, ZGF is using computational design to develop design solutions. “The intuitive strategies that we undertook 5-10 years ago can now be tested very quickly with the newest daylighting and energy modeling software that we can then quickly test against our client’s total cost of ownership,” says Hyman.
He cites as an example the new Bio Design Institute at Arizona State University, which is nearing completion. “We considered the building envelope and HVAC systems as a single-cost system. With modeling of performance very early in conceptual design, decisions were made that saved the university millions of dollars in both construction and operations over the life of the building,” he says.
Many firms are beginning to use this sort of computer performance modeling. “Generative design is going to have the biggest impact. The ability to evaluate almost infinite scenarios of layouts or design and provide cost/benefit scenarios is incredible. It puts the architect and the engineer in a powerful position to deliver the highest value solution to their clients,” says Vincent P. DiPofi Jr., COO of SSOE Group.
Technology is also advancing in the data-management arena. For example, VHB is working with universities and healthcare systems to integrate SAM IS (Smart Asset Management and Inventory System) into existing asset-management systems and more directly link data enterprise-wide. “SAM IS makes assets readily available in maps, reports and a customized dashboard to help clients track and manage assets and choose the smartest path forward when spending infrastructure dollars,” says David McIntyre, VHB’s institutions market leader.
For many firms, cutting-edge technology today will be a customer’s expectations tomorrow. “We are seeing a rapid evolution in how technology is leading change in the planning and delivery of projects. What is now considered leading-edge technology in areas like augmented and virtual reality will become a basic expectation for many clients over the next 5-10 years, if it even takes that long,” says Jeff Peacock, CEO of Parametrix.
Technology is having a profound impact on the profession in many ways, from visualization for design teams and clients, to computational design, AI, 3D printed buildings and more. “The profession will look different in 10 years with the advent of these technologies and their rapid development and industry uptake,” says Hyman.