ENR Top 500 Design Firms: The Market Keeps Growing
The market for large design firms right now may be the best that it has ever been. Many believe that the market growth, which has continued into its tenth year, cannot last. But people in the industry have been saying that for the past three to four years, and the growth has continued unabated.
The scope of the boom can be seen in the data collected from the 2019 participants on ENR’s Top 500 Design Firms list. Taken as a group, the firms had a record total design revenue of $101.16 billion in 2018—up an impressive 7.7%—from $93.90 billion in 2017. Market growth was strongest on the domestic side, rising 8.9%, to $80.55 billion in 2018 from $73.97 billion in 2017. And revenue from projects outside the U.S. rose as well, up 3.4% to $20.61 billion.
Virtually all market sectors measured by the Top 500 survey saw gains in 2018. On the domestic side, the gains were robust, other than for manufacturing, which was down 0.4%. Leading the gainers was telecommunications, which rose 20.7%, followed by industrial process (20.6%), water (14.9%), transportation (10.6%) and petroleum (10.2%).
As usual, acquisitions changed the Top 500 landscape. One of the largest deals was WSP’s purchase of Louis Berger, which ranked No. 21 on last year’s Top 500. “Our acquisition of Louis Berger … has brought additional capabilities and clients to WSP and positions us for a major growth opportunity in the federal market,” says Gregory A. Kelly, CEO of WSP USA.
Kelly says WSP also recently launched a program management and construction management organizational unit to serve clients with a broad range of services, including program/project management, program controls, project information management systems and construction management. He says the new unit will take advantage of renewed emphasis on PM/CM and will help WSP support clients at each stage of project delivery, from concept to completion.
One of the biggest acquisitions to complete in 2019 will be WorleyParsons’ pickup of Jacobs Engineering's energy, chemicals and resource division, for $3.3 billion. The deal, which was announced last October, is on track for approval by the U.S. Federal Trade Commission. WorleyParsons announced on April 18 that it plans to change its name to Worley Ltd. once the purchase is complete.
For Jacobs, the spinoff alters its focus to higher-margin, noncyclical sectors, including technology, environment, infrastructure and buildings. “This is about thinking differently to address unprecedented, disruptive shifts in technology, urbanization, the environment and climate threats,” says CEO Steve Demetriou. The firm announced on April 22 an agreement to buy government security and high-tech engineer KeyW, in a deal estimated at $815 million.
Another major change is Stantec’s decision to sell its contracting group, MWH Constructors, to Los Angeles equity investor Oaktree Capital Management LP. “For Stantec, 2018 was a year of transition as we returned to our core business as a pure-play design consulting firm with the divestiture of our construction services business,” says Gord Johnston, Stantec CEO.
Also gaining from equity investment is Kleinfelder. The firm was acquired by members of its management team and Chicago-based equity investor Wind Point Partners last year. “It came down to us having a sustainable future,” says Louis Armstrong, Kleinfelder’s president. The purchase “secures our financial future and will allow us to expand in a growing market.”
Acquisitions have not just been confined to megafirms. Gannett Fleming has bought four firms in the last seven months. “Each acquisition brought new skills to the firm in geographies where we didn’t have a footprint,” says CEO Robert M. Scaer. He says the firm is not “growing for the sake of being bigger,” but to broaden client services.
TRC, which was purchased by equity investor New Mountain Capital two years ago, is on the lookout for acquisitions of its own, “provided the target firms are consistent with our market strategy,” says Chris Vincze, CEO of TRC, adding that it is looking at Canada for a possible purchase.
Some firms, however, worry that industry consolidation may have a negative impact on clients and employees. “Clients have fewer options and employees are presented with fewer choices, making it more difficult for them to see a clear career path,” says Mark Dvorak, president of EXP. “As a middle market company, we provide an alternative for our clients and future employees.”
No Signs of Abating
Design firm executives continue to expect a strong market that shows little evidence of slowing down. “We have been enjoying a growing market for 10 to 11 years,” says Patrick Sheehan, CEO of GZA GeoEnvironmental. He admits that there has been some speculation on when the inevitable downturn will occur. “But the economy remains strong and there is plenty of money floating around in the market,” he says.
Many top executives agree. “We are bullish on the economy, the markets and the need for our services,” says Vincze of TRC. “There are a lot of people looking at how we invest in our infrastructure,” adds Kleinfelder's Armstrong. “Maybe the spend may fluctuate a little, but the critical need to invest in our transportation and water systems guarantees a steady market for years to come.”
Ray Kowalik, CEO of Burns & McDonnell, sums up his view of the near-term market: “The market is still being driven by factors that have been behind its growth over the past three to four years—cheap and abundant energy, the move to renewable sources of energy and pressure to spend on infrastructure.”
For many design firms, demand is not so much a limiting factor in the market as are broader industry issues. “The environment for engineering consultants is very good right now,” says David LaVelle, CEO of BKF Engineers. “Having said that, we are beginning to fight two headwinds going forward: One is the scarcity of qualified staff, and the other is escalating construction costs. Both of these are creating some drag on our business.”
The big question for many large design firms is where the money will come from to fund critically needed infrastructure. Political stalemates in Washington, D.C., continue to delay federal infrastructure reform measures. “Lack of funding is already an issue for the larger projects, with some public agencies and asset owners turning to [public-private partnership] financing,” says Nick DeNichilo, CEO of Mott MacDonald in North America. However, he says many clients are moving ahead with projects, motivated by the need for sustainability and resilience in the face of climate change and other threats.
While the Trump Administration and Congress have yet to act on an infrastructure bill, many states, counties and municipalities are taking matters into their own hands rather than waiting for new federal funding to be announced. Voters approved more than $40 billion in funding at ballot boxes in more than 34 states in the 2018 midterm elections, which will help sustain the transportation market somewhat as the industry awaits federal plans, according to Scott Roux, senior vice president of Michael Baker International. “As a result, the bridge market nationally remains solid, though somewhat regionalized and not as strong as it could be with proper funding.”
Other infrastructure firms also are finding relief through state and local funding programs. For example, 28 states have raised or changed their gas-tax structure to support and commit to transportation infrastructure programs since 2013, says Kelly of WSP. “Missouri was the latest when it asked voters this November to consider a 10-cent increase—it was successful,” he points out.
Kelly is also pleased that states such as Illinois and New Jersey have successfully asked voters to create a “lock box” to protect transportation funds from being used for general spending, and Connecticut is asking voters for such protections this November. “This trend of state and local governments seeking voter approval for dedicated funds will continue as the federal solution remains unresolved,” says Kelly.
Clean water also continues as a major market sector for engineers, particularly as its importance grows in the minds of the public. People increasingly are demanding to be protected from contaminants in drinking water. “Clean water has been an issue for many years west of the Rockies, but we are now seeing it more of an issue in the east as well,” says Sheehan of GZA GeoEnvironmental.
In response to demands for clean water, states are stepping in to regulate “emerging contaminants” in drinking water, such as per- and polyfluoroalkyl substances (PFAS) and 1,4-dioxane. “EPA has been slow to adopt drinking water standards, so individual states are regulating these contaminants, which means impacts to aquifers, drinking water standards and testing requirements may vary significantly by state,” says David T. Gockel, CEO of Langan. He says the firm’s national environmental practice leaders are working to develop technically sound yet practical approaches to managing financial and asset risks associated with emerging contaminants.
Wood is another design firm active in this effort. “We see potential to build our sediments and PFAS [expertise] and to address large-scale remedial projects, including remedial construction, coal-ash cleanup work and radiological remediation,” says Ann Massey, Wood’s CEO of Environment & Infrastructure Solutions. She also says coal-fired plant closures and the related decommissioning and coal ash remediation are a key focus for its clients in the energy sector.
No Lack of Energy
The market for oil and gas projects dried up in 2014 when oil prices plunged below $40/bbl. While oil prices have recovered some in the past few years, some design firms are not optimistic that the upstream petroleum market will rebound quickly. “Burgeoning shale production in both oil and gas has built a supply-side ceiling on pricing,” says Thomas Davison, president of UniversalPegasus. “Based on the ever-growing shale potential, it is hard to envision a demand side scenario that will drive prices higher.”
However, many firms believe the export market, primarily for natural gas, will fuel additional work. Already, several LNG export terminals have been approved and some are under construction, with more in the pipeline.
These export terminals are prompting new players to enter the market for shale gas. “In U.S. shale basins, the supermajors [large oil companies] are coming in assertively, chasing production volumes at lower costs, and bringing a transformational capability for large scale build-out and development,” says Andrew Stewart, Wood’s CEO of Asset Solutions Americas. The engineering firm has extensive relationships with many supermajors and feels positive about being able to partner to deliver capital projects, long-term brownfield modification programs and managed maintenance programs, he says.
“We have seen increased interest in the gas market—liquefied natural gas and natural gas liquids—primarily for export,” adds Dvorak of EXP. He says the stability of oil prices indicate new upstream investments are on the horizon.
The renewable energy market also is seeing a surge. Says DeNichilo, of Mott MacDonald: “As the cost of generating renewable energy becomes competitive with fossil fuel generation, in some cases even less expensive, the public has embraced renewables. That’s especially true for wind and solar, which currently have the greatest public exposure. Businesses are also adding renewable energy to their operating models.”
Despite the strong market, competition continues to be a problem. Many track levels of competition to gauge their success rates against competitors. “Data collected from most of the large architecture firms tells the story: We all responded to roughly 30% more [requests for proposals] in 2018 than prior years, with most of those responses requiring more detail and some level of design response,” says Ted Hyman, managing partner at ZGF Architects. “At the same time, the success rates for these same firms has dropped by as much as 15%. Clearly, competition—especially with new clients—is getting more intense.”
Hyman also says that past successes don’t always ensure client loyalty. “With the ongoing changes in the demographics of client decision-makers, the search for something new and different is overriding existing trust and loyalty,” Hyman says. So firms have to resell not just their past client relationships, but their new and innovative ideas and technologies, he says.
Another problem continues to be the long-standing commodification of design. “We’ve found that there is a prevalent commodity mentality for many of the services we provide—clients who are ultimately seeking low prices over value and wanting us to provide more for less,” says John Hiltz, president of OHM Advisors. That means “we’ve chosen to focus on clients who want us in the trenches, collaborating alongside as an extension of their team,” he points out.
Another area of concern is that many large design firms are seeing unfamiliar faces, often from outside the industry. “We are beginning to see nontraditional competitors enter our industry,” says Mike McArdle, chief development officer of VHB. He cites as an example WeWork, a New York City-based firm that provides shared office space for individuals and companies, which is starting a smart cities division. Meanwhile, he says, Ford Motor Co. is moving into the mobility-as-a-service transportation planning realm. “Clients require consultants with breadth and depth of resources to address increasingly complex project needs,” he says.
Design firms also are seeing competition from advisory and management consulting firms. “One way we are approaching this is through channel partnerships outside of our industry. As an example, we recently partnered with Econsult Solutions, an economic consultant, on their smart city research studies to enable us to have the tools necessary to guide our clients through their smart city journey,” says Joseph Viscuso, senior vice president at Pennoni.
Alternate Project Delivery Takes Hold
The emerging dominance of alternate project delivery also is posing challenges to design firms. “We have not seen a single design-bid-build project in the past two years,” says Hyman of ZGF. He says CM-at-risk is the standard for delivery in the buildings sector, “but we are seeing more and more design-build projects. Even our CM-at-risk projects are employing design-assist for building envelope and MEP systems.”
Hyman cites ZGF’s award-winning design of the Arizona State University BioDesign C project (ENR 3/4-11 p. 44) as an example of effective us of CM-at-risk and design-assist. ZGF “engaged the envelope subcontractor early in design to work with the design team, saving the university over $2 million on a high-performance envelope that also serves as an iconic building at the entry of the campus,” Hyman says.
Design-build construction spending across the U.S. is anticipated to grow 18% from 2018 to 2021 and reach over $320 billion, says Jeff Clevenger, senior vice president of Michael Baker International. He says design-build is anticipated to represent up to 44% of construction spending by 2021, up from 33% in 2018. Clevenger adds that the Gulf Coast, Mountain states, Southeast and West regions are primed to show the greatest growth in design-build projects.
The growth of design-build also is changing design firm relationships with clients, and altering how marketing strategies are developed and to whom they are targeted. “Yes, we are seeing an increase in the P3/Design-Build delivery approach. Therefore, our business development strategy has to be adjusted to focus more on our potential build-partners than we had in previous pursuits,” says Curtis J. Moody, CEO of Moody Nolan Inc.
The move toward design-build also is forcing design firms to be more careful in the work they pursue and the firms they partner with on a design-build team. Design-build “requires a new focus on understanding the drivers of each owner and developing a very specific working relationship with build partners. Forced partnerships don’t work, especially not for the owners,” says Mike Medici, president of SmithGroup.
Bidding on design-build projects can also be costly for design firms. Often, a bid package will rely heavily on the nature and details of the overall design, putting pressure on engineers to produce a substantial amount of up-front work with no guarantee of winning the project. “Design-build pursuits can be costly, and if you don’t win at a rate of 30% or better, it can harm your financial marketing budgets,” says Medici.
Another concern in alternate project delivery is the selection criteria for design-build teams. Too often, teams are selected based on price rather than qualifications. “We would hope to see more value-based decision-making, but that does not seem to be taking hold yet,” says Bret Weiss, WSB’s CEO.
However, some firms have seen a general movement toward qualifications, rather than merely price. “We are seeing a trend of [design-build] procurements now focusing more on best value, whereas in the past, the focus may have been more on lowest bid,” says McArdle of VHB.
The lack of a federal transportation funding package, coupled with the need to fix or expand aging infrastructure, has many cities and states exploring new private sources of project finance. Funding of public projects is increasingly being shifted to the private sector through the use of public-private partnerships (P3s). This has many infrastructure designers watching developments carefully.
Design firms are especially wary of the amount of risk they assume, and the nature of those risks, when they enter into the P3 arena. “We see a significant increase in P3 and design-build procurement with an associated redistribution of risk that is concerning as the procurement setup often diminishes shared value and increases project conflict and claims,” says Andy Howard, Arup Americas chair.
Public-private partnership models are also creating different ways to approach projects. Perfecting this model may be the key to addressing U.S. infrastructure needs, “but it has a long way to go,” says Howard. “Current versions are not serving the best interests of the public sector or the private developers. Expect to see AEC firms leave this market if there isn’t a significant shift in risk allocation away from the design-builder.”
The continued privatization of infrastructure and reliance on P3s is changing the risk profile of the companies involved. “Companies engaged in these projects have had to calibrate their approach to risk-reward while trying to figure this out—and many have been gaining experience the hard way,” says Hisham Mahmoud, CEO of Golder Associates
Litigation risk also is on the minds of many design firms in design-build and P3 markets. “Public-private partnerships, design-build and design-build-finance are no longer newcomers to the infrastructure delivery markets. However, there appears to be an increase in litigation, particularly as projects near completion—a very concerning trend,” says David Wantman, CEO of Wantman Group. He adds that contractors are more likely than ever to use litigation as a means of protecting profitability, “which continues to strain relationships and drive distrust in future teaming.”
One of the most critical issues for design firms is finding enough skilled people to do the work available. There are many firms that are in a position where they have to limit their business development efforts in order to ensure they have enough people to do the work they have already booked.
This shortage of people has led to a war for talent among firms. “Like other firms, we are finding it difficult to hire mid-level design staff,” says Viscuso of Pennoni. Pennoni is one of numerous firms working to boost corporate culture and provide clearer career paths to entice graduates to stay through the five- to seven-year experience levels that are currently in shortest supply.
Another means of attracting young people is to emphasize a firm’s healthy work environment. T&M Associates offers incentives to significantly discount health insurance fees with wellness actions and biometric screenings, according to Gary Dahms, its CEO. To accompany these incentives, wellness seminars, fitness competitions and a consultant to address life concerns are also offered. Lectures are available on financial wellness. Sit-and-stand desks are offered and T&M University is accessible for those interested in field-specific and business courses, he says.
VHB has created a new People and Culture Department that focuses on the entire employee experience, from recruiting to retention and professional development, says Keri Kocur, chief people officer. “It truly is about creating an environment for each employee to realize full potential in all our locations.”
Many firms also are providing employee stock ownership plans to retain and motivate staff. Salas O’Brien has adopted a 100% ESOP structure that insures employee interests are aligned and keeps people highly motivated to stay with the firm long-term and grow the business, says Darin Anderson, CEO. “We also work hard to make sure every team member has upward mobility within our firm as well as consistent recognition and appreciation.”
Finding people with the right skills continues to be a challenge. Given the growing demand for design firms to keep up with information technology, “ensuring a competent digital workforce is becoming a greater concern. We have invested strongly in recruitment and development programs for our early career professionals,” says DeNichilo of Mott MacDonald.
One critical approach to expand the workforce is reaching out to underrepresented groups, such as women and people of color. “Yes, we are projecting shortages and right now we are seeing talent jump from firm to firm. This practice is not sustainable, and we need to reach new talent through nontraditional communities,” says Weiss of WSB. It has developed programs to train and mentor potential staff members from more diverse communities, he says.
Many firms are implementing diversity initiatives not just to fill staff but to stimulate creativity. “Diversity drives innovation, and we’re wholly committed to supporting women and minorities,” says Hiltz of OHM Advisors.
ZGF is making real measurable progress in this regard, according to Hyman. “This isn’t just about having more women, or people of color, or specific demographics as principals and partners. It is about ensuring inclusion for everyone at ZGF,” he says. While this topic is trending heavily, Hyman claims there is a real business case for ensuring diversity and inclusion, well beyond the ethical perspective. “Our work is better, it’s more holistic and creative, and the people working here feel empowered to reach their own individual goals and potential.”
VHB has been active in fostering a diverse workforce. Three years ago, it accelerated diversity and inclusion initiatives by intentionally incorporating them in the strategic business plan, says Kocur. “While we always strived to hire and inspire employees to realize career goals here, what’s different now is we have set goals, objectives and metrics to keep us in check.”
Kocur says diversity is not just a buzzword. It is rapidly becoming an operation necessity. “The AEC industry can’t afford to wait any longer to change from within. The younger generation of professionals, which will make up 75% of the U.S. workforce by 2025, expects diversity and inclusion to be the norm, not the exception, in the workplace.”
Perkins+Will has established a comprehensive diversity program, according to CEO Phil Harrison. “The most important response we have to this is to be a firm in which everyone can succeed, and to continue expanding our already robust diversity and inclusion plan, which includes 100% comparable pay equity, flexible work, mandatory sexual harassment prevention training and implicit bias training,” he says.
Technology: The Great Leveler
Technology is rapidly changing the design profession and, for some firms, is the competitive edge. “Technology is a great leveler and is creating a market where scale is less relevant. There are more and more capable competitors and many traditional ‘bread and butter’ practices of design firms are being commoditized,” says Howard of Arup.
Technology now is the price of entry. “If you are not seriously discussing digital technology now, you are probably too late to the game,” says Vincze of TRC.
What used to be flashy toys are now necessities. For example, 3D modeling used to be a tool used primarily for sharing what spaces would feel like, and mostly used on projects for clash detection, says Hyman of ZGF. “But today, we are really starting to see it become a tool for streamlining the process. Design-build teams are working collaboratively in a single model, eliminating the need to redraw the same information from the design files into shop drawings.”
Another technology that is becoming commonplace is laser scanning, now that the cost of scanners has come down. “Laser scanning within facilities will be used more, both as a tool for capturing existing conditions before design starts and during construction to document progress,” says Frank Mangin, senior vice president and AE practice leader at Haskell. The firm is making a significant investment to bring these capabilities in house to leverage the technologies throughout the project delivery process, he says.
Putting the most advanced tools in the hands of employees often enables them to find more efficient ways of performing their tasks, and “this approach also fosters a higher level of employee engagement,” says Christopher Solomon, CEO of Surveying And Mapping (SAM) LLC.
Technology is quickly evolving, and the AEC industry needs to keep up with these advancements. For many firms, the means of staying in step with the technology revolution is to partner with smaller companies that are providing specific technologies that can be implemented within the standard services currently being offered to clients, according to Viscuso of Pennoni.
The increasing presence of robots and robot research has many in the industry intrigued. But designers also are wary of the robot revolution. “We need experienced designers and cannot just leave it to the robots and design software. There is a human element of our work that is imperative. Good design on a larger scale isn’t something that can be completely automated,” says Weiss of WSB.
Technology also is driving alternative thinking in the designs themselves. For instance, Perkins+Will is the designer for the University of Cincinnati Gardner Neuroscience Center, a state of the art care center for patients with neurological disorders.
During the design process, the firm’s Hx Lab (Design for the Human Experience) conducted its own neuroscience research in preparation for commencing design work. It found that glare that can be disorienting for patients with cognitive disorders, says Harrison, so the firm designs mesh screen over the building’s facade that filters incoming daylight, preventing glare.
Gensler forecasts that the autonomous vehicle revolution will take place in 10-15 years. As a result, the firm is encouraging clients to rethink the way they view mobility. “We are encouraging building parking structures that can later be adapted for offices, retail, housing or amenities. Other considerations we are addressing are how to build for micromobility, and how to incorporate wider loading zones since people will no longer need to enter spaces from parking garages,” says co-CEO Andy Cohen.
The market is strong, but there will be a leveling off, or even a downturn in the indeterminate future. However, for many design firms, all eyes are on the future of design, and not just on the market.