After a year of delayed and canceled projects, the electrical design firms on EC&M's 2010 Top 40 list look toward economic recovery and improved backlogs, which may not arrive until 2011
Notwithstanding an injection of federal funding for public works construction through the American Recovery and Reinvestment Act (ARRA) of 2009, the U.S. construction market remained soft in 2009. Plagued by tighter credit standards and budget shortfalls, many owners and developers delayed or canceled major projects. Although the electrical design firms on EC&M's 2010 Top 40 list reported $18.3 billion in overall design services revenue, of the 31 firms present on last year's list, 19 suffered year-over-year decreases in overall design revenue (Top 40 Design Firms). Ten firms experienced double-digit declines, including Boston-based R.G. Vanderweil Engineers (No. 22) with a decrease of 31.1%, Orlando, Fla.-based TLC Engineering for Architecture (No. 25) with a 27.2% downturn, Denver-based Zachry Engineering Corp. (No. 14) with a 26.9% decrease, and Albany, N.Y.-based CHA (No. 19) with a 26.4% decline. As a result, the overall design revenue totals for the 31 firms marked an average decrease of 1.4% over the disclosed totals for 2009. Nine firms are new to the Top 40 list this year.
Additionally, 26 firms on the list separated out their electrical design services revenue from overall design services revenue to report $1.3 billion in total electrical design services revenue for 2009 (Top Electrical Design Firms). Of the 23 firms that reported electrical design work last year, 14 experienced a decrease in revenue for electrical design work, with half those firms reporting a double-digit decline. The average year-over-year gain in revenue for electrical design work for the 23 firms totals 6.7%, buoyed by two firms with reported increases of more than 75% in electrical design services revenue. Phoenix-based Carollo Engineers (No. 17), with a 154.5% increase, moves from No. 20 to No. 7 on the electrical design list, and Hailey, Idaho-based POWER Engineers (No. 15), with an 82.6% gain, moves from the fifth spot in 2009 to No. 2 on the 2010 electrical design list. Overland Park, Kan.-based Black & Veatch (No. 6) remains at the top of the electrical design revenue list with a modest 5% increase over 2008.
When asked if they “exceeded, met, or did not meet” their revenue expectations for 2009, of the 38 respondents, only seven firms reported exceeding revenue expectations, whereas 13 indicated they met revenue expectations and 18 admitted to not having met revenue expectations (Fig. 1). The major challenge to achieving sales goals in 2009, according to the respondents, was delayed or canceled projects in both the private and public sectors due to tight credit standards, budget shortfalls, and cautious investment practices. For example, in January 2009, Stanford University, Stanford, Calif., announced plans to suspend or cancel proposed construction projects worth $1.3 billion because of an unprecedented decline in investment returns from its endowment.
Additionally, proposed federal regulations in the banking industry as well as unknown consequences of the yet-unpassed health care reform bill had investors nervous about starting new projects. Consequently, an unprecedented number of firms nationwide characterized the business climate of the past year as “fair” or “weak” while only two firms described the 2009 business climate as “strong” (Fig. 2).
The uncertainty caused by shrinking backlogs and shifting schedules posed additional challenges for the Top 40 firms in 2009, including increased competition, pressure to lower fees and shorten schedules, difficulty collecting fees, and difficulty in making decisions about office space, investment in new technology, and staffing levels. To maintain staff despite a reduced workload, some firms implemented work-sharing processes among offices, whereas others downsized by laying off workers and closing offices. Although 16 firms reported an increase in the number of employees that worked for their company in 2009, more than half indicated a decrease in the number of employees year-over-year. Only two firms reported the same amount of employees in 2008 as 2009 (Fig. 3).
Seattle-based Sparling (No. 31) reluctantly executed a reduction in workforce in June 2009. The majority of the 20 employees affected by the decision were contract employees. Since that time, the firm has hired back half the number it let go and has plans to hire the rest back in the near future. “Like many firms in our industry, we worked pretty hard at maintaining backlog and size, but had one reduction in workforce,” says Eric Overton, CEO. “As the market slowly begins to rebound, I fully anticipate getting back to that number and beyond before the end of this year.”
Oddly enough, finding experienced electrical professionals — despite extensive layoffs throughout the industry — remained a difficulty for some firms in 2009 and into this year. “It depends on the specialty,” continues Overton. “On our technology side, we look for unique specialties — and that can often be difficult to find.”
In addition to downsizing, other strategies were used by the firms in this year's Top 40 to gain a competitive advantage. Six firms reported outsourcing some of their electrical design services to companies outside of the United States in 2009, and five are considering outsourcing electrical work to companies outside of the United States this year. In addition, several firms outsourced work to subcontractors and joint-venture partners in other geographic locations in the United States to satisfy local codes and standards or diversity content goals.
With the increasing popularity of the design/build project delivery method (Table 1), design firms partnered with construction companies in order to provide design-build services to their clients. New York-based STV (No. 10) teamed up with Bohemia, N.Y.-based general contractor J. Kokolakis Contracting to provide full architectural-engineering design and construction services for the $103-million design/build contract for the new U.S. Military Academy Preparatory School (USMAPS) campus at West Point, N.Y. STV previously served as the engineer and architect-of-record for the Jefferson Hall Library and Learning Center, the first new building on the U.S. military academy's West Point campus in more than 30 years.
Additional alliances led to new markets in 2009. Black & Veatch teamed with Rockville, Md.-based Lockheed Martin to help electric utility clients improve the reliability, efficiency, and interoperability of the electric power grid and protect it against cyber attacks. The partnership will focus on supporting the U.S. Department of Energy (DOE) applicants' Smart Grid initiatives for advanced metering infrastructure, substation and distribution automation, supervisory control and data acquisition (SCADA), distribution management systems, and demand response projects, especially in the areas of interoperability and cyber security.
In a more permanent partnership, Omaha, Neb.-based HDR (No. 11) acquired engineering-environmental Management, Inc. (e2M), a Denver-based environmental sciences and engineering firm. e2M now conducts business as HDR|e2M and specializes in environmental compliance, conservation and planning, restoration, engineering, and information technology services to public and private sectors, with more than 90% of its clients representing the federal government. “As part of HDR's strategic plan, we wanted to expand our federal program, and e2M will be a tremendous asset in that effort,” says George A. Little, P.E., HDR president. “Its services complement ours, and our combined strengths create a powerhouse resource for federal clients.”
The Top 40 firms report being most active in educational and institutional, health care, and government markets in 2009 (Table 2). Furthermore, 37 companies reported their firm worked on renewable energy projects in 2009. Not surprisingly, the top markets are a natural fit for the renewable energy projects. “We look at co-generation — combined heat and power projects — that are related to university campus and health care settings,” says Overton. “They can often take advantage of combined heat and power plants.”
Therefore, a presence in the public sector — both federal and state — was an asset in 2009, particularly when finding creative ways to fund projects through ARRA or other renewable energy and energy-efficiency grants and programs.
According to a statement made in support of the ARRA legislation by Len C. Rodman, chairman, president, and CEO of Black & Veatch, stimulus funding in such sectors as mass transit, railroads, energy and water not only would help jump-start and sustain the U.S. economy, but also would lead to improvements in efficiency and better utilization of vital infrastructure. In addition, Rodman advised that such investments would bolster the basic construction industry as well as technology and manufacturing industries where the use of equipment that supports these needs drives a much wider base of the economy. “The goal of investing in the nation's infrastructure as part of the economic recovery deserves widespread support and quick action,” wrote Rodman. “We must look beyond simple U.S. roads and bridge infrastructure investments if we are to realize a wide-ranging and sustainable economic rejuvenation.”
In 2009, ARRA had an effect on the project bookings and workload of almost half the firms in the Top 40. New and upgraded wastewater and water treatments plant projects, practically at a standstill once money for that infrastructure was pulled after the meltdown in the residential market, are one of the primary beneficiaries of ARRA funding, as are transportation projects.
In 2009, Cambridge, Mass.-based Camp Dresser & McKee, Inc. (No. 7) helped clients develop creative financing plans such as user-fee programs, state revolving fund loans, rural development grants and loans, and community block grants, as well as ARRA monies. “These efforts have led to a long list of successful funding initiatives throughout New England,” says Pat Hughes, Camp Dresser & McKee, Inc.'s area manager for New England. For example, more than 50% of the cost for $27 million in water and sewer improvements in North Conway, N.H., came from rural development funding. In addition, Stafford, Conn., leveraged ARRA funding, as well as national water and environmental loans and grants to complete an $8.5-million upgrade, including replacement of the electrical system, to its 35-yr-old plant.
Camp Dresser & McKee, Inc. also pointed the precinct toward 50% grant funding made available by ARRA to invest in alternative energy. It was awarded contracts for the installation of more than 700 solar panels that will produce approximately 200,800kWh of electricity per year and a geothermal system that will provide heating and cooling for a major portion of the treatment plant. “This will be the largest solar installation in New Hampshire,” says Jennifer Osgood, senior project manager at Camp Dresser & McKee, Inc. “It will serve as a model for progressive utilities that want to adopt more sustainable practices.”
Despite certain stimulus successes, a majority of firms report ARRA will have little effect on their bookings and workload this year and into 2011 (Fig. 4). “Stimulus program spending will help to cushion the downturn in the institutional sector, but will do little to help with commercial or industrial facilities,” says Kermit Baker, Ph.D., Hon. AIA, chief economist for the American Institute of Architects (AIA), Washington, D.C. “Funding allocations to the public works construction sector for activities such as streets and highways, bridges, water and sewer, and conservation projects are significant, but they are much more modest for buildings. Residential and non-residential building stimulus projects are estimated to total as much as $35 to $40 billion over the next 2 yr. For a $400-billion-a-year sector, spending at this level will help, but unfortunately not much for the private side of the market.”
The outlook for overall design services revenue by the firms on the 2010 Top 40 is almost as pessimistic. The AIA Consensus Construction Forecast Panel predicts a further 12% decline in non-residential construction for 2010. Although about half the firms in the Top 40 are predicting an increase in revenue, just as many are expecting to remain at the 2009 level or experience a decrease in sales (click here to see Fig. 5). Despite only six firms that reported encountering difficulty in obtaining credit in 2009 or expect to encounter difficulty this year, many more are expecting clients with credit difficulties who will then try to push for lower fees on projects with more competition. To combat any expected decreases, the firms in the 2010 Top 40 have vowed to increase marketing efforts, adopt new technologies (such as building information modeling), reduce overhead costs, seek projects outside U.S. borders, and price competitively.