The biggest engineering firms ride a wave of new work
and push total design revenues to a whole new level
Talk about a year to remember. The design firms in EC&M's 2005 Top 40 list enjoyed an average year-over-year gain of 8.75% in design services. Maybe this explains why so many design firm executives are walking around these days with permanent smiles on their faces.
This year's Top 40 design firms posted an impressive total of $18.6 billion in design services revenue in 2004. Twenty-six out of forty firms posted higher revenue totals in 2004 than in 2003, and of those that posted lower totals in 2004, only six had declines of more than 10% (click here to see the Top 40 Listings). The overall success of this group resulted in very little movement of individual rankings, and most of those that did move rose or fell by only a single spot or two.
But the good news doesn't end there. From what these powerful design firms shared with us in their survey responses, they're looking at posting even bigger and better numbers in fiscal 2005. Of the 24 firms that responded to our question on what kind of increase or decrease they forecasted for design revenues in 2005, nine of them are projecting an increase of more than 10% and another seven are looking for gains in the 6% to 10% range (Fig. 1). Only three firms project a decrease in the 6% to 10% range.
So why were these industry giants so successful in 2004? And what makes them exude such confidence this year? The return of and continued strength of some key market segments and an improving economy is fueling this powerful growth. See Table 1 for a listing of the eight hottest and coolest market sectors as identified by the respondents of our Top 40 survey.
An aging population and new care and treatment strategies have made for a healthy health-care market. An ever-growing population of new students and increased competition for research funding has created the need for new housing, classrooms, and research space at higher education facilities. The low cost of financing continues to support a red-hot new and existing housing market. And the continued fight against terrorism and fear of future attacks continue to drive federal and private sector growth in the security and defense markets. Their strength has been powerful enough to offset some of the downturn in other business sectors such as automotive, manufacturing, pulping and paper, telecommunications, and power, which have suffered for years now.
All in all, 2004 turned out to be a pretty strong year for our Top 40. And based on the overall financial performance and backlog figures noted by our top ten firms, this growth will continue in 2005 and beyond. The key to future growth will be knowing when and where it makes the most sense to join forces with another, how to choose the best methods in project delivery, where to find and retain the best available talent, and how to leverage the latest technologies to get the best return on your investment. The firms that are able to best manage these issues will be the ones that find themselves on future Top 40 lists.
Note: The information used to generate this report was obtained through an exclusive EC&M survey, published annual reports, company press releases, and corporate Web sites.
1. As one of the largest engineering design services firms in the world, URS Corp. has a firm grasp on the top position in our 2005 listing for the second straight year. The company offers a range of professional planning and design, systems engineering and technical assistance, program and construction management, and operations and maintenance services for transportation, commercial, industrial, facilities, environmental, water/wastewater, homeland security, and defense systems. The company recorded revenues of $2.85 billion in 2004 for its design services, a 3.8% improvement over its 2003 figure. In addition, it raised its backlog for a fifth straight year, ending the year at $3.82 billion.
URS’ federal sector, which accounts for nearly 50% of its total revenue (Fig. 2), continued to be a major driver for the company in 2004. Federal sector revenue increased 16% over its 2003 level. Fiscal 2004 revenue from the company’s state and local government sector business was essentially flat compared to 2003, as states continued to slowly recover from their 2002 budgetary crisis. And its private sector revenue declined approximately 10% last year, as its clients faced a difficult business environment. However, international business provided a bright spot for the firm by posting revenue of $315 million, which was an increase of 19% over its 2003 level.
2. Making a move from the No. 4 spot to No. 2 on this year’s listing, Fluor Corp. posted an 18.4% increase in design services revenue from 2003 to 2004, finishing the year at $2.26 billion. The firm offset an incremental decline in its power business last year with revenue from other business groups to deliver its fifth consecutive year of earnings growth and set a record for new awards.
The company’s government business segment delivered high growth in 2004, with operating profit increasing 74% to $83 million. New awards grew 13% to $2.3 billion, and backlog rose 2% to $1.5 billion. In addition to its continued support of the Army, Air Force, and the Army Corp of Engineers, the firm has expanded its market position with the State Department and is now providing design/build services for U.S. embassies throughout the world.
Another interesting statistic about this firm had to do with its employee base. End-of-year employment totals grew 20% from 2003 to 2004, from 29,011 to 34,799 total employees. Although the firm saw a small decrease in its salaried employee labor pool, it realized a 52% increase among its craft/hourly employee base.
3. Holding firm at No.3 on our listing, Jacobs Engineering Group, Inc. posted 2004 design services revenues of $1.97 billion. This total was 4.6% higher than the firm’s 2003 figure of $1.88 billion. The company finished the year with essentially flat profits, on a year-over-year basis, but increased its total backlog to $7.5 billion from $7 billion the year prior (Fig. 3).
In other Jacobs Engineering Group divisions, the story was mixed. The firm’s oil and gas business grew considerably during the course of the year as companies pushed exploration and production into new territories. Although its buildings business remained flat, the company says it believes the health-care and justice segments of this market are growing steadily. And although its pulp and paper business remained depressed, the firm expects an increased workload in the years to come due to outsourcing of engineering services.
4. CH2M Hill Companies, Ltd. jumped two spots in our 2004 listing, placing it in the No. 4 position. The company posted 2004 design services revenue of $1.73 billion, and gross revenues of $3.1 billion. This 14,500+ employee-owned engineering, construction, operations, and related technical services firm operates out of more than 200 offices around the world and serves the water, energy, environment, transportation, communications, and industrial market sectors.
A key component of the firm’s growth in revenue last year was due to the acquisition of Lockwood Greene in December 2003. Lockwood Greene posted design revenues of $228.6 million in 2003 and ranked 18th on last year’s EC&M Top 40 listing. The firm is now a wholly owned subsidiary of CH2M Hill and provides engineering and construction services to the food and beverages, manufacturing, power, chemicals, and pharmaceuticals industries.
In September 2004, the company opened an office 10 miles northeast of downtown Cincinnati, in Blue Ash, Ohio, to serve as the center for the firm’s aviation planning function. The move was made to centralize planning staff and encourage collaboration and innovation among the group’s 300 professional team members.
5. Although it slipped a few spots in our ranking this year, Bechtel and its 40,000 employees came in at No. 5 this year and posted revenues of $1.56 billion for 2004 design services rendered. For the second straight year, the company achieved record workoff revenue of $17.4 billion, up $1.1 billion from 2003. On the other hand, the value of new work booked was $15.7 billion, as compared to $21 billion in 2003 (Fig. 4). With a focus on electrical generating plants using fossil and nuclear fuel, Bechtel Power turned in an especially strong performance last year with new work booked, ranking second only to Bechtel National.
6. Slipping one spot in our listing this year, Parsons Corp. suffered the largest year-to-year percentage decrease in design services revenue among the Top 40 firms. Revenue for design services in 2004 was $1.1 billion, down 27.4% from its 2003 total of $1.52 billion. This fall off was due in part to the exclusion of revenue from Parsons E&C, a provider of engineering, procurement, project management, and construction management services to the oil and gas, refining, petrochemicals and chemicals, and power sectors, which was sold to the Worley Group Limited of Australia for $245 million.
7. Parsons Brinckerhoff (PB) posted record total revenues and operating income in fiscal year 2004 to hold on to a spot in the top 10. Total revenue increased $16 million, or approximately 1%, over 2003 to $1.4 billion. Increases from its Asia-Pacific and Facilities business offset declines in revenue from its Americas Infrastructure and Construction Services of 2% and 17%, respectively. The Americas group has struggled the past two years due to the absence of multiyear federal funding legislation for transportation projects. Revenue specific to design services was $894.4 million, slightly less than its 2003 total of $896.6 million.
8. Although total revenue on contracts for Black and Veatch Holding Co. was down more than $60 million in 2004—$1.35 billion versus $1.41 billion in 2003—revenue for Black & Veatch Corp. (B&V) rose 5.6% to $731.7 million, from a 2003 level of $692.8 million. The drop off in total revenue was attributed to slower-than-anticipated recovery of energy markets and economic uncertainty, which delayed project awards. A breakdown of the firm’s revenue by business sector is shown in Fig. 5.
The good news for B&V was that its backlog at the end of the year was up nearly $150 million over last year to $1.9 billion. The increase was attributable to new business in all of the firm’s major business groups. Based on awards made earlier this year, the firm says it feels the energy market is poised to award significant projects in the areas of liquefied natural gas, coal, and power transmission. It also expects the water and government markets to maintain their steady growth.
9. The Shaw Group, Inc. broke into the top 10 this year after posting a 48.7% increase in revenue for design services over 2003 and finishing the year at $629.2 million. The company’s backlog as of fiscal year end Aug. 31, 2004, rose to $5.8 billion, up 20.8% from the prior fiscal year. The firm estimates that $2.4 billion of this backlog will be converted to revenues during fiscal 2005.
The Engineering, Construction & Maintenance (ECM) segment of Shaw’s business, which accounts for 51% of the company’s total revenue, provides a range of engineering, procurement, and construction services for the power generation and process industries on a global basis. Although demand for new power plants decreased significantly over the last few years, the group is counting on future growth tied to the need for “re-powered” or substantially upgraded facilities, as well as maintenance and modification services. The same can be said for the process industry, where decreased spending by chemical, petrochemical, and refining companies has presented difficult challenges on the growth front. However, the firm says it’s encouraged by what it refers to as “an increase in inquiry activity in the petrochemical and refining industries, especially in the overseas market.” The firm is looking for increased spending in this sector this year.
10. Holding firm at No. 10 on our listing this year, HDR Engineering, Inc. reported design services revenues of $521.5 million in 2004, a 2.4% increase over its 2003 level of $509.2 million. This architectural, engineering, and consulting firm operates out of 100 offices throughout the United States and employed more than 3,700 people at the end of 2004. An important reason for its growth in revenue in 2004 was the opening of some new branch offices and expansion of some others in the areas of Charlotte, N.C.; Denver; Detroit; Lake Forest, Calif.; Mt. Vernon, Wash.; and St. Louis.
As noted in the Zweig Letter Hot Firm 2004 List, HDR has achieved a 35% growth in gross revenues from 2000 to 2003, placing it No. 68 out of 100 of the fastest-growing A/E/P and environmental firms in the United States.
When asked what technology they felt had the greatest chance of changing the landscape of electrical design work in the next three to five years, several firms focused on 3D CAD software. Since AutoCAD was first introduced, many designers have looked forward to the day when they could develop a 3D computer model of a building and integrate that 3D model into their construction documents. Whenever any updates were made to the 3D model, they would automatically update and modify information throughout the construction document set. Recent advancements by the CAD software community have put this capability within reach of the electrical designer, which will eventually enable designers to more easily coordinate with other team members and with other members of a project team.
Taking this one step further, electrical designers are looking forward to the day when they can take separate design platforms, such as design, workflow, and load calculation, and make them work together. As one respondent put it, “When that happens, the difference will be huge.”
“Smart buildings” and the convergence of technology were also on the minds of our Top 40 respondents. The ever-increasing use of low-voltage systems integration in the design of buildings and the explosion of wireless communications equipment are forcing many designers to continually educate themselves on the latest product offerings in this fast-moving market. And the study of technology and materials that enhance sustainable design, from control systems for energy efficiency to electrical materials that use recycled products, were also noted as key issues in future design work.
Although many of the firms on this year's listing had a good 2004, a few of them had an outstanding 2004.
New to this year's listing, and growing by leaps and bounds, Stantec (No. 11) increased its gross revenue in 2004 to $398.4 million, up 13.3% from 2003. Net revenue in 2004 increased 14.8% to $343.6 million, and net income rose 20.4% to $23.1 million. According to president and CEO Tony Franceschini, P.E., Stantec's current vision, which was set in 1998, is to become a top 10 global design firm by 2008. Based on the company's growth rate over the last few years and its four acquisitions in 2004, it's doing what it can to pull that off.
The company's steady growth rate over the last five years is supported by the data shown in Fig. 6. Phoenix-based Stantec Consulting, Inc. posted 2004 revenue of $151 million, specifically related to design services. This was a 30.2% increase from the prior year revenue total of $116 million.
Founded in 1954, Stantec centers its business strategy on increasing its geographic reach in North America and selected international markets. This North American-based firm currently operates in five geographic regions — central and western Canada, and southwest, west, southeast, and northeast United States — and has offices in five provinces and 12 states. Over the past five years, the firm has increased its staffing level from 2,300 to 4,300, expanded the number of its offices from 40 to 50, and increased its number of practice areas. The company now provides professional services in all phases of the infrastructure and facilities project life cycle.
Posting this year's best year-over-year percentage increase among the Top 40 (Table 3), Aker Kvaerner (No. 17), a Houston-based division of Aker Kvaerner ASA, Oslo, Norway, bounced back from a difficult 2003 to post design revenues of $248.9 million in 2004, a 69.1% increase over its 2003 total of $147.2 million. The company attributed the turnaround in large part to work on a couple of big projects for ExxonMobil and ChevronTexaco.
In August 2004, Stanley Consultants, Inc. (No. 25) expanded its West Palm Beach, Fla., operations to offer consulting and construction management/inspection services for electrical distribution, transmission, and substation projects. The office was already providing transportation, structural, construction management, and water resource services to its customer base in this geographic area. Expanding its Florida-based operations into the power and energy market was one of many strategic moves this company has made of late, which helped propel its 2004 design services revenue to $124.2 million — a 36.2% increase over its 2003 number.
Another firm on our list that posted a year-over-year design revenue increase of more than 30% was KJWW Engineering Consultants (No. 39). Although its overall ranking held steady at number 39 on our Top 40 list, this firm that operates out of five offices in the Midwest with 200+ employees is poised to move up a few spots in our ranking if it can post another solid revenue figure in 2005.
POWER Engineers, Inc. (No. 27) posted one of the highest year-to-year percentage increases in design services revenue among our group this year. This energy, facilities, and communications consulting engineering firm based in Hailey, Idaho, yielded total design revenue for 2004 of $91.3 million, a 30.4% increase over its 2003 figure of $70 million.
The company says the impressive growth in revenue was due in part to the opening of a new office in Yarmouth, Maine, in March 2004. The Yarmouth office provides electric substation and transmission line design services for customers such as Atlantic Energy, Bangor Hydro, Connecticut Light and Power, Niagara Mohawk, NSTAR, Public Service of New Hampshire, and PECO Energy. This newly opened office is staffed with employees formerly of Industry and Energy Associates (IEA).
One of the most interesting moves in the Top 40 this year wasn't up or down the ranking listing, but a true physical move of people and support systems. Fluor Corp.'s (No. 2) recent announcement that it will relocate its corporate headquarters from Southern California to the Dallas/Ft. Worth metropolitan area follows a series of other moves by the company over the past two years that the company says will place its senior business unit executives closer to the customers they serve.
While the firm made it clear that it isn't abandoning its West Coast clients, it said the move would allow it to better serve the majority of its North American customers, which are clustered in Texas and on the East Coast. The move will involve relocating about 100 people to the new headquarters in Texas.
Among the many market sectors that Jacobs Engineering Group (No. 3) works in, its expansion efforts in the infrastructure market last year centered on two acquisitions. Effective Jan. 1, 2004, Leigh-Fisher Associates (LFA) became the global airport consulting division of Jacobs Consultancy. Jacobs acquired full ownership of LFA, but allowed the company to continue operating as an autonomous business. In August 2004, the firm closed on the acquisition of the Babtie Group, a technical and management consultancy firm headquartered in Glasgow, Scotland. Jacobs' CEO Noel Watson noted at the time, “Adding Babtie gives us the opportunity to continue building a solid presence in the infrastructure market — in the United Kingdom, the United States, and globally — that provides the foundation for becoming a market leader.”
In another move on the acquisition front, Parsons Corp. (No. 6) recently acquired RCI Construction Group, a Washington-based firm with more than $300 million in contracts. RCI specializes in transportation, infrastructure, civil and industrial construction, environmental site remediation, and residential and commercial development projects. The all-cash sale includes both Robison Construction, Inc. and RCI Environmental, Inc., which are two separate operating companies of RCI Construction Group, and over 400 pieces of heavy construction equipment in Washington, Oregon, and Hawaii.
This acquisition follows the trend among many of the Top 40 to become a one-stop shop for design and construction services.
In mid-January 2005, Black & Veatch (No. 8) completed the acquisition of R.J. Rudden Associates, Inc., a strategic, economic, and management consulting company that specialized in the electric utility industry, and Lukens Energy Group, Inc., a management consulting group that served senior management in the oil and gas industry in strategy, risk mitigation, valuation, and regulatory matters. The company says the acquisitions were meant to broaden the capabilities of its Enterprise Management Solutions (EMS) group. “These acquisitions demonstrate Black & Veatch's commitment to building our EMS organization,” says Len Rodman, chairman, president, and CEO of B&V. “They fit our investment profile, offering professionals with industry-leading skill sets, blue-chip clients, and reputations for a strong commitment to client service.”
On April 14, 2005, Stantec (No. 11) announced it would acquire the Keith Companies (TKC), which reported 2004 revenues of $105 million. TKC is a multi-disciplined engineering and consulting services company based in Irvine, Calif., that helps public and private clients improve the efficiency and reliability of automated and manufacturing processes, production lines, and fire protection systems. The transaction is expected to strengthen the firm's presence in the United States by adding 10 locations throughout southern California and approximately 850 employees.
Stantec's acquisition of the Sear-Brown Group in April 2004 added the bio/pharmaceuticals sector to the company's offering and expanded its reach into the northeast region of the United States. The Sear-Brown Group was No. 32 on EC&M's 2004 Top 40 listing with 2003 design revenues of $42 million.
On Nov. 1, 2004, Dewberry (No. 20) finalized its acquisition of PSA, a Peoria, Ill.-based architecture, engineering, interior design, and technology services design firm. PSA was merged with Dewberry's building services practice and now goes by the name of PSA-Dewberry, Inc. The group employs approximately 260 architects and engineers with expertise in both public- and private-sector design services. The company expects this acquisition to significantly enhance its practice in architecture and mechanical/electrical engineering.
Not to be outwitted on the full service design/build front, Zachary Group, the San Antonio-based parent company of Zachary Construction Corp. and Capitol Aggregates, Inc., agreed to purchase Utility Engineering Corp. (No. 29) from Xcel Energy, Inc. Terms of the transaction weren't disclosed. Approximately 500 employees of UE and its subsidiaries will continue to work in the companies' principal offices in Amarillo, Tex.; Denver; Groton, Conn.; Minneapolis; and Omaha, Neb.
Zachary construction offers construction, project development, construction management, and industrial maintenance services to domestic and international customers.
The National Institute of Standards and Technology Advanced Measurement Laboratory (NIST AML), located in Gaithersburg, Md., and designed by HDR Engineering, Inc. (No. 10) was recognized with high honors in R&D magazine's 2005 Lab of the Year competition. With temperature control in most wings of the building maintained at plus or minus 0.25°C and at plus or minus 0.01°C in a number of specialized laboratories, and with vibration control maintained at 3 micrometers per second or better, it's the benchmark for advanced nanoscale research laboratories. HDR's work on the $235 million facility, was recognized for its excellence in siting, planning, traffic flow, aesthetics, working conditions, lab design, opportunities for collaboration and idea exchange, energy efficiency, cost to build, and cost to operate.
The Industrial Company and Utility Engineering's (UE) (No. 29) Denver office won an Eagle Award from the Associated Builders and Contractors for its work on City Public Service of San Antonio's Leon Creek peaking power plant. The 200MW plant provides power to the city of San Antonio. UE provided the engineering design and procurement of BOP equipment, start-up, and performance testing of four gas turbines in simple-cycle configuration.
Syska Hennessy Group (No. 30) was a recipient of a 2005 Engineering Excellence Award from the American Council of Engineering Companies (ACEC) for its work on the new Maria Fareri Children's Hospital at Westchester Medical Center in New York. The firm's design blended the facility's building systems into the distinctive structural details of the building. For instance, lighting and HVAC systems were integrated into creative child imaginative displays, including a 5,000-gallon aquarium, an authentic locomotive, the world's largest doll house, an actual fire engine cab, and an outdoor miniature golf course.
Smith Seckman Reid (No. 35) recently earned the top award in the ACEC of Tennessee annual statewide awards competition for its work on the Metropolitan Nashville District Energy System. As the lead engineering firm on the project, SSR provided engineering planning, design, construction administration, and commissioning services for a new facility that replaced the previous waste-burning plant that had been operated by the Nashville Thermal Transfer Corp. since 1974.
KJWW Engineering Consultants (No. 39) received the 2004 Honor Award from the ACEC of Illinois for its engineering designs of a 190,000-square-foot hospital expansion and 64,000-square-foot renovation at Condell Medical Center in Libertyville, Ill. KJWW served as the mechanical, electrical, and technology engineer on the $90 million project, which challenged the firm to design and construct parts of the expansion directly atop an existing entrance and called for relocating existing site utilities.
When asked what challenges they face for the remainder of this year and into 2006, many of the Top 40 firms zeroed in on the topic of finding properly trained and experienced design and construction professionals to keep pace with the industry's anticipated growth. In today's fast-paced environment, the speed of project delivery has reached the point where clients are now asking firms to complete the design and construction of a project in the same time it used to take to merely complete the design. This places a lot of pressure on the design firm to not only hire technically qualified candidates, but to find those individuals who can handle the pressures of today's speed of project delivery. And that's easier said than done. The problem of managing and adding resources to meet future market opportunities will only get worse if the future growth projections of many of the Top 40 hold true.
One of the ways in which design firms can overcome this obstacle is to outsource professional services to overseas companies or hire foreign guest workers to temporarily increase staffing levels. In fact, one of the Top 40 firms noted that as Internet connection speeds rise and more advanced software hits the market, the outsourcing of electrical engineering and design work to overseas countries will increase. This approach can hold down rising business costs, such as health-care and benefits plans, combat fee pressures due to continued competition, and allow firms to take on more work, more quickly. But it doesn’t come without its concerns.
In looking out for the interests of its U.S. engineers, the IEEE has actively pushed Congress to enact legislation that requires companies to use L-1 visas strictly for their intended purpose. The group says the visa systems are being abused and therefore preventing U.S. workers from finding work. The purpose of an L-1 visa is to enable multinational corporate executives, managers, and employees with special skills to work at subsidiaries in the United States on a temporary basis. However, IEEE claims companies are using the visas to move foreign guest workers into the country as a source of lower-cost contract labor.
Ultimately, the Top 40 and every other professional design firm in the country will have to wrestle with these issues if workloads continue to rise at their current levels.