Design and construction markets related to environment, infrastructure and facilities contracted in 2009, but management consultants Farkas Berkowitz & Co. forecast that these markets will bottom out in 2010 and enjoy at least modest growth in 2011. The firm presented these findings as part of its 22nd annual State-of-the-Industry Report that was presented to an invitation-only conference of CEOs from leading design and construction companies.
Designers for transportation, power, water infrastructure, remediation and facilities saw their U.S. billings plummet 12 percent in 2009, and construction firms serving these same markets saw their markets fall roughly 7 percent.
Research revealed that 91 percent of design and construction companies took special measures in 2009 to
maintain profitability in the face of declining revenues. Eighty-four percent laid off professional staff; 57 percent made marketing more productive; 50 percent closed marginal offices; 45 percent exited marginal businesses; 40 percent ?fired? unprofitable clients; and 32 percent reduced fringe benefits. These firms are also undertaking in 2010 initiatives designed to position them for the recovery, with some 84 percent intent on further improvements in sales and marketing. Over 50 percent of surveyed firms intend during 2010 to make organizational changes, conduct strategic planning, provide leadership development training, and make at least one acquisition.
Improved backlogs suggest that many firms started seeing signs of recovery in late 2009. Fifty-five percent of firms saw increases in backlog during 2009 vs. 42 percent in 2008. Conversely, only 17 percent reported a decrease in backlog in 2009, while 39 percent reported lower backlogs in 2008.
In spite of improved backlogs, only 19 percent are seeing an upturn in their principal markets in the first half of 2010, 38 percent expect improvement in the second half of the year, and 43 percent do not expect to see their markets improve until 2011.
Water Infrastructure Engineering and Construction
Farkas Berkowitz estimates that the water and wastewater design market shrank by 2 percent in 2009, while the value of construction put in place for water and wastewater decreased by 3 percent, according to Commerce Department statistics. Chris Frangione, Managing Associate of Farkas Berkowitz, presented the firm?s report on the water infrastructure market. He commented, ?This market fared better in 2009 than any of the other markets we covered. We estimate modest growth of 3 percent in 2010, with stronger recovery in 2011.? The firm forecasts a 6 percent growth rate in 2011 for engineers.
Farkas Berkowitz expects that 2010 will be a mirror image of 2009. Engineers enjoyed a decent market in the first half of 2009, but in the second half, the market sunk. Frangione noted, ?Those that participated in the Sun Belt states were hit the hardest with some firms reporting revenue decreases of greater than 10 percent.? The firm expects a sluggish first half of 2010 followed by a stronger second half. The report notes relationships are becoming more important and local offices are again becoming a pre-requisite for winning work. Frangione noted, ?There was a time when clients only looked at resumes and did not care where your office was located. But now in these austere times, clients like to know that the money they spend will be reinvested in the community in the form of sales taxes, income taxes or property taxes.?
The report notes that participants have hope that the Obama administration will help the market over the mid-term. The EPA is developing stricter regulations for coastal waters that will impact dischargers in Florida and has announced that it wants to update the Clean Water Act.
Engineering-led design-build projects reversed flow in 2009. The firm estimates that the engineer-led design-build market shrunk by more than 10 percent in 2009. Frangione commented, ?Every participant could point to cancelled or delayed projects and the once rapidly growing markets in Arizona and Florida just screeched to a halt.? The firm does believe that the market will recover in 2011.
Water Public-Private Partnerships
Based on a survey recently reported in Public Works Financing magazine, Farkas Berkowitz finds that the water public-private partnership market has remained essentially constant since 2005, at just under $1.3 billion.
Farkas Berkowitz reported that inquiries seem to have increased significantly in 2010, with many of these being design-build-operate. In addition, participants are adapting to the stagnated market by expanding the range of services they provide. Frangione noted, ?Participants are offering other municipal services, doing tank maintenance, and entering new geographies.?
In addition to the adaptation by the market participants, the report noted two potential game changes in the market. First, the City of Winnipeg is trying to create its own corporation with the City as the only shareholder to manage the operations and maintenance (O&M) of its water facilities. This corporation will then be able to compete for the O&M contracts of other municipalities. Second, the City of Indianapolis signed a memorandum of understanding to sell its water utility to the non-profit that runs their gas utility. The City chose Citizens Gas out of the 24 proposals because it was a non-profit. This decision was easier politically and also allowed the water utility to transfer ownership without calling into question its use of tax-exempt financing. Frangione asked, ?The question remains: will other municipalities follow suit and are these potential game changers opportunities or threats to current market participants??
Farkas Berkowitz & Co. is a management consulting firm serving companies that provide design, construction and operational services for government and industry. For information, contact Alan Farkas at (202) 833-7530 or [email protected], or visit www.farkasberkowitz.com.
