Design Firms Rebuild Their Confidence After Dismal 2011
Five straight years of revenue declines for the Southwest's top design firms have taken a toll. Design revenue from projects located in Arizona, Nevada and New Mexico for the top 70 survey respondents fell another 19% to $817.7 million in 2011, compared with the previous year. But many firms began laying the groundwork to jump out of the gate once design work picks up—and in some market sectors, it already has.
The year "2011 was another ... where our revenues were lower than the year before," says Steven Perich with Albuquerque, N.M., firm Dekker/Perich/Sabatini. "We reluctantly did another round of staff reductions in the middle of the year." However, the market began improving for the firm in the fourth quarter and into first quarter of 2012, Perich says, which "allowed us to bring back some of the people we had previously let go and also to add some strategic new hires."
Many firms survived and even thrived by working lean and recalibrating goals. "Like everyone else, we revised our strategies significantly in the past few years and stripped down to the bare bones in our expenses to help bridge the gap," says Kristine Mower, director of marketing with Phoenix-based Orcutt | Winslow. As a result, the company realized a modest profit in 2011 and has seen a "very positive" first quarter in 2012.
Firms doing work in New Mexico saw revenue drop 25% in 2011, and Nevada work plummeted 37%. Arizona fared a little better, with just a 6% drop, and some firms even reported growth. The Phoenix office of top-ranked Arizona firm HDR brought in more than $60 million of design work in the state. Last year was "a very successful year [for us] in Arizona," says Steve Gallehon, managing principal of HDR's architecture division. But he says 2012 may be more challenging after several current projects wrap up in the next few months.
Laurie Roden, Southwest area manager for HDR's engineering division, is cautiously optimistic about 2012. "We see a few projects in the Southwest that might have their funding at risk, but, on the other hand, we see a few projects that are moving forward and starting to progress with different funding types," she says. Being an integrated A/E firm and sharing work among different regional offices has helped the firm weather the recession, Roden adds.
Some smaller, nimble firms were able to pick up more work. PHX Architecture in Scottsdale, Ariz., increased revenue by 38% in 2011, and is adding to its backlog of work in the current year. "There is definitely a buzz in the air now," says Nikal Conti, principal. But despite the increased workload, "margins are still very low, and the challenge will be to continue to win work and provide exceptional and thorough service with adequate compensation," he says.
Niche design firm Walker Parking Consultants, Greenwood Village, Colo., is exploring every possible efficiency, says Robert Stanley, director of operations. "We are leveraging our industry experts to find ways to provide new or repackaged services to existing clients who value our work."
Fierce Competition
Even with firms that experienced growth in 2011, the recession still had a negative effect. "Collections were tough, and demand to produce projects in record time was very high," says Cathy Bowman, office manager with Hawkins Design Group, Mesa, Ariz. "There were absolutely no margins in the construction budgets to take care of anything in the field, so every problem discovered led to a lot of placing of blame before any action was taken."
With its main regional office in Henderson, Nev., transportation engineer Atkins managed to exceed its 2011 revenue budget in one of the toughest regions. "With limited funds available for infrastructure improvements, the competition to win new work is fierce," says Mark Isaak, executive vice president. "Further, clients are attempting to cut their costs by reducing the steps in procurement, factoring price into the selection process, seeking lower profit margins, asking for salaries with no escalation for the contract term and not paying stipends."
Owners facing funding constraints have begun to shift their focus to fewer, but larger, alternative delivery projects, Isaak says. "We expect significant growth in public-private partnerships, as they are a real solution to finance and construct projects."
Election Year Jitters
Regulatory clarity, especially involving emissions control requirements and domestic energy policy, are important to the health of key industries such as power and petrochemical, says Scott Duffy, senior vice president with Zachry Holdings Inc.'s San Antonio, Texas, office.
Many designers see uncertainty in the near future due to the partisan nature of the political climate, the looming presidential election and how the outcome will affect public funding for infrastructure projects. Historically a recipient of extensive federal spending, New Mexico especially would face a disproportionate impact if those dollars are reduced, Perich says.
All the more reason for increased state support for the construction industry, says Tom O'Neil, senior principal with DLR Group's Phoenix office. "State legislatures need to consider creative measures to allow the economic engine to begin firing on all cylinders once again," he says.
Some municipalities are creating work in the industry as they look at new ways to fund projects and shed risk—and thereby save money—by hiring integrated companies to design, build and then operate their infrastructure projects. Firms willing to take on that risk will be the ones to find the work, says Greg Fischer, design-build director in the Western region for CH2M-Hill, this year's top-ranked design firm overall. "Entities like us that can do progressive design-build and design-build-operate are going to be the leaders of the market. Those who can't … are going to be left behind," he says.
Despite the generally down market, firms are dealing with a problem normally seen during the boom years. "Ironically, one issue today is the same issue we experienced in 2007: the lack of a good quality, experienced labor force," says Ben Barcon, principal of Tempe, Ariz.-based ADM Group. "It appears the weak economy in Arizona has driven potential employees [out of state] or out of the work force. Finding young enthusiastic workers is still a challenge."
