Last December I had the opportunity to attend the 2014 PSMJ Industry Summit. It was my first time attending this great conference, and the chance to serve as a presenter is what drew me there. The opening keynote featured David Burstein, PSMJ's director of client services. If you know anything about David, you know that he is a fountain of knowledge when it comes to trends and metrics in our industry. His keynote was filled with great information and useful content.
As a follow-up to the event, I interviewed him about some of the more salient points from his presentation. Want to know what is coming down the pike in the A/E/C industry? Read on for the thoughts of PSMJ's resident prognosticator!
A/E/C Talent Shortage
The industry's pending talent shortage has been on our radar for several years, perhaps delayed by The Great Recession. But many firms are busy again, and others are ramping up to expand their capacity. I know first-hand about this trend – my firm has struggled for several years to find electrical engineering talent in our region. So I asked David how "real" this trend really is.
"The talent shortage will be one of the main drivers in the short-term in our industry," he told me, "and the single biggest issue in the median term. This will dwarf all other problems that we have in the industry in just a few years."
What is creating the talent shortage? There are six issues creating this perfect storm, according to David.
"First, there are not enough engineering graduates. Second, there is an increasing number of foreign students in these programs. When they graduate, they are returning to their home countries instead of remaining in the United States. Third, A/E/C salaries are not competitive with other professions." For this trend, David noted that a newly graduated civil engineer, for instance, can draw a 20% larger salary by staying away from the consulting side of civil engineering.
He continued: "Fourth, there's a lot of senior engineering experience retiring in a few years. Their lost knowledge cannot be replaced by new graduates. Fifth, after serious cuts in the engineering profession during the recession, the profession has now recovered to pre-recession demand levels. And sixth, there's been an increase in employee turnover, as headhunters have become more aggressive in raiding talent from other firms."
When I shared with David my firm's problems finding electrical engineers, he laughed and responded, "Finding electrical engineers is horrible."
Downward Utilization
At his PSMJ Industry Summit presentation, David shared two corresponded trends, which I asked him to elaborate upon. Labor utilization is trending downward, while overhead costs are trending upward.
He told me that the "Big thing driving this is computerization. Back in the 1970s, firms had rooms of drafters and drafting boards. These drafters had 40 to 50 billable hours every week. But they were slowly replaced by CADD, and now Revit and Building Information Modeling. Engineers and architects are doing more of their own CADD work – hours of billable time for them but eliminating the need for drafting support. Since the advent of BIM this trend has accelerated, and will continue until all design and drafting are done solely by architects and engineers."
While that is the biggest driver, David noted that firms have changed the make-up of staffing due to technology integration: "Now we have IT managers and full departments who are non-billable, creating an overhead labor category that didn't even exist years ago."
Firm Profitability
I was curious about firm profitability, and David shared that the trends have actually been positive: "Firm profits increased in 2013 to rates that we haven't seen since before the recession," he said. "Likewise, 2014 looks to be increasing again, close to the pre-recession levels."
PSMJ has been monitoring profitability trends for several decades, and they've uncovered something intriguing about our industry: we actually learn! Says David: "Each peak and each trough have resulted in higher profit levels than in previous business cycles." In other words, the highs are higher and the lows aren't as low. He attributes this to the industry getting "a lot better at handling economic cycles."
Market Outlook
Next we discussed the hot markets, something he spoke about at length at the PSMJ Industry Summit.
"Housing is back, a lot sooner than most experts thought it would be," David told me. "This time it looks sustainable and not another bubble."
If you've been in the industry for a few years, you certainly know the importance of housing to the overall A/E/C industry. But how important is it really? At the PSMJ Industry Summit, David told the audience that as much as 80% of our industry is driven by housing and new residential subdivisions.
"Housing drives so many markets – roads, bridges, sewer, water, shopping, hotels, government buildings, and more," he says.
Because my firm does a lot of work in the manufacturing sector, I was particularly interested in his forecast for the industrial market, which also certainly benefits from new housing construction. Happily for me, David is bullish on manufacturing.
"The industrial market is coming along strong. Manufacturing costs in other markets are going up. In fact, by 2015, there will only be a 5% cost difference for most manufacturing when you compare the U.S. and China. The United States has the lowest manufacturing costs in the developed world, and energy-intensive manufacturing is now cheaper in the U.S. than anywhere else (including China). Because of this, a lot of companies are moving manufacturing back to the U.S."
As for the health care market, David shared some pros and cons. "It is still growing and will continue to grow, with aging Baby Boomers and Obamacare driving more customers into the health care system and creating demand."
But although the demand-side is strong, competition is intense. "During the recession, a lot of firms piled into the health care market. Today, a lot still want to get into the market. But what's happened is that so many firms are pursuing the work that the market is becoming oversaturated. So while the market used to be extremely profitable for A/E firms, it's now going into reverse. Firms that specialize in the health care market are now less profitable than A/E firms in other markets."
This is why it is so important that firms focus on the entire picture when looking into markets to pursue. "Is the market growing? That's an important factor, but certainly not the only factor to look at."
If you are interested in seeing these trends real-time, be sure to participate in PSMJ's Quarterly Market Surveys – there's no cost to participate and the findings are free to participants. As for what's next for David Burstein, he'll be presenting at the PSMJ Human Resources Summit on April 1-2 in Boston. And the next PSMJ Industry Summit, which I highly recommend, will be in San Francisco in December 2015.