Position Your A&E Firm for Success in 2023 & Beyond

Now more than ever, it’s critical to prepare for the coming year and align your strategic plans to what’s happening in the industry. In a recent webinar, Megan Miller, Director of Product Marketing at Deltek was joined by industry experts, Jennifer Riskus, Director of Market & Economic Research at American Institute of Architects (AIA) and Daphne Bryant, Executive Director of ACEC Research Institute. Speakers discussed how current market conditions could impact projects in the coming year and how firms can prepare. Workforce challenges including staffing and retention, as well as project backlogs, are expected to persist.

Project Backlogs Hit a Record-High but New Billings May Slow

“The pace of billings growth for architecture firms has slowed compared to the Spring, however there is still strong growth overall with firms reporting near record-high backlogs, averaging seven months—the highest that we've recorded in the 12 years that we've been collecting that data,” said Jennifer Riskus from the AIA.

Jennifer sees a possibility that billings growth will slow for architecture firms going into 2023. Clients are starting to be more cautious, especially with rising inflation and interest rates. In addition, there are ongoing issues with the price and availability of construction materials. In AIA’s August survey, 42% of architecture firm leaders reported delayed and canceled projects are at least somewhat of a serious issue. Those firms indicated that 23% of their recent projects have been seriously delayed, 12% have been indefinitely on hold, and 6% have been completely canceled. Despite inflation and other concerns, engineering firms are losing work due to staffing and retention. “The last Engineering Business Sentiment Report showed that 25% of the firms said they've turned down work in just the past three months, including profitable projects,“ said Daphne from the ACEC.

Daphne sees a continuation of increased revenue for firms through 2027, although it is predicted to slow. “The Infrastructure Investment and Jobs Act (IIJA) has played a hand in this growth. The industry is expected to see about 132 billion in revenue and about 82,000 new jobs from this bill over the coming five years. About 20% of firms have already experienced the impact of this bill, and the majority of them are expecting to see it in the coming 12 months, taking this growth into the first half of 2023,” said Daphne. She is also seeing firm backlogs continuing to increase with backlogs going from 10 to 12 months in the last quarter.

Jennifer advises firms to be prepared if they start to see less projects coming in. During COVID, projects slowed but due to backlog, many firms still had projects to complete. When planning for 2023 she advises firms to think about diversifying their portfolios. For example, if commercial projects slow, there could be a demand for multi-family residential projects. Architecture and engineering firms might want to consider taking on different types of work as backup to hedge against potential downturns in one area of the industry.

Get Creative with Staffing

“ACEC was looking to understand the impact workforce shortages have on engineering firms, so in the last Sentiment Report, we asked them specifically, have you turned down work in the past three months as a result of the workforce shortage? And, over half of the firms indicated they had, “said Daphne. More companies are having to turn down work because they don't have the people to deliver it, which is one factor contributing to the reported backlog. It's not necessarily that they've secured a lot of new work, but some firms are struggling to deliver on existing projects as expected, leading to ongoing conversations on staffing and retention according to Megan Miller from Deltek.”

Daphne says the ACEC Q4 Sentiment study, showed that nine out of 10 engineering firms currently have job openings, and at the 2022 ACEC Fall Conference, workforce was one of the top challenges discussed. She adds, “78% of firms are hiring because of growth and 60% are hiring due to attrition.” The study also showed that firms are now paying 10% or more in new hire salaries to attract talent and seven out of 10 firms believe they will see an increase in open positions in the next 12 months.

Jennifer shared that for architecture firms, staffing is always a critical issue whether times are good or bad. “At the end of each year and the beginning of the next year, we always survey our panelists and ask them what their top business-related concerns are for the coming year. Profitability is pretty much always number one and staffing issues are usually number two.”

The ABI survey found that architecture firms expect revenue to increase at a slower rate next year. In 2022, firms expect an increase of 6.8% compared to 2021, but in 2023 that decreases to only 0.8%. Of those firms that are expecting a decline in their revenue next year, 9% indicated that lack of staff and the ability to take on new projects were likely to be the biggest reason for that decline.

Despite some of the obvious challenges, Jennifer does see a possible bright spot in all of this. “If work slows then staffing might become less critical. I know some firms were feeling pretty overwhelmed recently and were having to turn away projects because they just didn't have the people power to get the jobs completed.”

A panel discussion at the 2022 ACEC Fall Conference in October had a diverse mix of engineering firms, including a small public works firm, a mid-size firm that works on mostly private projects, and a large firm that deals with both public and private contracts. Plans for how to deal with inflation, wages, and other workforce issues varied by type of firm. The small firm is offering employee referral bonuses in lieu of salary increases and found that it is starting to pay off. The midsize firm talked about raising salaries to retain talent, while the larger firm was taking a long-view approach to employee retention—they decided not to continue to raise salaries to stem attrition but are looking to offer value for their employees through flexible work schedules.

Jennifer agrees that firms need to be creative to keep projects properly staffed and on schedule without raising employee salaries. “We are seeing firms offer employees different benefits and perks like flexibility and bringing more continuing education offerings in-house to make it more convenient and easier for employees to get support for education.”

Invest in Technology

The cost of running a firm has increased recently and is expected to continue due to inflation, as well as increased labor costs. This means firms will need to be creative and find new ways to manage costs. According to a survey conducted by AIA, 19% of firms are planning to outsource some of their technical and support services such as IT, website design, HR, and finance to manage these costs.

In addition, Daphne sees the possibility that firms will need to cut travel and other discretionary spending because it’s usually the second or third largest controllable expense on most companies’ budgets.

Megan Miller adds that technology should be added into the mix to help with the challenges of staffing. “Firms need to leverage technology so that you can be as efficient as possible, as informed as possible, and as automated as possible, so that you can focus on the things that matter leaving you to do the highest and best work with your staff. There's technology designed to help you get market intelligence on government spending as well as CRM solutions to help you proactively manage your pipeline and client relationships.”

It doesn’t matter what sort of projects firms take on, it’s important to have the right data to make the best decisions to move forward and remain profitable. It’s incredibly valuable for companies to be more strategic, more deliberate and more informed as they determine what they want to do and how they can reach their goals going into next year. One way to do this is to invest in technology to meet your firm’s evolving needs and better face industry challenges. Deltek software is specifically designed for the A&E industry. By using solutions designed to make everyday tasks easier to manage, you can concentrate on what matters to your firm, like gaining insight into how every dollar is spent and earned, helping to improve your bottom line.