Federal Markets: Short-Term Pain, Long-Term Gain?

• Tough times ahead: Budget pressures will challenge AEC firms working on federal projects. This summer’s debt ceiling agreement will shrink future federal spending by $913 billion in the next decade, and a 12-member bipartisan committee could cut a further $1.5 trillion. Almost all discretionary federal spending, which finances most federal construction, after 2013 will be impacted. A House committee has eliminated FY 2012 funding for new construction and major renovations of federal buildings, and cuts are coming to military construction and the Army Corps of Engineers. A lack of Congressional action on long-term reauthorization of transportation legislation is also a drag on highway and airport projects.

• Presidential proposal: President Obama’s American Jobs Act, unveiled in September, includes $105 billion for construction projects, including $50 billion for transportation, $27 billion for highways and bridges, and $25 billion for K-12 schools. The measure, however, faces an uphill battle in Congress.

• It’s a small world: A controversial proposal by the federal Small Business Administration (SBA) to raise the size standard for A/E firms from $4.5 million in annual gross receipts to $19 million could transform the competitive landscape. If enacted, nearly all A/E firms would be eligible for federal projects set aside for small businesses. Good news for larger firms, terrible for the smallest, which would have to compete against firms with significantly more resources.

• Long-range view rosier: A new study from AEC enterprise software provider Deltek projects that, despite budget-tightening, federal spending on A/E services will rise from $8.1 billion in 2011 to $9.5 billion in 2016, a compounded annual growth rate of 3.2%. During an August webinar detailing the study, Deltek vice president Kevin Plexico said: “We’re definitely in a more grounded market in terms of what the government can afford to spend, but amidst the budget cuts we’re seeing across other functions, 3.2% growth is a relatively bright spot in federal contracting.” Plexico says opportunities are stronger on infrastructure maintenance and repair versus new construction.

M&A Activity Retreats in Third Quarter

• Domestic M&A slowdown: A slight pullback in global M&A activity in the third quarter was largely driven by a slowdown in the domestic M&A market (i.e., transactions involving a U.S.-based selling firm). Domestic M&A activity came into the third quarter up 12% on a year-over-year basis, and it left the third quarter up only 3%, with 120 M&A domestic deals announced in the first nine months of 2011. Assuming this pace continues, 157 domestic deals are projected to occur through year-end 2011.

• International firms not drawn to U.S.: So far in 2011, international buyers have represented only 9.2% of all U.S. sales, a five-year low and down considerably from 2010, when close to one in five domestic firm sales were to international buyers. In a continued reversal of a trend seen since 2007, through the first nine months of 2011, there have been more transactions involving a U.S. firm buying an international firm (15) than an international firm buying into the U.S. (11).

• Heightened international M&A activity: In contrast to the flat domestic market, international M&A deals (i.e., transactions involving a non-U.S.-based selling firm) through the first nine months of 2011 are up 69% compared to last year and at a five-year high. Assuming this pace continues, 172 international deals are projected to occur through year-end 2011.

• Interstate transactions fall: Following a flurry of domestic deals across state lines in the first quarter of 2011 (62% of deals), the percentage of interstate deal-making fell to 54% and 50% in the second and third quarters, respectively. This is perhaps indicative of a sliding confidence in the domestic economy.

Passive Job Seekers Reluctant to Jump Ship

• LIFO fears complicating hiring: “Last in, first out” is having a significant impact on the hiring process in the AEC industry. Due to the tight labor market and uncertain economy, employers are resorting to aggressive signing bonuses and sharing financial information to convince skittish candidates to take the plunge.

• Candidates in no rush: Prospective candidates are taking more time to consider an offer, putting employers on hold while they ponder the pros and cons. Candidates are turning down lateral moves even if significant career potential is offered. Initial offers need to be strong as highly sought-after candidates appear more willing to shut down negotiations before they even get started.

• Soft housing market pushing employers to up ante: The soft housing market is making it especially problematic to convince potential job seekers to relocate. Aggressive firms are offering significantly stronger relocation packages, flying families in to check out houses and schools, and focusing heavily on alleviating the concerns of not only job seekers, but their spouses as well.

Google’s Fingerprints are on the AEC Industry

• Google’s digital pencil: Technology powerhouse Google is known for its search engine, Gmail, Google Docs, and scores of other applications, but, now it’s also familiar to many AEC firms for SketchUp, one of the most widely used 3-D design tools. Although SketchUp was developed as a general-purpose product, architects were among its early adopters. Engineering, construction, and landscape architecture firms are now also core users.

• SketchUp pros and cons: SketchUp’s ability to create conceptual designs and renderings that allow clients and project team members to visualize projects is increasingly valuable as IPD and BIM foster greater project collaboration. SketchUp’s benefits touted by AEC firms include a relatively shallow learning curve, the $495 price point (for the professional edition), modest system requirements, and the ability to integrate with aerial and street-level photography from Google Earth. The major drawback is that its functionality is more limited than CAD and BIM software solutions; SketchUp is a tool for developing communications documents, not construction documents.

• Google’s AEC future: Will Google move beyond SketchUp to target the AEC space? The famously tight-lipped company won’t comment, but Google’s business strategy generally focuses on mass-market web applications rather than specialized vertical products. (Some industry analysts questioned whether Google’s acquisition of SketchUp from @Last Software in 2006 was peripheral to its core business, but Google saw value in the integration of SketchUp and Google Earth.) So a Google move into CAD and BIM software would be unusual unless the company foresaw synergy with its other web products.