The A&E Industry Forecast for 2023 (2024)

Industry insider, Steve Gido, from Rusk O’Brien Gido + Partners recently shared his observations from 2022 in a best practices webinar and discussed how those trends might impact architecture and engineering firms in 2023. Steve’s firm advises hundreds of architecture, engineering, planning and environmental consulting firms around the world.

2022 Had Many Bright Spots, But Still a Few Dark Clouds Prevailed

2022 was a very strong year for architecture and engineering (A&E) firms. According to Steve, total construction revenue rose by 7.8% from 2021 to 2022, however, the industry continued to suffer from talent shortages, record backlogs and inflation.

Many companies have expressed excitement and enthusiasm for 2023 but also concern or caution due to economic headwinds. In the Architectural Billings Index, an economic indicator for non-residential construction activity, a level of 50 or above indicates growth. However, in the fall of 2022, the level dropped to 46.6 indicating a decline. In December 2022, the level was slightly higher at 47.5, but still below the growth level. These trends are expected to continue into 2023.

Steve believes the driving forces of growth for this year will be multi-layered and multi-factored. There will be less residential purchases due to rising interest rates and inflation will deter homeowners from investing in household renovations. However, firms with non-building portfolios will see more projects coming their way.

Industry groups, AIA and ACEC cited concerns over lower profitability for A&E firms due to rising costs of materials and wages going into 2023. In a recent webinar, industry experts stated that the cost of running a firm has increased recently and is expected to continue due to inflation, as well as rising salaries. Firms will need to meet these challenges by finding creative ways to manage costs. According to a survey conducted by the 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 expenses.

Sunny Skies Predicted for Non-Building Structures

FMI, a leading consulting and investment banking firm dedicated to serving companies working within the built environment, predicts non-residential and non-built structure projects will increase this year.

According to a recent FMI study, Non-building structures such as lodgings (due to tourism coming back), public works, and infrastructure (roads, highways) will do well and are expected to increase by 6% from 2022 to 2023.

10 Observations From 2022 That Will Continue to Impact Firms in 2023

1. Inflation Navigation Will Slow Profitability
   Increases in the cost of living, rent, auto, fuel and salary will crimp profit margins. For example, nearly two-thirds of a firm’s cost structure are salaries and compensation. Most firms will not be able to pass those fees onto clients.
2. Talent Management Challenges Will Persist
   A tight labor market and continued staff attrition will be front and center. Companies will need to do a better job of attracting talent by offering bonuses and other tactics to retain employees. In addition, to attract younger talent to the industry, firms will need to appeal to a new generation through science, technology, engineering, math (STEM) programs and mentorships early on, perhaps at the high school level.
3. The Industry Will Continue to Have Great Public Relations and Influence with Government Agencies
   Industry organizations such as AIA, ACEC and others are stepping up their advocacy efforts to call on lawmakers and ensure industry needs are prioritized. This has led to favorable depreciation and amortization on the tax front and placement of public policy dollars into infrastructure and spending. The industry has done a good job to get the attention of government leaders and is getting financial support through programs such as the Investment Jobs Act which can fund infrastructure. Not all of the money from this program has been used, so firms will see benefits continuing into 2023.
4. Impactful DEI Programs Will Increase in Importance
   Many A&E firms are embracing diversity, equity and inclusion (DEI) programs. They are no longer siloed into a policy or program from Human Resources. The programs are becoming core values which are being incorporated into organizations today that are looking to expand opportunities not only for employment, but also for leadership and ownership potential.
5. Smaller Startup Firms Will Enter the Industry
   Possibly due to the presence of influencers and television shows such as Shark Tank, employees are looking to start their own companies, including architecture and engineering firms. It’s also easier to start a firm today versus 20 years ago because the barriers to entry are easier. Recruiting tools are there, work from home models are established, and we are seeing an increase in older generations selling their businesses.
6. Companies Will Use Culture as a Recruitment Tool
   Companies are being more purposeful and intentional regarding their culture. Firms are promoting a more inclusive and collaborative workspace where all voices are heard and appreciated. They will continue to use it as a tool so they will be seen as an employer of choice.
7. The Shift From Offshoring to Onshoring Will Continue
   The United States is bringing manufacturing back into the country. New semiconductor and chip plants are being built; one such plant is in Syracuse, NY. We are also seeing an increased need for manufacturing facilities, specifically in the food and beverage and industrial sectors. Firms in those markets will be well positioned in the next several years to take advantage of this trend.
8. Industry Consolidation in the Form of M&A Will Continue at a Steady Pace
   2021 and 2022 were the most active mergers and acquisitions (M&A) years and the trend is predicted to continue. Today’s buyers have confidence and capital and are looking to expand their business. Acquisition is an easier way to expand versus organic growth. In addition, older owners are selling and retiring as baby boomers are coming into their 50s, 60s and 70s, so more opportunities are available.
9. The Industry Will Have Four Distinct Business Ownership Models
   Traditional or partner models, are businesses where professionals start or buy a business and groom younger employees to take over after they retire. Employee Stock Ownership Plan (ESOP) is another model, where employees all own a piece of the business. There are also global companies that purchase smaller firms who wish to join a larger organization of a global nature. The private equity model is increasing at a high rate as more architecture, engineering and environmental companies are starting to take investment dollars from outside investors. Currently there are a large number of firms with capital around the world looking to invest in good companies.
10. Baby Boomers Will Bid Farewell to Their Firms
    Baby boomers, or those born between 1946 and 1964 are now in their 50s, 60s and 70s. Many are now looking to relinquish their role in the company and hand it over to younger talent or retire completely and sell their business. This will create new opportunities for a new generation to reshape the A&E industry the way they want to.

A&E Firms in 2023: Which Playbook Will Your Firm Follow?

In closing, Steve sees two types of A&E firms emerging in 2023. Those that have an offensive playbook and those that will be playing defense.

The offensive group will continue to invest by taking on new opportunities, such as hiring more staff, pursuing more clients, looking for new market sectors and verticals, and opening new offices. The defensive team will be more sensitive to economic headwinds from a macroeconomic perspective and will deploy a wait and see mindset by holding the line on spending, such as delaying the purchase of trucks or surveying equipment. These firms will not be looking to bring on new types of projects or clients and will concentrate on their core business.

Whether a firm is offensive or defensive, Steve advises, “Don’t wait to step up business development or investment in marketing. During the last few years, the industry saw tremendous growth. This may not repeat this year, so make sure your company is prepared for any downturn. It’s important to be proactive. Keep an eye on KPIs and track performance. If you see any area that is looking soft, recalibrate your organization to stay on top of that.”

One way to keep your firm profitable, regardless of business climate, is to have visibility into your project lifecycle. Having a 360 view will help you get the right people on the right projects at the right time to deliver better results. With better plans from the outset, firms can boost utilization, balance workloads and adjust resources to meet changing demands.