Sustainability efforts. Private firms and government clients are increasingly focused on the environmental impacts of infrastructure development, benefiting markets such as power, renewables and infrastructure. In addition, there is a growing emphasis on climate resilience for some projects, which increases the need for value-added consulting, design and engineering expertise. A further growth opportunity exists for firms with environmental remediation capabilities given the rise in demand for these solutions.
Growth in regulation. An increase in both regulation and legal activity has had a direct impact on construction and engineering projects. For example, in March 2022, the Securities and Exchange Commission (SEC) proposed rules that would require public companies to disclose extensive climate-related information in their SEC filings. The 2015 definition of WOTUS (waters of the United States) was reinstated in 2021 to include smaller streams, and the law requires compliance for discharges into dry streams and ditches. In 2021, New Jersey announced the Brownfield Redevelopment Incentive to provide tax credits to companies undertaking brownfield remediation projects. The continued evolution in guidelines and enforcement of federal and state regulations creates demand for consulting and engineering services as clients seek support in navigating these changes.
Lack of pricing pressure. Pricing for the sector is expected to remain strong in part due to labor shortages. While talent scarcity can constrain the ability to meet demand, it also keeps prices high. Pricing for AEC consulting and construction services can even be countercyclical in recessions, due to non-GDP-driven spending. In addition, cost-effective engineered solutions are often considered more attractive by stakeholders during economic downturns, so services such as cost management and project management can actually see an uptick in a recession.
Outsourcing. A challenging labor market has meant that corporations, developers and government agencies are increasingly facing a shortage of qualified engineers. Outsourcing represents an attractive — and increasingly common — alternative to hiring in-house AEC talent and other construction services professionals, a clear opportunity for firms that provide these resources to clients.
The price of success: Haphazard growth
Buoyed by positive market growth drivers, many AEC and construction services companies have grown quickly. But peer under the hood and it becomes apparent that much of that expansion is undirected and somewhat random. AEC and construction services firms frequently grow as a result of client demands for specific services, while others expand services when they bring on new hires with additional capabilities.
Many firms enhance revenues by taking on projects that are outside their core capabilities because their clients are asking for specific services. But turning around and selling these services to other clients can be challenging. Unsurprisingly, clients expect both excellence and expertise, including a solid track record for specific services. Many place a high value on local relationships, and it can be hard to transfer relationships within client organizations that are often siloed. Above all, the experience that a customer has had with an AEC and construction services firm on prior work determines who they will select for future work, making it difficult to convince them to consider other options. Clients also want to have a specific point of contact that they can go to for support, regardless of the project assignment.
Furthermore, because many firms have decentralized operations, offices or business lines may grow opportunistically and independently from one another without a systematic review of how capital, labor and management time could be more optimally deployed. While taking an entrepreneurial approach to growth can ensure that firms are responsive to market and customer needs, it can also lead to a lack of focus or missed opportunities.
Ensuring purposeful growth
A combination of entrepreneurial expansion practices and cross-selling challenges has meant that firms struggle to pursue organized and purposeful growth. Yet without that intentional trajectory, these companies are missing out on opportunities to maximize profits and ensure their future viability. Companies need to set priorities based on market fundamentals (e.g., opportunity size, margin profile, growth rate) and their ability to leverage their existing talent and resources. There are several strategies that companies should consider on the path to purposeful growth.
Analyze market position and performance
Starting with a grounded understanding of market positioning is essential. Firms need to systematically analyze their performance across end markets, service lines and geographies. This will determine where they are underweighted versus overweighted compared with the overall market. They will then have to weigh these factors against other considerations such as their margins, growth and capabilities across each of these areas. Combined, this information will facilitate decisions about where to invest for optimal expansion (see Figure 3).