Deltek Inc.
07/01/2024 | News release | Distributed by Public on 07/01/2024 11:29
Today's A&E Landscape: How Firms are Embracing the Latest Technology and Trends
Today's A&E Landscape: How Firms are Embracing the Latest Technology and Trends
July 01, 2024
Key financial metrics in 2023 held steady, reflecting a welcome relief following general economic volatility, inflationary pressures and talent shortages observed in recent years. However, challenges remain: while high talent turnover has waned, shortages persist, and many firms continue to make do with less, requiring the best-performing A&E firms to seek operational efficiencies and cross-train talent.
In a recent webinar, Megan Miller, Director of Product Marketing at Deltek, and industry experts Michele Russo, Vice President of Research and Practice at the American Institute of Architects (AIA) and Daphne Bryant, Executive Director of American Council of Engineering Companies (ACEC) Research Institute, discussed the latest results from the 45th Annual Deltek Clarity A&E Industry Study and how firms can use those insights for successful business planning.
Firms Focus on Digital Transformation
Firms are shifting their attention to artificial intelligence (AI) to drive efficiency with the more agile and tech-fluent firms likely to adapt quickly and set themselves apart from competitors. According to the latest Deltek Clarity A&E Industry Study, 62% of firms expect AI to improve operational efficiency and just over half (52%) have an AI strategy or are working on one. Most firms believe AI will have a positive impact on their business. In addition, 33% of respondents to the AIA Work-on-the-Boards survey from September 2023, a monthly survey of firms that measures their business conditions, say they plan to implement some form of AI in the next 1-2 years. The survey results show popular use cases of firms using or considering AI include design concepts, marketing and zoning/code compliance.
Each quarter, the ACEC Research Institute conducts an engineering business sentiment study with responses from about 650 firm executives. The study includes questions about the economic status and various hot topics, such as AI. In Q1 2024, the study asked about AI strategies, revealing that 52% of executives either have or are developing an AI strategy. "Additionally, 63% of firms believe AI will have a somewhat to very positive impact on their firm," said Daphne Bryant.
Michele Russo remarked, "Within architecture firms, there have been many discussions about technology and AI as a place architects are exploring, and I would say those firms are seeing similar trends from the Deltek Clarity A&E Study." She added, "We are also seeing from our research, that applications of AI are being utilized in two main areas: design or project-related tasks and firm operations." In design, AI is used for visualization, allowing architects to create and present visual concepts to clients interactively. For firm operations, AI aids in the specification process, which is often time-consuming and repetitive, improving efficiency and productivity.
Megan Miller added, "From our Deltek Clarity research, we see firms focused on other areas of digital transformation besides AI, as well, including leveraging technology to improve project delivery. We're seeing more and more firms taking what they're learning from technology and they're using that as a revenue stream by offering those services to their clients. It is opening up doors for this industry in ways that we have not seen."
In this year's Deltek Clarity Study, one of the questions firms were asked is what they think might happen if they make little progress in digital transformation and how that might affect their market share. About 40% of companies reported that they are expecting to lose market share in the next two years if they don't make those technology investments now.
Strong Financial Results with Challenges on the Horizon
According to the Deltek Clarity A&E study, firms saw another solid year financially, with operating profits holding steady amid challenges controlling costs. Operating Profit on Net Revenue stands at 18.7%, according to participants. There is also plenty of work for firms with backlogs estimated at nine months. However, firms believe some changes may be on the horizon for the next year or so.
Megan shared, "Financially, firms have had a strong year, with stable and positive financial metrics in 2023. Despite rising operational costs, labor expenses and inflation, revenue has increased, maintaining profitability." This financial stability allows firms to invest in new technology. However, businesses are re-evaluating their spending and operational strategies to optimize efficiency and sustain positive economic trends. While utilization rates are rising and overhead rates are declining, firms must monitor potential negative impacts such as employee turnover and burnout.
Michele remarked, "Architecture firms had a positive year in 2023, but expectations for 2024 are mixed. Larger firms and those involved in institutional work anticipate a solid year, while smaller firms and those in the commercial sector struggle more." She added, "Based on our research overall, we are seeing forecasted averages that are nearly flat year-over-year, with a slight growth of just under 1%, raising some concerns given the rising costs." AIA also reports that architectural billings have decreased over the past year and a half due to clients not signing contracts, reflecting current conditions. However, on a positive note, inquiries have been increasing, indicating growth and continued interest in future projects. Michele noted that project backlogs for architecture firms, tracked quarterly by the AIA, are smaller than reported in the Deltek Clarity study and stand at around 6 to 6 1/2 months, which is still healthy, although they don't have as much backlogged work as engineering firms. According to Daphne Bryant, the engineering industry has backlogs averaging 11 months, with firms predicting higher backlogs.
The ACEC Q2 2024 Sentiment Study shows that engineering firms are also feeling very optimistic. Sentiment scores range from -100 to +100. The current sentiment rating is +83 for the industry and +86 for firms' finances and both have remained consistently in the +80s since the study was created in 2021. Optimism about the U.S. economy continues to improve, currently at +30, which is up over the last quarter and way up compared to its low of -15 in Q3 of 2022.
Resource and Schedule Management is Vital to Successful Projects
Project managers face significant challenges, with scheduling being the top issue driven by internal factors and client pressure to deliver projects faster. This demand affects the entire project lifecycle, including compressed timelines for both drawings and specifications, as one example.
The Deltek Clarity A&E Study found 31% of projects are over budget and 42% of projects are behind schedule. In addition, 43% of firms need more confidence in project performance reporting and 47% report low visibility in schedule variance. According to Megan, "Successful project management requires the right mix of staff, tools and mentorship. Firms must invest in developing project managers, enabling them to manage projects proactively and not just serve as client liaisons, ensuring they have the tools to track project performance."
Michele added, "I think issues stem from internal and external pressures. Especially when projects are delayed and become more expensive. The good part is we are now at a time when the use of tools can catch the firm up to the needs, and that's what we're seeing at AIA." She continued, "The more you coordinate upfront on a project, using the right tools, the more efficient it is, the more sustainable it is and the faster it is."
Employee Turnover is Steady, but Salary Pressures Continue
With staffing still a challenge and the cost of new hires growing, firms are shifting focus to career development and upskilling staff. Even with employee turnover remaining steady year over year at 13.6%, based on data from the Deltek Clarity Study, firms are looking to find ways to do more with the staff they have.
According to the ACEC Research Institute Engineering Business Sentiment Survey from Q1 2024, wage inflation is the biggest single concern among all firm executives as they head into 2024. Based on this study, wages are going up and firms are trying to figure out how to manage that challenge. In addition, 51% of firms reported turning down work due to workforce shortages. For those firms turning down work, 24% of the work are good and profitable projects, which is challenging and puts pressure on the firms to deliver.
Daphne said, "There is upward pressure on existing staff wages and new higher wages, plus concerns on political disruption and recession fears. According to our study, if you combine that with the fact that on average 9% of positions remain open and nine out of ten firms still have open positions, there are clearly workforce challenges."
Planning for a Future Workforce
Navigating the complexities of managing a multigenerational workforce can be challenging for firm leaders. When succession planning or hiring senior executives and senior leadership, firms must consider the modern workforce and their unique needs.
According to Daphne, based on the ACEC Research Institute Diversity Roadmap from 2023, the average age of employees at A&E firms is 40 years old. Millennials represent 42% of the workforce, with Gen X at 27%. Those demographics have different wants and needs than traditional Baby Boomers in the industry.
An additional concern for architecture firms is enticing new graduates to look for jobs in the industry. "Today's graduates place value on salary over passion, so firms need to create a culture to acquire and retain employees long term, including work-life balance, meaningful work and a path to promotion," remarked Michele. To ensure future success, firms today must consider a culture that accommodates different generational preferences with an inclusive decision-making process that encourages open dialogue.