Ian has spent the past twenty years working with hundreds of architecture, engineering and environmental consulting firms large and small throughout the U.S. and abroad with a focus on ownership planning, business valuation, ESOP advisory services, mergers & acquisitions, and strategic planning. Ian is a professionally trained and accredited business appraiser and holds the Accredited Senior Appraiser (ASA) designation with the American Society of Appraisers and is a certified merger & acquisition advisor (CM&AA) with the Alliance of Merger & Acquisition Advisors.
In Spite of the Pandemic, A/E Firms Report Improved Margins
In Spite of Pandemic, Early Reports Indicate Higher Labor Utilization and Improved Margins in 2020
March 30, 2021
As firms continue to close out their 2020 fiscal years and finalize financial statements, some interesting data is beginning to come in. Early indications suggest that while revenue levels were flat on average, A/E firms experienced improved labor utilization levels and profit margins in 2020.
While this data represents only about 10% of the total respondents we expect to participate in the survey over the coming months, it aligns with anecdotal observations and discussions with principal contacts across the industry. Below is a chart highlighting a number of key financial performance metrics over the last three years and the early indications from calendar year 2020.
| Financial Metrics | Early Results 2020 | FY 2019 | FY 2018 | FY 2017 |
|---|---|---|---|---|
| EBIT / Net Revenue | 16.0% | 13.5% | 13.1% | 12.6% |
| Labor Utilization | 62.0% | 61.0% | 60.0% | 61.0% |
| Labor Multiplier | 2.9x | 3.0x | 3.1x | 3.0x |
| Overhead Rate | 1.5x | 1.6x | 1.6x | 1.6x |
Managers have reported a number of factors contributing to improved labor utilization, lower overhead costs, and improved profit margins in 2020. For most firms, the transition to working from home was relatively seamless and employees were able to remain productive while working remotely. Most firms had already invested in the software platforms and videoconferencing systems to allow for remote working, and the pandemic was simply the catalyst for immediate and full adoption of the technology. Other factors contributing to improved performance include a drastic reduction in travel and entertainment expenses and associated labor costs.
On the negative side, the ability to collaborate as a team and for managers to mentor and train younger staff is certainly more difficult in the current environment. And the inability to visit clients, attend networking events and conferences has made business development challenging. In recognition of these challenges, some firms are pushing for a return to the office as fast and as safely as possible.
Other firms have decided to go in the opposite direction and embrace the virtual workplace environment in the hopes of continuing to take advantage of the labor efficiencies and fixed overhead savings, while seeking new approaches for collaboration and networking.
For decades the design and construction industry has lagged other major industries as well as the global economy in productivity growth. Will the technology adoption ushered in by the pandemic result in long-term productivity gains for the industry, or are the early indications of improved efficiencies just a short-term sugar high? Time will tell.
We will be presenting findings of the newly released A/E Business Valuation and M&A Transactions Study during a live webinar hosted by the American Council of Engineering Companies (ACEC) on Thursday, April 1st from 1:30 pm 2:30 eastern. You can register using the following link:
The eighth edition of the A/E Business Valuation and M&A Transactions Study
can be ordered online here.
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