New Study Shows Strong Growth

Notwithstanding the potential impact of the coronavirus on global markets, the U.S. economic recovery that began in the third quarter of 2009 has continued virtually unchecked through 2019 and into the New Year. So it’s not surprising to see firms in the architecture, engineering and environmental consulting industries posting strong levels of revenue growth and earnings.

The recently released A/E Business Valuation and M&A Transaction Study showed firms in the industry achieving their highest levels of growth and profitability in the last five years. The survey, which reflects data from respondent fiscal years ended on or before September 30, 2019, showed that the median two-year compounded average growth rate of net service revenue hit 9.2%, with particularly strong growth in the architecture space, which posted a median two-year growth of 11.6%.

  All Firms Engineering & E/a Architecture & A/e Environmental Consulting
Median 9.2% 9.9% 11.6% 9.2%
Mean 11.2% 9.5% 14.2% 11.2%
Upper Quartile 18.3% 17.1% 22.9% 16.0%
Lower Quartile 1.0% 2.6% -3.3% 5.2%

This healthy industry growth has translated into strong profit margins. The median pre-bonus earnings before interest and taxes reached 13.1% (of net service revenue), driven in part by increased labor multipliers (net service revenue divided by direct labor cost). The median labor multiplier for all firms surveyed increased from 2.96 to 3.07.

Anecdotally, our contacts with firms across the U.S. continue to report healthy growth and record backlogs heading into 2020.  As Oliver Mellows, Principal / Controller of MBH Architects observes, “Opportunity remains abundant and a lot of work is coming our way. Retail remains strong, particularly in the luxury sector, and the developers, who are our canary in the coal mine, still seem to be bullish and are starting long term projects, be it housing or office TI work.”

But such growth has also strained human resources at many firms. The most commonly cited challenge for A/E firms continues to be recruiting and retaining top talent in order to meet the demand for their services. As a result, many firms are re-examining their incentive compensation plans. This year’s study includes an examination of bonus payments in the industry. The study indicates that bonuses and profit sharing payments, measured as a percentage of total payroll (unburdened) averaged a very healthy 13.6%. It will be interesting to see how these levels will trend in relation to industry growth.

If you’d like to learn more about these and other performance trends, the seventh edition of the study includes 23 different financial benchmarking metrics. The study also examines business valuation and merger & acquisition transaction data from over 261 distinct stock transactions collected via a confidential online survey.  For more information, visit https://rog-partners.com/aestudy/.