This was originally published by our assistant managing editor Sean Tucker
The federal government is expected to cut spending and reduce the number of contracts it issues in coming years — even in fields that have seen rapid growth over the last decade. For architecture, engineering and construction (A/E) contractors, this means a tough, competitive new climate and a need for new strategies.
That’s the key lesson A/E firms learn in a new industry report from Deltek. The Federal Architecture and Engineering Market Outlook, 2011-2016, forecasts federal spending on construction and infrastructure projects over the next five years, as budget pressures are expected to force a contraction in total government spending.
Federal spending on A/E contracts will continue to grow despite pressure for budget cuts, according to report author Angie Petty, Deltek’s Principal Analyst for the A/E industry. But growth will not come at the comfortable rate companies have grown accustomed to.
Deltek predicts growth to $9.5 billion by 2016: a compound annual growth rate (CAGR) of just 3.2 percent. The market will soften first, but begin to rebound for the 2014 fiscal year, Petty says, “due to a number of factors, including the age of federal buildings and structures. At that point, there is some work that can’t be avoided.”
The Departments of Defense (DOD) and Homeland Security (DHS) will continue to lead federal spending on A/E projects, but both are expected to cut back on their total spending. Priorities will shift, with DOD focusing its efforts on civil works, barracks, training facilities and facilities for military families.
“Military construction funds will shift,” Petty explains, “because of the pullback in Iraq and Afghanistan and the end of the 2005 Base Realignment and Closure (BRAC) initiative. Money will be spent, instead, on the needs of military families such as housing and daycare facilities, and on barracks and training facilities. There will also be some growth in Army Corp of Engineers spending on civil works.”
A Shift in Spending Patterns
The biggest change A/E firms can expect, however, may not come in total dollars spent, but in how that spending is targeted — and how they should position themselves to win it. Petty explains, “Helping the agencies with their portfolio right-sizing initiative will be key. Agencies will need help analyzing the structures and buildings within their portfolio and trying to make decisions about their future needs.”
“That helps firms that can provide services that aren’t necessarily going to result in a construction contract.”
Agencies will attempt to maintain and rehabilitate property and structures rather than build new ones. Projects to restore and expand aging infrastructure will take precedence over new construction, the report says.
Successful A/E firms will develop an expertise in maintenance, repair and renovation.
A large-scale government effort to trim the number of federal data centers and an Office and Management and Budget (OMB) initiative aimed at moving agencies toward cloud computing will create new opportunities for A/E contractors with expertise in dealing with IT and communications solutions, though they may be heavily-contested opportunities.
Those new projects that are funded will include a focus on energy efficiency, total cost of ownership, facilitating telework and other cost-saving measures.
Bidding on Cost
Cost will become more important in the bidding process, Petty says.
“Cost isn’t everything in this market. But, because of budget pressures, some of the agency officials that we talk to are placing a lot more emphasis on cost today than they have in the past. Firms need to be conscious of that and try to get their multipliers down to stay competitive.”
A continued trend toward design-build projects and experimentation with public-private partnerships mean that A/E firms will also have to assume more risk, the report says.
The full report is available from Deltek now. In addition, a free executive briefing report summarizes some of the key findings from the report. Kevin Plexico, Deltek Senior Vice President of Research and Analysis Services, will also host a webinar to discuss trends in the federal A/E marketplace on August 30.
Sean Tucker covers the federal government and the contracting industry for GovWin, a Deltek network that helps government contractors win new business every day. He can be reached at [email protected].