Every year PSMJ does a forecast of the various architecture, engineering, and construction (A/E/C) markets. This year, we present PSMJ’s A/E/C Market Outlook: How do the A/E/C Markets Look in 2016 and Beyond? This report covers A/E/C industry and market trends for 2015 and 2016. We begin by looking at trends in the overall economy–especially those trend that affect A/E/C firms. Next, we detail what is happening specifically in the A/E/C industry right now. Then we present our outlook for next year and beyond—what we think is going to happen in the various market sectors. We look at which markets are up and which markets are down. And finally, we conclude with recommendations on what A/E/C firms should to do to be successful in 2016 and beyond.

1. How do the A/E/C
Markets Look
in 2016 and
Beyond?
By David Burstein, P.E.
PSMJ Resources, Inc.
PSMJ’s
A/E/C Market
Outlook

2. INTRODUCTION
Every year PSMJ does a forecast of the various architecture,
engineering, and construction (A/E/C) markets. This year, we
present PSMJ’s A/E/C Market Outlook: How do the A/E/C
Markets Look in 2016 and Beyond? This report covers A/E/C
industry and market trends for 2015 and 2016.
We begin by looking at trends in the overall economy–especially
those trend that affect A/E/C firms. Next, we detail what is
happening specifically in the A/E/C industry right now.
Then we present our outlook for next year and beyond—what we
think is going to happen in the various market sectors. We look at
which markets are up and which markets are down.
And finally, we conclude with recommendations on what A/E/C
firms should to do to be successful in 2016 and beyond.
We hope that you find this report helpful in your planning for 2016.
For more information and additional resources, please contact us
at 617-965-0055 or www.psmj.com.
2

3. I. Trends in the overall economy 4
II. What’s happening to the A/E/C industry now? 11
III. Which markets will be up and which will be down? 22
IV. What should you do? 43
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CONTENTS
3

4. If you listen to all of the candidates in the various states, there is a lot of anger
about our economy. The way that they talk, you’d think we are going down the
tubes. However, the data doesn’t actually support that view.
I. Trends in the Overall Economy
4
There’s a lot of anger about our economy
Let’s start with trends in the overall economy, especially those the affect the
A/E/C industry.

5. If you look at 2015
GDP, North America
has some of highest
growth rates in the
world.
The only areas that have higher
growth rates are China, Sub-
Saharan Africa, and Middle
East/North Africa. They are so
high, because they have a lot of
catching up to do. If you look at
the US and Canada, we have the
highest growth rates in the
industrialized world.
.
Also, we are seeing a
substantial decrease
in jobless claims.
This is the real harbinger of
what’s going to happen to the
overall economy. The most
recent number of jobless claims
(in Sept. 2015) is actually the
lowest it has been since the U.S
began to gather this information
back in the 1960s. Fewer
people are applying for
unemployment insurance than
have ever applied since it
began.
5

6. The reason it is not
disastrous is very
interesting.
What you find is that spending
has actually been quite flat.
What you see here is that since
the end of the recession, there
has been virtually no increase in
federal spending, while there has
been a big increase in revenue
from tax collection as the
economy improves. Most of the
reduction in the deficit, which
has gone from 10% to 2.5%, is
due to spending cuts as a result
of the sequester.
6
There is also the
perception that the
country’s debt and
deficit is completely
out of control.
Our debt is too high, but in terms
of the actual deficit—how much we
are over-spending as a share of
gross domestic product—is
actually pretty reasonable. In fact,
what we see now is that our deficit
of 2.5% of GDP is actually below
the average deficit the U.S. has
had since 1975. It’s still a bit too
high in my view, but a long way
from disastrous.

7. Federal expenditure
as a percentage of
GDP has declined.
When you look at current
federal expenditure versus
GDP, you can also see that in
relative terms, expenditures
have actually declined from
over 25% of GDP to a little
over 22%. So since the
recession, the federal
government has been cutting
back.
7
Also household debt
has leveled off a
positive impact.
If you look at household debt
since the recession, you can see
that household liabilities have
leveled off to about $14 trillion.
On the other hand, household
assets since the beginning of the
recession have gone from $80 to
$100 trillion. And so, the ratio of
assets to liabilities has never
been as favorable as it is now.

8. But we have relatively
little exposure.
The good news for us is that we
really are not affected. A few
months ago, there was a big scare
about the drop in Chinese imports,
and what effect that would have on
the world economy. Certainly, in
some countries, it has had a huge
effect. The GDP in Asian countries
especially, is reliant on Chinese
exports. Only 0.8% of the GDP in
North America is from Chinese
exports. So the scare and stock
market plunge was a severe
overreaction, and we have
recovered since then.
8
Import demand in
China is slowing
down.
Everyone seems to be worried
about China taking over the U.S.,
but if you look at this graph (left),
there is a substantial slowing
down going on. What’s keeping
China’s growth up is the financial
sector. When it comes to
construction and industrial
activity, both are declining. Both
are down to below 5%. So we
see a steep reduction in
Chinese demand for imports.

9. But it is not going
happen right away.
The most reliable predictor of
future recessions is what
economists call the “yield curve.”
The signal that it shows now is
not at all like it looked when the
country was going into
recession, as indicated by the
deep red circles.
9
We will have another
recession.
Will there be another recession?
Absolutely! Recessions come
and go. When you are in one, it
feels like it will last forever, and
it never does. When you are in
an expansion, that feels like it
will last forever, and it never
does. We are 74 months since
the last recession, and that is
just a little above the median
duration of recessions since
1960. So we are due for another
recession.

10. A tighter labor market.
The biggest problem we see in
today’s economy is that the labor
market is tighter. You can see in
this survey by the National
Federation of Independent
Businesses, that the percentage of
small businesses reporting few or
no qualified applicants for job
openings is approaching 50%. This
is higher than it was before the
recession.
10
Most sunny with a
few clouds.
Basically, we find that in
2016, we’ll have pretty good
economy!
So our prediction for the U.S. Economy in 2016 is:
The biggest problem in today’s economy is:

11. II. What’s Happening in the A/E/C Industry
Now?
11
To start, we look at financial trends in the A/E/C
industry now, as reported in PSMJ’s 2015 Financial
Performance Benchmark Survey Report.

12. Revenue also
continues to grow.
Based on our 2015 Financial
Performance Benchmark
Survey Report, we can see that
revenues are also increasing. In
fact, in the past year, revenues
increased to a high of about
10% for the median A/E firm .
Firm staff continues
to grow.
Based on our 2015 Financial
Performance Benchmark
Survey Report, we can see
that firm staff has been growing
over the past few years. In fact,
in this past year, we had a
median staff growth rate of
almost 4%. The big drops in
staff seen in previous years
have definitely turned around.
12

13. Group insurance
costs have leveled off.
Interestingly, if you look at group
insurance costs per employee
(which is another big overhead
factor), you can see that it
increased pretty steadily from the
1980s to the 1990s, but then
accelerated from 2000 through
2009.
But since then, group insurance
costs per employee have actually
leveled off. And so, we are not
seeing the same kind of
inflationary pressure on firms.
This does not include how much
employees are spending, and is
just the firm portion. But you can
see that it’s leveled out, and will
stay level for a while.
Utilization continues
on a downward trend.
We can see that labor utilization
has been on a long-term down-
ward trend, beginning in the
1990s. A couple of things are
happening:
One is automation: As CAD came
about in the 1990s, fewer drafters
were spending 40 hours a week,
week after week, on projects.
More and more of that work was
done by CAD systems, so the
number of labor hours charged
declined.
Another overhead factor has
crept in: information technology.
Now most firms not only have a
IT director, but they have a full IT
department. And IT staff is not
chargeable. So that’s the biggest
reason for the decline in
utilization. And with BIM coming
into play, we expect to see that
continued downward trend.
13

14. A comparison of target
multiplier vs. break-
even multiplier is
revealing.
Here, you can see that, for many
years, the target multiplier (green
line) for the A/E industry has stayed
at a median of 3.0. It went up a little
bit, but has settled at 3.1.
The break-even multiplier (red
dashed line) is the overhead rate
plus one, and so you can see that it
has been on the same upward
trend.
We haven’t been seeing the
increases in the target multiplier
nearly to the extent that we have
seen increases in the break-even
multiplier.
Overhead rates are
creeping back up.
Because overhead rates are tied
very closely to labor utilization, the
long-term decline in utilization is
manifesting itself as a long-term
increase in overhead rates. Again,
because of automation, and as
health insurance rates start to go
up, we expect to see a continuation
of the increase in overhead rates.
14

15. That means that target
margins have shrunk.
If you go all the way back to 1978, when
PSMJ first started doing these surveys,
what you find is that difference between
the target multiplier and the break-even
multiplier. So for every dollar of labor,
there was $1.25 of overhead, and $.75
in targeted profit. Today, for every dollar
of labor, there is $1.61 of overhead, and
only $.49 in targeted profit. Although
target multiplier is higher, target profit is
lower. Overhead rate has gone up faster
than the target multiplier.
However, that has been
offset by another factor:
If you look at the achieved multiplier
compared to the target multiplier,
the gap, which we call net revenue
deficit, has gotten smaller as firms
have gotten better at managing
their projects. That gap is now
almost closed. That means that, as
an industry, we are doing a better
job of achieving the target multipliers
we set out to get.
Meanwhile, net payroll
multiplier has been on
the rise.
If we look at net payroll multiplier
(also known as revenue factor,
which is utilization x multiplier or
could be calculated as net revenue
divided by total revenue), you can
see that we bottomed out during the
recession, but have been gradually
increasing to 1.80 in 2015. Not quite
up to peak levels, but we’re doing
better.
15

16. Profitability is nearing
pre-recession levels.
And if you look at profitability, it
follows a very similar path.
Profitability is very highly
correlated with revenue factor,
and you can see it is coming
back to historical levels. When
we get this year’s financial
performance results, I am
personally expecting that
profitability will be at or above
what it was industry-wide
pre-recession.
Return on equity is
also increasing.
When we look at return on
equity, which is profit for each
dollar of shareholders’ equity, we
can see that it is also returning
close to pre-recession levels,
almost 20%.
16

17. 17
PSMJ
Survey
 PSMJ conducts
quarterly market
surveys as a free
service to the industry.
 Input is restricted to A/E
firms.
 200-500 people
respond to these
surveys.
 We use this data to
chart trends using a
“Plus/Minus Index”.
PSMJ’s Quarterly
Market Surveys
Next, we look at financial trends in the A/E/C industry
as reported in PSMJ’s Quarterly Market Surveys.

18. 18
How We Compute the
“Plus/Minus Index”
Sample Question: Are revenues in the transportation sector
increasing or decreasing compared to last quarter?
Sample Calculation:
Total firms reporting = 185
Firms reporting an increase = 60 firms x 1 points = +60
Firms reporting no change = 80 firms x 0 points = 0
Firms reporting a decrease = 45 firms x -1 points = -45
Total “points” = +15
Index = 15 ÷ 185 = +8%

19. 21 consecutive
quarters
of increasing A/E
firm revenues…
If we look at revenue, what we
see is that there has been 21
consecutive quarters where
more A/E firms are seeing
increases in revenues rather
than decreases.
…Have resulted in
more backlog
Ongoing increases in revenue
have resulted in more firms
seeing increases in backlog.
…Creating optimism
about the future
Increased backlog has created
optimism about the future,
because firms are continuing to
project increases in revenue.
19

20. When Planning
Your Firm’s
Strategy…
“Don’t skate to where the
puck is. Skate to where
it’s going to be.”
-- Wayne Gretzky
In other words: Look at
where things are going to be
in the future, and plan your
strategy to that, rather than to
where things are today.

21. We find that most predictions are wrong for two reasons:
People tend to look at
lagging indicators.
Lagging indicators are things that
tell you what’s happening today
or yesterday, in some cases. You
should be looking at leading
indicators, things that can tell you
what’s happening tomorrow.
They extrapolate the
past into the future.
Just because there is a trend in
the past, you cannot extrapolate it
into the future, because it does not
necessarily happen the way it was
projected.

22. Instead, we look at two things:
We look at leading indicators and we look for turning points - where the
trends of the past has changed and gone in a different direction.
Turning Points

23. A/E proposal opportunities are the most leading
indicator.
We find that the top leading indicator for A/E firms is proposal opportunities.
When firms see more proposal opportunities that means that eventually A/E firms
will win more projects. This will increase their backlog, and then increase their
revenue. More proposal opportunities will also increase the cash flow for A/E
firms, and ultimately revenues and cash flow for construction firms.
23

24. 24
A/E proposal
opportunities
continue their
upward trend
When we look at proposal
opportunities over the past
quarters (and we started
doing this in 2003, so there is
a lot of data to look at), we
see a continued increase in
the optimism of firm, and how
they see proposal
opportunities. In fact, what
you see is that proposal
opportunities are on an
upward slope. Not only are
firms optimistic, but they seem
to be increasingly optimistic,
based on the number of
proposal opportunities they’re
reporting.
All regions are
showing substantial
increases
If you look at proposal trends
regionally, there are very strong
results in all the regions. Canada
is the weakest region (33%), but
even in Canada, things are very
positive.

25. Now, we will look at what
markets are up and which
markets are down.
III. Which A/E Markets Are…
25
Let’s Look Closer at A/E Proposal Activity
Following is an outline of
proposal activity in all major
markets overall and by region.
We also look at which
submarkets are up or down.
All data was gathered in
PSMJ’s Quarterly Market
Surveys.

26. Energy/Utilities
Submarkets
Renewable energy
Power plants
Utility distribution
Telecom/cable
Pipelines
In All Regions
26
Energy/Utilities Market Remains Strong

27. Especially in Canada
27
The Heavy Industry Market is Slowing

28. In All Regions
Light Industry Looks Better
28

29. Industrial Submarkets
29
Mining and resource extraction
(including oil)
Primary materials manufacturing
Petroleum facilities
Pharmaceutical manufacturing
Chemical plants
Component assembly (including
telecom)
Warehouse/distribution facilities
Repair/service facilities

30. In All Regions
30
The Housing Market is Very Strong
Other Housing
Submarkets
Condominiums
Multi-family housing
(apartments)
Single family homes
Senior and assisted
living

31. In All Regions
31
The Commercial Markets Have Fully Recovered
Commercial
Submarkets
Office Buildings
Retail Buildings (for lease)
Warehouse & Distribution
Facilities
Restaurants
Hotels/motels
Retail Buildings
Call Centers & Data
Facilities

32. All Regions Are Still Strong
32
Environmental Markets May be Slowing
Environmental
Submarkets
Waste disposal (landfills,
etc.)
Wetlands delineation
Site characterization
Site cleanup
Environmental permitting
Resource management
Air pollution

33. In All Regions
33
The Healthcare Market Remains Strong
Healthcare
Submarkets
Hospitals
Medical offices
Continuing care facilities
Medical laboratories

34. There is another factor involved: If you go back to 2007, you can see that the
average firm that specialized in the healthcare market had about 8% higher
profitability than the average A/E firm overall. Fast forward to 2014-2015, profits
for firms that specialize in the healthcare market are less profitable than the
average firm overall. This indicates that, although the market is strong, the
number of firms going into the market is growing faster than the market itself is
growing.
But the profit premium for healthcare firms is gone.
34

35. The recession hit the
public sector hard
If you look at the effect of
recessions on the public sector
market, what you see is that this
recession has had the biggest
effect on the public sector. The
number of public sector payroll
jobs has dropped lower than any
other recession, and it is slower to
pick up. So you know that, if
public sector agencies are cutting
their own payrolls, they are in
trouble. And probably won’t be
giving out work.
But government
finances have
Improved.
However, government finances
have improved on the federal level.
You can see that the budget deficit
has gone from 10% to 2.5% of GDP.
Recovery has begun.
If you look at employment in local
government in utilities, you can see
it has been recovering since then–
even though it took a big hit from
2009 to 2013.
In the Public Sector
35

36. Every U.S. Region is Moderately
Strong
36
The Transportation Market is Improving
Transportation
Submarkets
Transportation planning
Roads
Airports
Bridges
Traffic
Rail

37. All Regions are Strong
37
The Education Market is Growing
Education
Submarkets
K-12
Laboratories
Support facilities (gyms,
dorms, libraries, etc.)
Higher education

38. All Regions are Strong
38
Water/Wastewater Continues Strong
Water/Wastewater
Submarkets
Water supply
Water distribution
Water treatment
Wastewater collection
Wastewater treatment
Wastewater reuse

39. Except in Canada
39
Other Government Buildings Are (Finally) Beginning to
Recover
Other Government
Buildings
Submarkets
Public Safety
Public Recreation
Justice Facilities
Sports Facilities

40. Summary of Proposal Plus/Minus Index
Housing
Commercial Users
Commercial Developer
Light Industrial
Heavy Industrial
Energy & Utilities
Water/Wastewater
Environmental
Education
Transportation
Other Gov’t. Buildings
Health Care
0-20-40-60-80 +20 +40 +60 +80 +100-100
0-20-40-60-80 +20 +40 +60 +80 +100-100
40

41. The Hottest Submarkets
If you look at the submarkets, the hottest right now is continuing care facilities,
followed closely by retirement/assisted-living facilities. As the population ages,
there is a lot of demand in those markets.
41

42. Profitability is also important.
You need to get an idea not only of how good market sectors are from a revenue
standpoint, but also of how profitable each market sector is—in comparison to the
median profitability in the A/E industry overall.
In the chart below, we have gone back five years, looking at markets where firms
are less profitable (red), where firms are somewhat less profitable (pink), where
firms are somewhat more profitable (light green), and where firms are significantly
more profitable (dark green).
42

43. To winning the war for talent
43
IV. So What Should Our Firm Do?
We believe you need to move your focus:
From winning the war for clients

44. Reason #1: Firms Are Growing Again,
Increasing the Demand for Talent
Source: U.S. Department of Labor
Employment in U.S. A/E Industry
As you can see in the chart below, we reached a peak of 1,450,000 employees in
the A/E industry before the recession. We are coming pretty close to reaching that
peak right now.
44

45. Reason #2: The Long-term Decline in
Employee Turnover…
If you go all the way
back to 1985…
Do a little regression, and you
can see that the average
employee turnover has declined
from about 40% a year to about
12% a year in 2015. It looks like
there has been a huge decline
in turnover.
45
If you look at it a bit
differently…
Based on a three-year moving
average, what you find is that
the trend in turnover decline
has reversed. There is a turning
point in recent years, where we
see employee turnover is going
up. That creates additional
demand for people.
…May Be Coming to an End

46. Reason #3 – Boomers Are Beginning to Retire
Back in 1900, only 6.2% of the population was over 65. By 2000, that was up to
16%, and by 2050, it will be almost a quarter of the population (23.8%).
46

47. Reason #4: There Are Big Gaps in Supply
Source: American Society for Engineering Education
Civil engineering
as an example:
You can see that if you are
looking for a civil engineer,
with about 10-15 years of
experience, they are just not
out there because few
graduated in 2001-2005, for
example. There is an upswing
in people getting degrees but
a big gap in experienced
people.
Architecture is not
as extreme.
However, there is definitely a
big gap in people with about
10-15 years of experience.
They are not out there
because fewer graduated in
1996-2001. And architecture
degrees have actually been
declining recent years.
47

48. Are we attracting the best and brightest new grads?
Sources:
2014 Salary
Survey, National
Association of
Colleges and
Employers
2014 PSMJ Staff
Salary Survey
Another thing you need to consider is that you are not just competing for graduates
with other A/E firms. You are competing with all kinds of industries. Here, we look
at two sets of data: The blue bar is data from the National Association of Colleges
and Employers. All of their median starting salaries are higher than the top 25%
A/E firms. Even the top quartile of A/E firms are paying less than the median for all
employers.
48
Experienced
Professionals
(who are retiring)
with New Grads,
(of which
there are a
surplus)
Reason #5: You Can’t Simply Replace…

49. 49
What happens if you raise salaries while holding
prices steady?
The answer is that your profit margins, which are thin enough right now, will
become even thinner. And if you raise salaries a lot, they will fall into the
negative. That’s really not a solution.
How many of you have…
• Raised your prices in the past 2 years?
– A number have raised their hand and said yes.
• Regretted doing so because you lost too much work?
– Of all of those firms that raised their prices, only two said they lost business.
Raise your fees and offer higher salaries to attract the
best and brightest!
For all these reasons you need to look to
winning the war for talent.
I have asked this question of many
firms:
So the conclusion is:

50. ABOUT PSMJ
Over 40 years of helping
A/E/C firms achieve
business success.
PSMJ Resources, Inc. is the world’s leading
authority, publisher, and consultant on
the effective management of architecture,
engineering, and construction firms.
With offices in the United States as well as
the United Kingdom and Australia, PSMJ
offers over 150 titles in book, audio, and video
format.
In addition, the company publishes several
monthly periodicals and delivers dozens of
seminars, roundtables, conferences, webinars,
and in-house training sessions every year for
A/E/C professionals around the world.
PSMJ’s sought-after consulting expertise
covers a range of critical business areas such
as strategic planning, project management,
valuation, succession planning, and mergers &
acquisitions.
PSMJ is also active within the community,
utilizing our resources and the contacts at our
fingertips within the A/E/C Industry to help
those in need.