Pulse of the civil engineering industry

March 2011 » Resources » SURVEY
Market uncertainty tempers optimism for recovery
Bob Drake

By many measures, the economy in the United States is improving. Results of CE News’ third annual Pulse Survey mirror that sentiment as indicated by the increasing number of respondents who expect the AEC industry to grow in 2011 as compared with 2010 (see Figure 1).

Figure 1: Do you anticipate that the AEC industry will grow, shrink, or remain the same in the next year?
Figure 2: How do you anticipate your firm’s total revenue for engineering services in the next year will compare with the prior year?

However, that optimism is tempered industrywide by greater uncertainty (see Figure 2), perhaps influenced by several years of disappointed expectations and current political turmoil that threatens to derail public infrastructure investment, considered by survey respondents to be the most important issue for the civil engineering industry (see Table 1).

Table 1: How important are the following issues to the civil engineering industry?
Important or Most important
(percent of respondents in 2011)
Important or Most important
(percent of respondents in 2010)
Important or Most important
(percent of respondents in 2009)
Funding for public infrastructure projects
Funding for private projects
Engineering firms’ ability to improve worker productivity
Engineers’ ability to keep abreast of code/regulatory changes
Recruiting and retaining talented civil engineers
Industry’s ability to leverage technology effectively
Litigious AEC environment
Rising cost of construction materials

The Obama administration’s fiscal year (FY) 2012 budget, released in mid-February, proposes an aggressive infrastructure spending program including the following:

  • $70.5 billion in FY2012 and $336 billion during the next six years to rebuild bridges and roads, a 48-percent increase compared with the previous authorization;
  • $22.4 billion in FY2012 and $119 billion during six years — a 128-percent increase — to support public transit, including funding for 10 new transit construction projects, 11 projects previously recommended but not yet receiving federal money, and seven rail transit projects already operational or under construction;
  • $8 billion in FY2012 and $53 billion during the next six years to construct a national high-speed and intercity passenger rail network, including funding for Amtrak and for new “core express,” “regional,” and “emerging” corridors;
  • $5 billion in FY2012 and $30 billion during six years to establish an infrastructure bank that would provide credit assistance in the form of grants and loans to leverage transportation dollars; and
  • $2 billion in FY2012 for a National Infrastructure Investments grant program, similar to the American Recovery & Reinvestment Act’s (ARRA) Transportation Investment Generating Economic Recovery (TIGER) program, to provide grants to state and local governments and transit agencies for capital investments in roads, public transportation facilities, freight and passenger rail, and port infrastructure.

However, the Obama administration’s budget proposals for transportation investment may just be infrastructure pie-in-the-sky. The Republican-led House of Representatives is bent on drastically reducing federal spending, including cutting $100 billion in discretionary spending during FY2011. Even annual appropriation levels for transportation projects appear endangered, which bodes ill for Obama’s generous infrastructure spending plans.

“The president’s budget will destroy jobs by spending too much, taxing too much, and borrowing too much,” said Speaker of the House John Boehner. He said that Republicans would, in the coming weeks, offer “a comprehensive budget for the next fiscal year that will contrast sharply with the president’s job-crushing FY2012 budget.”

According to the American Road and Transportation Builders Association (ARTBA), continuing budget challenges for state and local governments, uncertainty surrounding a new long-term federal surface transportation bill, and winding down of infrastructure investment under the ARRA will result in a 4.4-percent decrease in the U.S. highway and bridge construction market in 2011.

“Although state and local investment typically accounts for 57 percent of the value of construction work, this percentage fluctuates and the state and local market share will often decline after a recession,” said ARTBA Vice President of Policy and Senior Economist Alison Premo Black. “States also tend to hold back on larger projects and simply maintain their programs until they know the new transportation funding levels from the federal government.”

Accordingly, CE News survey respondents’ expectations for the highway and bridge markets — although topping the list of sectors with the greatest growth potential — have been steadily declining during the last three years (see Table 2). Fewer than half of respondents identified highways as a market showing the greatest growth potential in 2011, compared with two-thirds of respondents in 2009.

Table 2: What markets or sectors show the greatest growth potential?
Sector Percent of respondents in 2011 Percent of respondents in 2010 Percent of respondents in 2009
Highways 49% 53% 67%
Alternative energy (wind, geothermal) 49% 53% N/A
Bridges 43% 47% 49%
Roadways 38% 42% 44%
Stormwater 34% 35% 33%
Wastewater 31% 36% 43%
Environmental (groundwater, soil remediation, landfill) 30% 25% 33%
Rail 29% 41% 29%
Potable water 28% 30% 32%
Transit 26% 33% 37%
Non-residential/commercial 23% 15% 15%
Hydrology (stream, channel, river) 16% 17% 14%
Industrial 13% 9% 12%
Mining 13% 5% 2%
Airports 11% 14% 14%
Residental 11% 7% 6%
Community masterplan design 10% 10% 8%
Dams 10% 8% 6%
Other 8% 6% 10%
Marine construction 8% 4% 4%
Tunnels 4% 4% 4%

Water markets
About a third of respondents to the CE News survey expect stormwater, wastewater, and potable water markets to show the greatest growth potential in 2011 (see Table 2). This is similar to expectations in 2010 and 2009. Nevertheless, according to The Zweig Letter, increasing regulation and a new focus on efficiency are turning the water market into one of the hottest commodities for engineering firms. “A reinvigorated focus on water conservation, new supply sources, and water efficiency installations throughout the United States are opening up major new business opportunities for consulting engineering firms beyond the traditional water/wastewater storage, treatment, and conveyance systems,” the newsletter asserted. “Also, a difficult funding environment in Washington, D.C., will force players in the market to come up with innovative solutions.”

Certainly, water markets have significant needs. According to the National Association of Clean Water Agencies (NACWA), the U.S. Environmental Protection Agency (EPA), the government Accountability Office, and the Water Infrastructure Network estimate a $500 billion funding gap during the next 20 years between what the nation needs to upgrade and repair its wastewater infrastructure and the amount of funding available at all levels of government. However, the Obama administration proposed only a $2.5 billion budget — a decrease of $947 million (27-percent decrease) — for the combined Clean Water and Drinking Water State Revolving Funds in FY2012. At the same time, EPA enforcement and compliance budgets would receive a $27.5 million increase.

The NACWA said in a statement that it “strongly believes that budget cuts of any kind at this time to the Clean Water Act (CWA) program ignore the very real financial constraints of states and municipalities to implement a growing array of increasingly costly CWA requirements.”

Non-residential/commercial markets
A smaller but increasing (compared with previous years) number of survey respondents picked non-residential/commercial construction as a sector showing the greatest growth potential in 2011. Recent statistics offer some evidence of a strengthening market. The Associated Builders and Contractors’ (ABC) Construction Backlog Indicator (CBI) averaged 7.1 months in the fourth quarter of 2010, up from 7 months in the third quarter of 2010 and 21.3-percent greater than the CBI’s average of 5.8 months in the fourth quarter of 2009.

“During the fourth quarter of last year, sources of economic improvement and growth expanded to include additional retail segments, rapid export growth, and an uptick in business investment,” said ABC Chief Economist Anirban Basu. “At the same time, improvement in commercial and institutional construction became more apparent as backlog in these two sectors rose to the highest level in the history of the series.”

According to Basu, ABC’s fourth quarter 2010 data shows that the economy is increasingly shifting toward private-sector momentum and away from public-sector dependence.

Ken Simonson, chief economist for the Associated General Contractors of America, said the outlook for 2011 is mixed. “Spending on rental housing, warehouses, hospitals, and factories should pick up,” he said. “Power construction should stay strong, and federal dollars for stimulus and base realignment or ‘BRAC’ projects will continue to sustain some contractors. But public school construction and other state and local projects will keep shrinking, while single-family homebuilding, retail, and office construction are likely to remain feeble.”

IHS Global Insight, an economic and financial information research firm, expects non-residential construction, excluding infrastructure, to see “significant improvement” in 2011. In conjunction with second-half gains in residential and commercial building, this should support a flat growth rate for construction spending overall in 2011, the firm said.

Challenging times
Civil engineers responding to the CE News survey sounded somewhat optimistic this year, compared with the two previous years, however, challenges remain. By a wide margin, the greatest challenge facing respondents’ firms is maintaining a backlog — 59 percent of respondents said so, compared with 56 percent in 2010 and 52 percent in 2009. The next greatest challenge is maintaining clients, as indicated by 13 percent of respondents this year.

The backlog challenge is intensified by the fact that 80 percent of respondents said they have experienced projects going on “hold” during the last six months. While this is fewer than in 2010 (86 percent) and 2009 (90 percent), it remains a significant problem.

Nevertheless, 27 percent of survey respondents optimistically forecast that their firms’ total revenue for engineering services will increase in the next year compared with last year (see Figure 2). A year ago, 23 percent of respondents anticipated increased revenue. An equal proportion of respondents (27 percent) expect decreased revenue this year compared with 36 percent of respondents last year.

While many civil engineering firms’ financial situations are beginning to recover, staffs remain on edge. More than half (53 percent) of the respondents to the CE News survey said they are dissatisfied with the way things are going at their organizations, essentially unchanged from 2010 (56 percent) and 2009 (54 percent). Perhaps fueling that dissatisfaction is the fact that 44 percent of respondents said they have experienced a layoff or downsizing event at their firm during the last six months. While that is down from last year (58 percent), it remains high.


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