Overcoming AEC Industry Challenges in 2024
What is the mindset of the AEC industry as we begin 2024? In late 2023, Stambaugh Ness conducted our second annual industry outlook survey to determine the pulse of the industry, and we shared our findings in a webinar and two blog posts.
The first post, New SN Research Sheds Light on State of AEC Industry Heading Into 2024, focused on the identified challenges that were top-of-mind for architecture, engineering, construction, and environmental firms headed into the new year. The second post, State of AEC Industry Headed Into 2024 (Part 2), looked at the revenue expectations for year-end 2023 and first half of 2024, as well as whether or not survey participants were anticipating an economic downturn this year.
For this series’s third and final post, we will explore how firms are positioning for challenges in 2024. Roughly half of the participants in our survey identified that they are either expecting a downturn in revenues in the first half of 2024, anticipating an economic recession over the next six months, or both. For those firms, we wanted to know what steps they were taking to address the anticipated revenue decline or challenging economic environment.
Expanding Marketing & Business Development
As you might expect, the most common steps fall under the marketing and business development umbrella, with 44% of firms looking to pursue more project opportunities in their existing market sectors. This statistic is down slightly from last year when 48% of firms identified this approach. Likewise, 37% of participants identified that they are pursuing project opportunities in new market sectors, the exact figure as the prior year. Expanding overall marketing efforts ranked fourth this year, with 36% of participating firms utilizing this strategy. Interestingly, last year, the number was 44%, so we’re seeing a decline in the number of firms increasing marketing activities.
Marketing too often takes a back seat when times are good – as they have been for many firms (and will continue to be for many firms, particularly those benefiting from IIJA-funded projects). Companies are busy and not concerned about the next project – or the project after that. Unfortunately, the AEC sales cycle doesn’t allow for on-demand sales when needed. It’s not like a firm can mark down their “product” to drive sales. Have you ever seen an engineering firm offer deep Black Friday discounts? No, the sales cycle may run two, three, or even five years from when a prospect is identified to when the first contract with them is signed. Sure, a firm can respond to a published advertisement for a government project, but their odds of success are quite low if they have yet to do extensive, sustained pre-positioning.
The AEC industry is notorious for its “peaks and valleys” in workload, meaning intentional, continual marketing is necessary – whether a firm is busy or not. Focusing on existing market sectors – the number one survey response – is a sound strategy, as it is easier to sell an existing service in an existing market than it is to sell an existing or new service in a new market sector. And yet, if a company has already saturated its markets or its market sectors are experiencing a downturn (like commercial development right now), it must expand into new market sectors.
Improving Project Financial Performance
However, the second most common strategy was not marketing-related but rather about improving project financial performance. There continues to be a productivity problem in the built environment, and better managing projects to drive profits is still a lower-hanging fruit for many firms. As referenced in the prior blog posts, the challenge of the “missing middle” is present in half of the companies in our survey, creating myriad issues. Senior firm leaders and project managers may be retiring, with no one to take on their responsibilities – recruiting new staff is still the industry’s top challenge. Younger staff members have been rapidly pulled into positions of project authority but have often not been given the proper training required to lead projects and manage budgets. So, firms see opportunities to improve project financial performance to deal with an economic downturn or forecast revenue decline.
Interestingly, in last year’s survey, 58% of companies identified improving project financial performance as an approach to navigating expected revenue declines or an economic recession. The drop from 58% last year to 40% this year is significant. As Stambaugh Ness Director of Transition Solutions Brad Wilson, CMA, MBA notes: “Let’s hope that all those firms have taken steps the past year to improve their project financial performance, but I’m skeptical that has actually occurred at most firms.” Rounding out the Top 5 most common approaches was strategically hiring staff to drive more opportunities and corporate growth, identified by 30% of survey respondents. This statistic also significantly dropped over last year, down from 47% of survey respondents a year ago. This decrease could indicate some belt-tightening at firms as 28% this year identified cutting non-staff expenses as one of their approaches—up 10% over last year—and 25% plan to cancel or postpone significant investments, up a modest 3% year-over-year.
Rounding out the top 10 approaches are:
- Cross-training staff in other areas (24%).
- Raising fees (23%).
- Expanding the seller-doer approach (21%).
Are you interested in learning more? If you didn’t have a chance to check out our recent webinar, Annual AEC Outlook: Looking Toward 2024, you can now watch it on-demand. Brad Wilson and I delve into the survey data and the current AEC marketing indicators. And if you are trying to sort through all the disruption to focus on your 2024 annual plan or long-term strategic plan, Stambaugh Ness can help with that. Whether guiding strategic or business planning, facilitating trends workshops, or helping you improve your profitability, business development, or overall firm performance, reach out and let’s discuss your current challenges and opportunities for improvement and growth.