This is a guest post by Gerry W Devine, MBA, P.E
After a 45-year career in the architecture, engineering, and construction (AEC) industry, I’ve decided to blog on AEC innovation, entrepreneurship, and industry disruption. This article provides a high-level overview of my blog and future posts.
Purposes of AEC Project Value Chain Blog
My prime purposes are:
- To help project owners understand the benefits of retaining AEC firms to develop their capital projects by using their business, economics, finance, and risk management expertise and their technical expertise rather than retaining traditional accounting, audit, and advisory firms.
- To contribute to the capacity of the AEC industry by thinking strategically and talking value creation for firms and client organizations alike.
- To attract and retain architects, engineers, and related professionals in the AEC industry by offering career ladders to advisory services that are personally, professionally, and financially rewarding.
The Project Value Chain
The AEC project value chain is the sequence of services sold to customers as shown in the illustration below. Adding new value can occur at all stages of the project life cycle.
For AEC firms, the various activities in the project value chain include:
- Generating project ideas to solve a client’s problem or respond to an opportunity
- Determining the appropriate ownership and operating model (g., public ownership, share capital corporation, joint venture, special purpose company, essential service corporation, public-private-partnership, co-operative, not-for-profit, etc.)
- Identifying and evaluating alternatives
- Determining if the client lease, acquire, build new, modernize and expand, or renew an asset
- Undertaking technical work for planning purposes to establish project scope, cost, and schedule
- Completing feasibility studies to determine if proposed projects are technically feasible
- Preparing pro-forma cash flow and cost benefit analyses
- Identifying sources and uses of funding and financing
- Identifying and analyzing project risks
- Selecting the preferred alternative that is financially viable, technically feasible, and socially responsible
- Preparing a business case to compete for funding and financing from scare resources
- Prioritizing capital projects seeking scarce capital resources
- Providing architectural, engineering, and environmental design services for approved projects
- Providing construction-related services to implement the approved project
- Providing asset management services for the built environment
- Providing services to dispose or recycle the capital asset
- Providing a full spectrum of program and project management services
Why is the AEC project value chain important?
The project value chain provides a blueprint to think strategically and focus on adding new value to clients, grow current AEC services, and expand into new services.
Providing advisory services throughout the AEC project value chain is important:
- Project development advisory services including business, economics, finance, and risk management services introduce AEC firms to executive and senior leadership in client organizations when preparing a project development strategy, an environmental permitting strategy, a bankable feasibility study, or a business case for a proposed capital project.
- Early-stage advisory work increases the likelihood of projects getting funded because bundling these services from a single firm versus several separate firms opens the door to creative and innovative problem-solving.
- Early-stage advisory services for design, construction, and capital asset management enable AEC firms to provide additional services downstream in the project life cycle by establishing trusted professional relationships with client organizations prior to the procurement process.
- AEC firms improve their chances of winning proposals, increasing work backlog, increasing project margin, and being cost competitive by doing the work not only faster but better given early project insights.
- Profit margins from traditional A&E design and consulting services often translates to lower billing rates, lower salaries, and higher staff turnover. Advisory services provided prior to capital expenditure approval can command higher margins, higher billing rates, and higher salaries.
- Advisory services establish AEC firms in a leadership role with project owners. By comparison, traditional leadership roles for A&E firms have often been subordinated to construction firms as project owners have searched for more efficient ways to deliver projects on time and on budget.
The project value chain is also important to AEC firms because investments in capital projects are foundational for GDP growth and for creating a better world. The AEC industry has a responsibility to develop sustainable projects in a socially, environmentally, and fiscally responsible manner. Finally, the construction industry has been referred to as a laggard in adopting new technology. The project value chain can be used by AEC firms to move forward with the development of innovative skills, methods, tools, and technologies to support growth opportunities.
Exploring the AEC Project Value Chain
What Are The Business Opportunities?
Advisory services fees for large capital projects may range, for example, from .1% to .5% of the project cost, whereas planning services may provide fees of 1%. Project management (PM) fees may range from 1.5% to 3%, and architectural and engineering design services fees can range from 6% to 10%.
The table below illustrates the “thin edge of the wedge” multiplier that the AEC project value chain produces. The table provides some generally accepted targets and characteristics for various services and illustrates some of the backlog impacts associated with each service.
Advisory services on a proposed $100 million project could generate $250,000 in fees, and planning services could generate $1 million in fees. That same project, if funding is approved,
could provide $2 million in project management fees and $8 million in design and construction phase fees.
Which business unit leaders will get the most recognition, the largest bonuses, or be promoted within the firm? Will it be the business unit with the highest net revenue and the largest staff, the business unit with the highest gross margin and highest net income, or the business unit that increases the backlog for the business unit and for the firm as a whole?
Small AEC Firms
How can small and medium-sized firms swim upstream in the project value chain to provide new value, low volume advisory services? It’s difficult but doable. Rather than trying to grow these services organically or make them in-house, small to medium-size (SME) firms are better suited to leverage their leadership with project management and design skills and then use contract employees or outsource and buy the requisite advisory services from other boutique or large firms. It’s difficult for SMEs to bring advisory services seamlessly into the client’s boardroom on short notice. However, firms with excellent project management skills can serve clients very well with a range of advisory services.
Large AEC Firms
How can large AEC firms swim upstream in the project value chain? Larger firms have the critical mass and resources to grow advisory services organically and to acquire firms that already offer these services. There are many headwinds, including:
- Developing a critical mass of skilled staff, many with business and technical degrees that often require higher salaries and higher charge-out rates than AEC design professionals
- Sourcing clients and projects from a broad geographical area rather than a local regional area
- Staff counts and net revenues from advisory services are much lower than the staff counts and fees generated from project management services and design services
- Potential increases in project backlog from early-stage advisory services can take months or years to materialize
Exploring the Project Life Cycle
The project life cycle is the sequence of phases that a project progresses through over time, whereas the project value chain includes all the services that are provided over the project life. The project life cycle includes planning, design, construction, operations and maintenance, asset management, and finally the disposition or renewal of a capital asset.
Innovation and resultant growth opportunities can be realized by focusing on the planning phase and providing advisory services at the front-end of proposed projects. However, most AEC firms stick to their knitting, providing technical expertise during the planning, design, and construction of capital projects because that is their wheelhouse and where the highest fees come from. What new opportunities can be realized by providing more advisory services at all stages of the project life cycle?
Advisory services are viewed as the high-value work that clients either perform in-house or outsource to develop their capital projects. Some AEC firms refer to advisory services as “paid BD (business development),” or services that provide high value and low absolute fees at an early project stage, yet they open the door to a pipeline of capital project opportunities for planning, design, and construction services and significantly higher absolute fees at later stages of the project life cycle.
Historic, Current, and Future Industry Disruption
The AEC industry has adapted remarkably well to disruption caused by industry consolidation through mergers and acquisitions, globalization and offshoring, convergence between management consulting and traditional A&E services, and by alternate forms of project delivery. Mergers and acquisitions with firms from the UK, Europe, and Australia have increased the scope of advisory services offered by North American firms and have driven convergence between traditional management consulting services and traditional A&E design and consulting services.
Alternate forms of project delivery have become commonplace with design-build contracts, construction management contracts, and a myriad of public private partnership delivery models. In response, architectural and engineering firms have been contracted to EPCM contractors, design-build contractors, and special-purpose companies rather than directly with project owners.
Today, AEC firms are taking the initiative to provide advisory services and are very well positioned to help clients get their projects funded, approved, and implemented on budget and on schedule while meeting financial, social, and environmental targets in a sustainable manner. Will we see AEC industry growth in advisory services? Will we see continued convergence between the management consulting and A&E industry? What other forms of AEC disruption will we see?
Please send me your comments related to innovation, entrepreneurship, and industry disruption in the AEC industry so that together we can increase the dialog and help to build industry capacity and rewarding careers by “thinking strategically, talking value creation, and building capacity.”
Future posts will discuss the following topics:
- The project value chain and my special interests in project development services,
- The project life cycle and providing advisory services to clients at all stages,
- How advisory services can increase backlog, project margin, and cash flow,
- Opportunities to retain and attract high caliber AEC talent using career ladders connected to advisory services
- Offering advisory services in small to medium sized firm and in large firms
- The challenges and risks associated with offering innovative services
- Historic, current, and future disruptions in the AEC industry
- The above topics obtained by interviewing industry leaders and project owners
About the Author: Gerry W Devine, MBA, P.E
I’ve been a partner, COO, and founder of structural engineering and building science technology business units in a multi-disciplinary consulting engineering firm. We grew the firm to about 100 staff in three 3 offices.
I’ve also been the founder of a management consulting business unit we grew to 20 staff that provided project development, business, economics, finance, and risk management advisory services in a large, publicly traded architectural and engineering firm serving clients in Canada, the USA, and internationally. I have also worked with a large general contractor, and in the glass curtain wall and window wall industries.
Today, I am actively working with a program and project management firm in Vancouver, Canada, MAKE Projects, that provides project management services and strategic advisory services to its clients.
We would love to hear any questions you might have or stories you might share about the AEC Project Value Chain.
Please leave your comments, feedback or questions in the section below.
To your success,
Anthony Fasano, PE, LEED AP
Engineering Management Institute
Author of Engineer Your Own Success