The future is bright for the E&C industry, but to be successful firms must recognize and navigate trends reshaping the industry.
Few industries felt the adverse impact of the Great Recession as much as the construction industry did. Overall, the recession that started in 2007 downsized the industry by 30%.1 Of course the construction and engineering industries are not just any industries. Not only do they play a pivotal role in our economy but also today, as in the past, construction and engineering projects are a symbol of a nation’s vitality and aspirations. In a very real sense, building projects embody the ethos of a culture.
So how is the industry doing in 2014? Many metrics and indexes evaluate the health of the industry and most point positive. The FMI forecast for construction put in place in 2013 was $909.6 billion, down 6% from 2012; however, FMI expects growth to return to 7% in 2014 and reach $977.1 billion.2 Construction spending is outpacing GDP growth and is forecast to continue doing so. According to the Bureau of Labor Statistics (BLS), employment in the construction industry is 5,851,000, up from a low of 5,435,000 in January 2011. However, it is far from a peak of 7,476,000 in the spring of 2006.3
This article analyzes labor market pay data based on FMI Compensation’s industry surveys for construction and engineering professionals to assess the health of the industries. By analyzing market pay trends, we find both industries well on their way to recovery. However, job pay levels are changing and revealing underlying shifts in the industry.
Labor Market Pay Indexes
To assess the overall labor market, an index based on FMI pay surveys was created that averages all positions. Each position’s base salary is given equal weighting (i.e., the index is a weighted average of the base salary across all positions). The base weighted average is then divided by a reference year average, for 2008 in this case, to produce an index. Exhibit 1 shows the performance of the indexes for both the construction and engineering industries.
As shown in Exhibit 1, the pay index for professionals in the construction and engineering industries has increased over 10% since 2008. Construction has seen a steady rise or recovery while engineering saw a dip in 2012 but shot back up in 2013.
To get a sense of the employment market for professionals, Appendix 1a shows the total number of survey incumbents in the construction professional survey. This provides a sense of the employment market and a rough proxy for professional employment. Total survey participants increased in 2009, dropped in 2010 and 2011, but recovered in 2012 before falling again in 2013. Overall, the number of participants is above 2008 levels, indicating that employment has improved for construction professionals.
Appendix 2a shows the total number of incumbents for the engineering/environmental survey and shows a similar trend. However, total survey participants are still fewer than in 2008, indicating that engineering professionals may have a bit further to go.
Construction Industry Pay Trends
A trend analysis across all jobs in the FMI Construction Professional Survey resulted in an easy-to-interpret graph.
Exhibit 2 shows that, in general, pay levels have been increasing since 2008. Although employment levels may have receded, those with the most talent and who offer the most value have experienced pay increases. By observing where lines cross, we can discern significant trends among job families. For example, at the top of the graph, business development rose over project management and revealed the emphasis in organizations on new business acquisition. We can also discern sharp growth trends in certain jobs, including business development, project superintendents, estimating/engineering, safety, Business Information Modeling (BIM) and project accounting. The following table reveals the top-five jobs by pay growth since 2009.
What do these trends reveal? They show that with reduced revenue and profit margins, the industry is focusing on levers of growth and efficiency that were neglected in the past. First, the industry is turning to an emphasis on sales in an increasingly competitive environment. This goes beyond nurturing relationships and extends to a better understanding of owner needs and to providing solutions. A more complex sales process requires more highly skilled professionals who, in turn, require higher compensation.
Second, a focus on cost control through effective accounting, quality and accurate bidding is key to increasing margins. Finally, while the industry has lagged when it comes to technology adoption, it is embracing technology to increase efficiency and reduce the likelihood of redo of work. Indeed, contractors are turning IT into a profit center through productivity tools and project tracking software.4 The significant rise in base pay (almost 30% since 2008) of BIM reflects this trend.
At the same time, those professions that in the past had seen the significant increases are experiencing slower growth.
Exhibit 4 shows the five construction jobs with the least pay growth and reveals that traditional areas, such as project management, project engineering and general foreman, are experiencing smaller increases. This is happening because the reduction in demand for construction projects has reduced the need for hiring in traditional positions, which in turn places downward pressure on wages. However, this is not a simple response to the business cycle; the construction industry is fundamentally changing. Indeed, a recent FMI research report points out the rise of low-bid procurement approaches such as reverse auction sites as well as diversification of delivery methods, including design-bid-build (D/B/B), design-build (D/B), construction manager (CM), construction manager at-risk (CM/GC) and integrated project delivery (IPD).5 Commoditization of construction is forcing the construction industry to revise go-to-market strategies and channels for new business as well as the talent pool.
The war for talent also drives professional pay rates. Appendix 1b shows the total number of incumbents by job. In addition, Appendix 1c shows the average number of incumbents by job per company. In other words, it shows the number of project managers, project superintendents, etc., in the average company in the survey. Thus, it provides a method of selectively identifying which jobs are in demand within the survey sample.
Overall, we note a drop and recovery reflecting the total trend, but some interesting features are clearly visible. Project managers and engineers have indeed fallen as expected; however, after an initial drop, the number of project superintendents has risen sharply since 2010. General foreman seems to defy the trend, having risen dramatically in incumbents per company. This is because companies emphasized lower-cost resources like superintendents and foremen before project managers. This rise is also reflected in the pay increase since 2011 for project superintendents. Thus, the demand for talent is driving wages up. Project/field engineer counts have also risen sharply since 2012; however, we do not see the wages increasing in Exhibit 2. Most likely, this recent trend has yet to hit survey wages but should start to drive wages next year (unless the available talent pool is still large). General foreman numbers show a sharp rise in 2010-2011 and subsequent leveling off. Similarly, Exhibit 2 shows a rise and then fall in the pay data, although this is far less dramatic.
What about project managers? Both the total number and average number per company have fallen and, not surprisingly, so have their wages, reflecting the aforementioned industry trends.
In addition to the base pay trends, we also analyzed the industry bonus pay trends.
While pay levels have increased overall, Exhibit 5 shows the precipitous fall in bonus levels as a percent of base salary since a high in 2010 and then the subsequent turn toward recovery for some professionals in 2013. According to FMI surveys, this occurred because 75% of construction companies pay discretionary bonuses.6 Typically, these plans involve a profit pool, and a shrinking pool means shrinking bonuses until the pool refills. So in 2010, while top talent received larger bonuses as a result of layoffs and hence fewer employees drinking from the pool, the pool ultimately shrank — leaving less for everybody. To prevent this, FMI Compensation recommends structured bonuses that pay out prescribed targets unless profits fall below a certain level.
Positions in project management, business development, project superintendent, project controls and estimating engineering have leveled off or started increasing while the others continue to trend downward. Note the sharp increase in project controls bonuses since 2011. In this data set, we see the opposite trend in base for project management and project superintendent as a result of the need to retain key talent.
Exhibit 6 shows purchasing received the only bonus percent increase since 2009, again reflecting the emphasis on effective cost control through procurement. Quality assurance, safety engineering and project controls received the least decrease, reflecting aforementioned trends. Project superintendents appear about flat, reflecting the need to keep them whole as the demand for them continues (since 2011–12).
Exhibit 7 shows the greatest bonus reductions, with general foreman being hit the hardest. In fact, the general foreman position represents somewhat of a mystery. Exhibit 4 shows that the base change for this position was the lowest; and here we see the greatest bonus reduction, and yet the survey incumbent data (Appendix 1c) reveals that the average number per company is increasing significantly (actually more than 200% — more than any other position). How can this be? Shouldn’t demand drive wages up? The answer is yes. And if we look closely at the trend charts, we see that base pay did go up through 2011, and likewise bonus pay went up significantly through 2010. We also see that incumbent growth was most pronounced from 2010–2011 and since has leveled off. Mystery solved.
What about BIM and project controls? Why do we see base increases along with bonus decreases for BIM and the opposite for project controls? It turns out that for both these positions, the total cash payout (base + bonus) increased modestly (5% for project controls and 8% for BIM). So what we are seeing for these jobs — as well as the others in the middle of the pack — is an adjustment of the mix of base to bonus which emphasizes base over bonus to suit the market while steadily increasing total cash compensation. This may reflect a trend on the part of new hires to see a pay package comprised of higher base salaries at the expense of bonuses in uncertain times. Simply put, they are not willing to put a significant portion of their compensation at risk.
Exhibit 8 shows the engineering base pay trend since 2006. As in the case of the construction industry, this figure shows the general rise of base pay. Note the sharp rise of client acquisition since 2010, when data for this position was first collected. This focus on sales is analogous to business development in construction. Exhibit 8 also shows the sharp rise in base pay for construction supervisor, project engineer and proposal manager positions. (Note that there are a few exceptions, such as process engineer.) In addition, project manager base pay is flat — similar to the construction industry as a whole. Exhibit 9 shows the top positions by change in base pay since 2009. Field engineer leads the list, increasing more than 20%, followed by quality assurance and proposal manager.
Exhibit 10 shows the bottom-five positions by base salary percentage change since 2009. Note that purchaser, process engineer and design drafter have actually seen a reduction in base pay.
How can we explain these results? Well, as is the case of construction, quality is of growing importance to cost control. An environment of economic uncertainty and budgetary constraints is driving the engineering industry to fundamental change. First, an increase in at-risk work, as well as industry consolidation, is driving A/E firms to the E&C model.7 Hence, we see the emphasis on positions with specialized expertise such as field engineers, construction supervisors and project engineers. Field and project engineers are replacing general engineers because they are cheaper, more specialized and closer to the projects, and ensure smoother engineering to construction transitions.
Second, the clients themselves are changing. Indeed, according to a recent FMI publication, new delivery and financing vehicles create environments in which the client “might be a group of players from a P3, developer/builder, operator, financier or financial holding company, to some other entity or combination of entities.”8 As a result, the marketing and sales processes are far more complex, with multiple stakeholders involved. Thus, in this challenging environment, we see increased base pay for client acquisition and proposal managers.
Third, the emphasis on smart buildings and environmentally friendly design places value on positions like environmental engineer. As in the construction industry, traditional roles (general engineer, project manager, estimator, etc.) see base pay and incumbent counts remain flat or even fall. Appendix 2c shows the sharp reduction in the number per company of general engineers within the sample set and the corresponding increase in field engineers, project engineers and project managers. These positions require a broader level of knowledge. Demand is increasing for them and they are becoming increasingly scarce, thus, their salaries are rising faster.
Exhibit 11 shows bonus pay trends for the engineering industry. In general, bonuses in the engineering industry are smaller than in construction and, unlike the construction industry, have remained rather flat since 2009 (although somewhat below 2008). The most salient feature is the precipitous drop in client acquisition bonuses. This occurred because client acquisition professionals earn bonuses based on sales, and sales were not good. As in the construction industry, project managers receive the largest bonuses (as a percentage of base salary), although their bonuses have remained flat since 2009. Bonuses in the engineering industry took a sharp hit but appear to be recovering. Note the sharp rise in process engineer and project engineer bonuses — both of which exceed prerecession levels. Exhibit 12 highlights the top increases with some even reaching above 100%. Exhibit 13 shows the largest decreases.
As you can see from Exhibit 13, the variation in bonus change is quite large and far exceeds similar variations in the construction industry as a whole. On the high end these jobs have experienced a bounce back to levels equaling or even somewhat exceeding their prerecession level peaks (2007–2008). Field engineers saw bonus reductions upon the heels of base increases, but their total cash is up 23% — a significant change in mix toward base. Estimator base salaries remained flat while process engineers saw a decline in base. These two positions may be attempting to make up for base erosion with incentives. Indeed, their total cash reward did remain flat or only went down slightly.
Field inspector and project engineers have seen both base and bonus increases, underlining their value to organizations in quality control and specialized knowledge. For positions with the largest bonus reductions, all of their total cash amounts went up, so this again, as in construction, appears to be a case of increasing salaries at the expense of bonuses in uncertain times. Basically, new hires are seeking the assurance of higher base salaries regardless of promises around an uncertain bonus. Process engineers saw the second-largest base reductions, yet their bonuses went up the most (more than 300%). This occurred because these professionals have seen large reductions in incumbent numbers, softening the base numbers; but large bonuses act as a retention mechanism for highly valued employees.
Conclusion: The Future Is Bright
At the job level, FMI Construction Professional and Engineering/Environmental Survey data provides an excellent vehicle for surgically dissecting trends within each industry. At the high level, indexes created by a weighted average of pay across all jobs indicate that both industries are well on their way to recovery, having increased more than 10% since 2008. These trends should continue moving forward at least for the next few years; hence, the future is bright.
One salient trend seen across both industries is the rise in importance of sales. Although bonuses for business development and client acquisition may be down in difficult times, the rise in base pay indicates their value in driving future business. The marketing and sales process is growing increasingly complex, as reflected in base pay increases for these jobs (construction — business development, engineering — client acquisition and proposal manager). Another common theme is the emphasis on roles with more specialized knowledge such as technology or environmental engineering.
We can identify hiring trends by examining the average number of jobs per company. In the construction industry, we see the number of foremen and superintendents increasing while more expensive resources like project managers remain flat. Similarly, in the engineering industry we see an increase in field and process engineers and a reduction in the number of general engineers. In summary, the future is bright for the construction and engineering industries, but to be successful, firms must recognize and navigate important trends that are fundamentally reshaping the industry.
Mike Rose is a consultant with FMI Corporation. He can be reached at 602.772.3434 or via email at email@example.com.
1 Kilgore, K.C. and Warner, P.E., “The Changing nature of Business in the Construction Industry,” FMI, 2012.
2 Warner, P.E., “Construction Forecast,” in U.S. Markets Construction Overview 2014, FMI, 2013.
3 U.S. Census Bureau News, U.S. Department of Commerce (http://www.census.gov/constructionspending). “Feeble Hiring in Construction is a Stubborn Drag on Growth,” New York Times, 12/13/13 (http://www.nytimes.com/2013/12/14/business/economy/feeble-construction-hiring-is-a-stubborn-drag-on-growth.html?_r=0).
4 Ibid. 1, p. 10.
5 Ibid. 1, p. 3.
6 Knesl, R., DiFonzo, S., Warner, P.E., “Incentive Compensation Effectiveness Survey,” FMI, 2013.
7 S. J. Isaacs, “Architects and Engineers” in US Construction Markets Overview 2014, FMI 2013.
8 Ibid. 7, p. 10.