Feature Stories - November 2008

Industry Focus: Engineers

Recently, over a dozen of Nevada’s top engineers gathered at the office of Holland & Hart, LLP to discuss the state of the economy, collection challenges, the sustainable development and green building trends and predictions for 2009. Connie Brennan, publisher of Nevada Business, served as moderator for the monthly event that brings leaders together to discuss issues pertinent to their professions. Following is a condensed version of the roundtable discussion.

Weathering the Economy

Connie Brennan: How has the industry been hit in terms of layoffs, changing firm practices and instituting creative solutions to weather the economic downturn?

Larry Carroll: Fortunately, our construction management division picked up the slack, so we put about 25 to 30 people in that group alone. So that’s what carried us through. Our design work was down last year, but that’s stabilized more this year. The projects are still out there, but they’re tougher to find.

Michael Pullen: The cost containment procedures that we have instituted in our company to weather this storm has required us to get down to our core group of people. Employees are extremely important to us and I think that any loss of that core group would be just devastating to us or any company.

Bruce Bowman: We’ve done some diversification here in recent years and opened new offices and that’s helped us weather the storm. Our work has dropped off precipitously. What we’re finding is, the revenue stream associated with public agencies is drying up and where projects were outsourced previously, they’re being done in-house.

Dave Frohnen: Finding enough work to keep our staff busy is our biggest challenge.

Brent Wright: I’m working harder than I have ever worked just to get work. People want to do projects, but they can’t get financing and others that have the financing are afraid to pull the trigger. We have got a lot of projects where people are ready to get started but just don’t pull the trigger. The projects are smaller and with the competition, your fees have to be skinnier.

Steve Schiller: What we are seeing is a lot of the projects we are getting are additions and remodels of projects that we have worked on previously. A lot of the work we do is in the hotel and casino industry because they have to keep their properties fresh, which generates work. But it’s not new projects, it’s freshening up the property, it’s a different type of work.

Kenneth Ackeret: As a firm we are dealing with a commitment to hiring young staff out of college. We are continuing the chain of new college hires and the training process, so that as we come out of our current economic situation, we will have the right staffing mix to do the work that will be there.

Mark Johnson: Ken made a very good point with regard to the challenge of continuing to hire young, talented people out of college. It is truly a challenge that we are committed to working through to maintain the youthfulness in our company.

Mark Hedge: We certainly have to chase down work out-of-market to get more work into our office.

Moe Momeni: I have maintained the same level of work today that I did a year and a half ago. I didn’t hire people so I didn’t have to lay off people.

Pete Blakely: We are definitely seeing less work volume than we have in the past and had to change our staff sizing and with that I think our biggest challenge has been keeping the employees motivated, engaged and enthusiastic.

Problems Collecting Fees

Brennan: Describe the problems the industry is facing with collecting money. Have you had to turn clients away because they are too risky in this market?

Hedge: One of the firm’s toughest challenges right now is collecting our past-due accounts.

Johnson: We actually have had to turn clients away. We have a very structured process we go through for qualifying clients from a financial standpoint. We go through credit checks, pretty expensive background checks and analyze their ability to pay. We make sure that our contracts are solid. Being able to at least have some means of collecting our money is important. I’m sure we are all doing that, probably to a greater extent than we were a year or two ago, but it still doesn’t weed out some clients.

Blakely: We’re all smarter with regard to qualifying our clients and verifying the funding. Two or three years ago we were hesitant to ask for retainers up front, but not anymore, we won’t answer the phone without a retainer in hand.

Carroll: Every time I have ever asked for a retainer, I’ve gotten one. Our problem now is we didn’t ask for them often enough in the past.

Blakely: The clients that refuse to give you a retainer are the ones you are going to have trouble with down the road. If they’re worried about 10 percent of the fee up front, you shouldn’t be doing business with them.

J. Stuart Hitchen: Even when clients owed us money in the past we always had the leverage of our work product. In the end, they were going to build whatever we were designing and we could always hold that back until they paid us in full. Well, that works great until they go, ‘we’re going under and we owe you a bunch of money, we’re real sorry.’ Now they’re not using our product because they’re not building what we designed and our leverage is gone.

Pullen: It is unfortunate, but we have noticed that the clients we’ve had for a long time, who during the good times were paying on time and there were no concerns, are as the times get tougher, very slow to pay and in a couple of cases not paying at all. When you work with somebody for a long time and then all of a sudden it gets to 90 days, 120 days and then 250 days, it’s hard.

Wright: We never had to spend a lot of time knocking on doors or performing the business development like we’re doing now. Something I have noticed is people are being more loyal to the people that they have worked with in the past, which is good as long as we have enough of those loyal clients to see us through the rough times.

Refining Operations

Brennan: Has the economy given your firms the opportunity to retool and refine operations?

Blakely: We are spending a lot of time reinventing ourselves, repackaging our engineers and pursuing new opportunities. You have to be creative and selective in your pursuits. You absolutely have to be different than you were before. We’ll likely have grown and be better business people going into the future.

Hedge: I have brought my staff into the business development part of it even more so now.

Ackeret: It has created a whole new opportunity for our mid-level, younger staff. Now is the time to say ‘well, you’ve always wanted the opportunity to learn about something else in engineering, here it is.’

Reducing Prices?

Brennan: Has reduced work forced you to reduce your fees to be more competitive?

Carroll: If we let our standards slip to where we’re competing solely on price alone, we will go out of business quicker by charging too little versus too much. We certainly don’t want to get into the battle of cutting fees.

Britta Tryggvi: We are committed to keeping fees up. There’s so much cut throat pricing out there that it is a real problem. Hopefully you would want to make money on your jobs when you do get them.

Frohnen: We’re down 42 percent on revenue from this time last year, but we have not reduced our fees.

Hedge: We are trying to hold our prices steady because it is just not worth it to start slashing, especially on the civil side when you are hoping to make 10 percent on the project to begin with.

Blakely: The overhead ratio is higher for sure now. I have seen competitors that have dropped fees 40 to 50 percent from what they were charging two years ago on a percent of construction costs for a typical project. I’m just not going there because you will never get out of it.

Hitchen: We haven’t dropped our fees; we’re not out there buying projects. There are people out there that will cut prices and they’re not at this table. I appreciate everybody’s position here. We have to protect our industry.

Carroll: Those who drastically reduce their fees will lose money in volume.

Schiller: We’re seeing an increase in demand of services. It used to be that we would get into a job and get out of it early, now we’re in them until a week before opening. The quantity of services is going up and the fees have to reflect that.

Johnson: The reality is the potential liability for a project is only getting greater every day. If you cut your fees, you are just putting yourself at risk of ruining your company.

Blakely: You can play the fee reducing game all you want and eventually they’re going to beat you on price. Where you have to beat them is doing it better and faster or if you sue us, we actually have liability insurance.

Development Review Process

Brennan: How has the development review process been affected by a reduced number of projects?

Blakely: Well, it’s worse on one regard, they have so much more time to focus on your job.

Pullen: The comments are certainly a lot worse. They’re all working off an enterprise fund and when they work off an enterprise fund, they don’t work. The mentality is ‘let’s make a lot of comments so we can keep our job.’

Momeni: They will still tell you it’s however long even when they have nothing to do. They are sitting there playing on the Internet.

William Wheeler: We have seen the turnaround speed up, the County and some of the other agencies are quite a bit quicker.

Momeni: I’ve seen no relief; the turn-around is still the same. You go to City of Henderson and they still take their sweet three or four weeks.Johnson: I would like to jump in and defend the City of Henderson a little bit. I had the opportunity to serve on the development services advisory committee as a chairman overseeing the enterprise fund for their development services operation and I would agree that there’s probably some excess capacity right now. The good news is, we’re getting good thorough reviews, which I think is a benefit to all of us. All those agencies are very receptive to public comments; it’s up to us to bring those issues forward.

Hedge: We’re still providing the same schedule to our clients on the review process as we did a year ago and the result is we just about always beat the schedules.

Green Building

Brennan: How has the engineering industry been affected by the green movement?

Wright: It’s a big opportunity for us.

Tryggvi: It’s the wave of the future. We’re getting more of our engineers certified because the exam is going to change in January. A lot of people are running out to take the exam.

Carroll: The government is taking the lead. A lot of these government agencies are insisting that they’re going to be LEED certified. I think that it is going to be more prevalent in the years to come.

Hedge: I think it’s a reflection of our society. Our building codes, especially the mechanical and plumbing codes, have been modified to the point that the building system is efficient as they could possibly be, but green still costs money.

Blakely: Reno is probably ahead of where Las Vegas is as far as acceptance of green building and spending a little extra money on it. All our clients were talking about it before and were happy to spend the money when things were good, but they’re not nearly as happy to spend the money on it now. The number that they choke on is the $100,000 in fees [for the engineering firm and to pay the United States Green Building Commission]. They don’t seem to mind the extra one percent of construction costs; they just don’t want to pay for the paperwork game.

Ackeret: I have to look at this as if it’s a movement. In a few years, we won’t think about it because it’s going to be a part of the practice. When ADA was created everybody was asking themselves ‘how can we incorporate it?’ Today, it’s just part of everything we do in designing. In time, green building is just going to be the way we practice.

Wheeler: Our municipal clients are pretty much requiring green elements and our university and collegiate projects are all sustainable.

Trends & Technology

Brennan: What trends are shaping the industry and how has technology changed the way you do business?

Hedge: The AutoCAD 3-D has been a real thorn in my side because they will be phasing out all the other AutoCAD versions and you have to renew your license anyway, so our software costs have recently increased substantially.

Hitchen: The way the designers think and design projects has completely changed with Civil 3-D. There’s a huge amount of training that needs to take place to implement Civil 3-D.

Hedge: There’s a lot of benefit in implementing it though.

Hitchen: Absolutely, but like Mark said, we don’t have a choice, at least on the land side of civil. AutoCAD is not going to support the software that we all used to use and they have made it very clear that they’re not supporting land development desktops any longer.

Schiller: They’re great tools, but it still comes back to the people who are operating it. You can’t turn someone loose and expect them to create a 3-D model that is going to be perfect.

Carroll: Training people on these programs is the biggest cost. A lot of our clients are demanding that new software now. I think it’s here to stay, but it’s going to take a couple of years to get up to speed.

Forecasting the Future

Brennan: Do you think your business will be in better shape this time next year? Have we hit bottom or is there still some pain coming?

Frohnen: Definitely better shape next year.

Blakely: We’re planning on picking up in the 4th Quarter of 2009.

Frohnen: There’s a mirror of what’s happening on Wall Street in the region. We have a lot of projects that are on hold, canceled or can’t get financing. Little by little though we’re starting to see some new investors coming in and that presents an opportunity for us in two realms. One area we’re getting involved in is performing due diligence studies for the new developers or investors. Then number two, the projects that are going to get restarted or reinvented are going to need our engineering services in the future.