ABI May 2023: Architecture firm billings bounce back

Nearly half of firm leaders think architecture staff productivity has declined compared to pre-pandemic levels

Business conditions at architecture firms bounced back in May, following a modest downturn in April. The AIA/Deltek Architecture Billings Index (ABI) score for the month was 51.0, the highest it has been since last September. In addition, inquiries into new projects and the value of new design contracts also bounced back this month, with inquiries reaching their highest level in nine months, and design contracts increasing for the first time since February. With recent declines in inflation and a pause in interest rate increases, it appears that the economy may be stabilizing.

Despite growth in the overall ABI this month, business conditions remain variable in different regions of the country. Billings improved at firms located in the South for the second consecutive month in May, while they were essentially flat at firms located in the Midwest, following six months of growth. However, billings continued to decline at firms located in both the West and Northeast, where scores have been below 50 since last fall. By firm specialization, business conditions softened further at firms with a multifamily residential specialization in May, falling to the lowest level in two years. Billings also declined for the ninth consecutive month at firms with a commercial/industrial specialization. On the other hand, business conditions improved for the second month in a row at firms with an institutional specialization, as they reported their strongest growth since last year. 

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Industry employment reaches post-pandemic high

In the broader economy, the Federal Reserve decided not to raise interest rates at their June meeting for the first time since the spring of 2022. The Consumer Price Index (CPI) for May showed the lowest annual increase in inflation since March 2021 at 4.0%, with an increase of just 0.1% from April to May. However, inflation levels remain above the Federal Reserve’s target level, so they have not ruled out the possibility of additional interest rate increases in the coming months.

On the employment side, nonfarm payroll employment continued to grow at a steady pace, with 339,000 new jobs added in May, right in line with average monthly gains over the last year. Construction employment also strengthened, adding 25,000 new jobs. And architectural services employment added an additional 1,100 new positions in April (the most recent data available), the largest monthly gain so far this year, bringing industry employment to a new post-pandemic high.

Opinions vary on how remote work impacts productivity

This month’s special practice questions covered productivity levels at architecture firms and the impact of remote work on productivity. Overall, more than four in 10 responding firm leaders (43%) indicated that they feel that staff productivity levels (defined as output per hour of labor) have decreased as compared to pre-pandemic levels, with 7% thinking that they have decreased a lot, and 36% that they have decreased a little. On the other hand, 22% of firm leaders believe that productivity levels have increased, while 35% think that they have remained about the same as pre-pandemic levels. Small firms with annual billings of less than $250,000 were least likely to report that productivity levels have decreased (27%), versus 50% of firms with annual billings over $5 million.

In terms of remote work, 70% of responding firm leaders estimated that nearly all paid workdays at their firm are worked remotely in some capacity, with 29% reporting that a few paid workdays (10% to 24%) are worked remotely at their firm, and 23% reporting that some paid workdays (25% to 49%) are worked remotely at their firm. Smaller firms were most likely to report that most or all paid workdays are worked remotely (33% versus 2% of larger firms), but smaller firms were also more likely to report that hardly any, or no, paid workdays were worked remotely (33% versus 21% of larger firms). Overall, slightly more than one third of firm leaders (35%) reported that they believe that their firm’s remote work policy has decreased overall staff productivity, while 55% think that it has not significantly changed productivity, and 10% think that it has increased overall staff productivity.

When asked about the extent to which their firm makes an effort to monitor staff productivity, 30% of responding firm leaders indicated that they do not attempt to monitor or measure it since there are too many factors to consider, while 39% indicated that they qualitatively evaluate how efficiently and productively their staff are performing, and 24% indicated that they track specific measures of staff output that relate to their level of productivity (the remaining 7% indicated some other response). Small firms were far more likely to report that they did not attempt to measure staff productivity (59% versus 26% of large firms). At the firms that indicated that they track specific measures of staff output, billable

hours as a share of total compensated hours (utilization or chargeability rate) and overall firm profitability or project-specific profitability were most frequently selected as the measures of staff productivity they attempt to quantify, selected by 85% and 83% of firms, respectively. Nearly half (48%) also reported using billings per employee (for either billable employees or total employees), while 8% reported using the total construction/reconstruction value of projects per employee. When asked which one of these productivity measures they consider to be most useful, 43% selected overall firm profitability, and 39% selected utilization/chargeability rate. Larger firms were more likely to select firm profitability, while small firms were more likely to select utilization rate. In addition, one quarter of small firms indicated that billings per employee was most useful, while fewer than 10% of larger firms reported the same.

What ABI May 2023 Work-on-the-Boards participants are saying

• “Good, but nearly halfway through the year we are slightly down from last year which was out best year in 10 years.” —75-person firm in the Midwest, institutional specialization
• “Although monthly billings and new design [contract] values are both up for the past month, things appear to be softening. Our pipeline is not replenishing at the rate it was, and solid production projects are more rare. The second half of 2023 is of some concern.” —19-person firm in the South, commercial/industrial specialization
• “The work is still out there, it’s just taking more effort to get the work. We are seeing our repeat clients slow down decision making, and moving projects forward, requiring us to go find new clients.” —22-person firm in the West, residential specialization
• “I am hearing of softness in certain sectors, like inpatient healthcare, residential, and life sciences. Ability to get or afford financing, and high construction prices, appear to be factors.” —9-person firm in the Northeast, mixed specialization