Since the beginning of the decade, we have witnessed a period of relatively steady growth in the engineering and construction industry. This growth has been driven by residential and nonresidential building construction as well as construction related to the onshore oil and natural gas and petrochemical industries. Commercial and residential buildings have become more complex, as owners and occupants require more amenities and are increasingly focused on reducing long term costs of ownership and environmental footprints. The increased level of complex systems will require significantly more, and different types of, maintenance than older less complex buildings, which will be required to upgrade or replace existing systems to stay competitive. Vertical integration trends within the building sector, including equipment manufacturers and building technology and system providers has increased as companies look to expand their service capabilities. New business models are being developed as energy service companies (ESCOs) gain market share compared to traditional mechanical and electrical construction and services. However, in the near term, both housing and commercial demand growth is slowing due to the current global economic recession. Companies focused on new residential and commercial construction will have to increase their focus on maintenance and repair, pivot towards other parts of the E&C business or declining revenues and profits.
The infrastructure that supports the US economy and especially its urban centers is aging and, in some cases, crumbling. Roads, bridges, rail, transit, water and natural gas infrastructure in the US have consistently received low marks compared to other developed and rapidly developing countries. Given the population growth in cities, and the increasing importance of our nation’s infrastructure to the economy, there is a major gap between the country’s infrastructure needs and the funding available. Infrastructure projects in the US see outsized costs and timelines compared even to other developed countries and the E&C industry has proven unable (or unwilling) to identify and address the root causes.
Capital projects are increasingly complex and larger in scope, with many projects facing significant cost overruns and schedule delays. Customers increasingly demand lump sum turn key contracts, which shift the impact of these issues onto E&C contractors and if managed improperly can be disastrous for contractors. To manage these challenges offsite construction including prefabrication, modularization, and pre-assembly are increasingly being utilized to deliver projects faster, safer and more cost effectively. These trends have led to a trend towards larger, more vertically integrated E&C firms with sophisticated supply chains, balance sheets and project management capabilities to execute contracts.
Despite the changes facing the E&C industry, investment has grown across a number of segments and M&A activity has been robust, both from institutional and strategic buyers. Buyers from both emerging and developed markets continue to look to the US for expansion and expertise. Demographic succession driven opportunities should increase throughout the industry due to baby-boomer retirements, which, coupled with heightened buyer interest should continue to encourage a healthy M&A market.
Given the rapidly changing landscape in the E&C industry, management teams and owners need to understand their position in the market, develop and execute a clear well thought out strategy, and focus on remaining profitable and competitive through technology and by focusing on growth segments and execution.