FMI's 2023 Market Report: Diving into the Details

In March, FMI Consulting forecast design-build projects will account for nearly half (47%) of all construction by 2026 and $1.9 trillion in spending, even with a looming recession in the greater industry. According to a majority of respondents, design-build is better situated than other delivery methods to help alleviate supply chain issues, respond to retention challenges and allow for offsite construction.

That news is good for DBIA and good for Owners and practitioners, but how can the data help them plan for that future? Emily Beardall from FMI joined this month’s Design-Build Delivers podcast to answer that question and to talk about the challenges and opportunities behind the findings.

Guest:

Emily Beardall
Senior Consultant, FMI Consulting

With FMI, Emily works as a senior consultant, developing creative tools and delivering powerful solutions for FMI clients like DBIA. Emily is a design-build expert with extensive experience in the greater industry, from speaking engagements to strategic planning.

Access all our free design-build resources and learn more about Design-Build Done Right® at dbia.org.

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Transcript

FMI's 2023 Market Report: Diving into the Details

SPEAKERS

Erin Looney, Emily Beardall

Erin Looney  00:09

Over the last few years, labor shortages, supply chain issues and a whole host of other challenges have certainly impacted the AEC industry. But a report from FMI Consulting indicates design-build is growing. And that growth comes at least in part due to the ability of design-build to absorb issues, adapt to challenges and to provide opportunity where there might otherwise be adversity.

I am Erin Looney at the DBIA National Headquarters, and this is the Design-Build Delivers podcast.

 In today's episode, we're talking to Emily Beardall from FMI about the Mid-Cycle Update Report that came out in March. With FMI, Emily works as a senior consultant, developing creative tools and delivering powerful solutions for FMI clients like DBIA. Emily is a design-build expert with extensive experience in the greater industry from speaking engagements to strategic planning, thought leadership and construction forecasting. Emily also talked about this report at the spring conference in Seattle and in a recent webinar, but we had a few more questions for her since the findings from the study have such far reaching implications for the immediate future of design-build.

Emily, thanks for being here. As I mentioned in the introduction, this report came out in March, and you spoke to us about it at the spring conference in Seattle. There are so many highlights, so many interesting findings. There's 47%, projected growth of design-build between now and 2026. There's how much construction spending – $1.9 trillion – is going to be design-build. But all the numbers are available in the report that's on the website. So we're going to dig a little deeper today. Before we do that, let's take a look at the report itself. So can you give us a brief overview of the study's purpose and its structure?

Emily Beardall  02:02

Yes, absolutely. Thank you so much for having me on. I'm really excited to get to talk about this. We joke here at FMI, you know, we're– we get so excited to get nerdy and talk about the numbers and the growth of design-build, too. We're really excited. So it's an honor to be here. And as far as this study goes, we've– This is the third time that we have worked with DBIA to understand the utilization of design-build across all types of construction. And so our methodology has– has evolved over that time. Our forecasting methodology to understand the actual construction spending hasn't changed that; our baseline comes from the Census Bureau, which– which releases construction spending year over year.

 And so that's our starting point when we take a look at the forecast to really understand, you know, where construction activity is happening from a segment standpoint, but also from a geography standpoint. So we look at geography, again, as defined by the Census Bureau. They publish regions and divisional level information that we use to help specify what regions we expect to see growth moving forward. Additionally, they also prescribe and define the types of construction that we expect to see moving forward. And that's how our report is broken up. So if you are curious what is captured in the commercial segment, for example, that is available, both in the report and as defined by the Census Bureau.

Now, we surveyed quite a number of people, we– we got feedback from over 350 individuals, both DBIA members and non DBIA members. So we feel this is a very representative cross section of folks who are active in the market across a wide range of construction types but also construction firms. So CM/GCs, architects and engineers, also public and private Owners. We're really excited about the responses we got from a wide range of– of people. Now. The last thing I'll say is tied to the segment and type of construction. We were really, really thrilled with how wide ranging the respondents were as far as their expertise. We got great response rates from individuals who are experts in commercial construction, education, construction – all kinds of infrastructure construction, such as, you know, water/ wastewater, highway transportation, we got a really, really powerful response rate from folks all across the industry. So it's, it's a well-rounded survey. I'll say that.

Erin Looney  04:53

You mentioned there were two previous studies. And so let's talk about those a little bit. This isn't the first time FMI has looked at the future of design-build. There was the Design-Build Utilization Report in 2018. Then an update in 2021. So can you give us a quick comparison between this study and what you found in the two previous studies? 

Emily Beardall  05:15

We did this update report a little bit sooner. 2021. Not that long ago. It feels like ages ago. But we wanted to engage in this study a little bit sooner than perhaps we would have normally, just given how fast things have changed over the last few years. One key difference from the 2021 report to now is we have the passage of the IIJA and the Infrastructure Bill. We wanted to understand the impact that legislation may have on design-build.

Additionally, DBIA was particularly interested in understanding talent retention. This is a massive topic right now – massive is probably an understatement. It's a really big concern for individuals in the market. And so we wanted to have an understanding of how something like design-build can help address the issues around talent retention and really help companies keep their folks for longer.

 Additionally, again, not a secret probably an understatement, the supply chain has really changed the way construction is addressed now. And that is something that was not addressed in the 2021 study. So there were more topics that we wanted to explore with the survey that we felt we really just needed to do an update or mid-cycle study sooner than we otherwise would have. And in the– in the last study – those 2018 to 2021 – those reports are fairly similar. Like I said, this one explores a little more a few more topics more broadly.

Erin Looney  06:59

This wasn't done to show that things have completely changed in two years, it was more a case of there's more we want to learn. There's more that's become salient to our community, our industry. Now we want to explore maybe sort of a second chapter to what was in 2021.

Emily Beardall  07:14

Exactly. That's a great way to think of it. This is the second chapter.

Erin Looney  07:17

Okay, so let's stay in 2023 now. Let's stay in chapter two. Were there any surprising, unexpected new insights that came out of the 2023 update?

Emily Beardall  07:29

It was really interesting to see kind of the shift in priorities of Owners and project participants as well. And in selecting a delivery method for projects. Previously, we had seen project complexity and project schedule be a really, really high factor of importance. In 2021, we actually saw project schedule decline a little bit and project complexity rose to be of more importance when selecting the delivery method. But now in 2023, we're back project schedules – really, really high priority for Owners to address.

Additionally, we saw more growth in qualifications based selection –  that is still a key driver, or a key format that individuals use design-build through. That is something that has remained.  But one particular piece that as– as I said, the new topic for this study is the talent retention piece. And the short answer is there is no one-stop shop solution. There's no one-size fits all for these organizations and tackling that talent retention challenge. The biggest component that we saw, or the biggest strategy, we saw companies tackle this talent retention challenge by are compensation adjustments. These were by far the most utilized. It was about a third of respondents said that they were using compensation to try to keep individuals longer. Additionally, folks just said, we're trying everything, we're throwing everything at the board to see what will keep folks to stay. So focusing on leadership and culture, increased time off, additional benefits such as flexible or remote work for folks who are able to do so. Those were additional things that about a quarter of respondents said, "You know, we're trying to all of it."

Erin Looney  09:34

You got to see what sticks to the wall right? 

Emily Beardall  09:36

Yes.

Erin Looney  09:39

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I want to take a turn now toward some of the specific questions that were in the 2023 update. As you know, since you were a speaker there, we have the sector specific conferences in the spring for transportation/aviation and water/wastewater. Design-build, though, is showing growth across more than just those two sectors. So from the study, can you identify any other sectors to watch? What were some of the insights in terms of the different areas where you might find design-build picking up steam?

Emily Beardall  10:43

There are a couple other areas that I would say we're seeing a lot of that activity growing in design-build. Communication was one that stood out to us as interesting as firms looks to take advantage of the broadband infrastructure funding that's available from the government. Those projects are attractive to use design-build delivery method for. Additionally, we saw pretty significant activity from the healthcare and education side. Those Owners – sometimes we call them institutional Owners – those really tend to be a little more hesitant to use design-build in some cases or some parts of the country. But we're seeing the impacts of education programs like the ones DBIA puts on and seeing a lot of growth in Owners testing the waters there.

And then you mentioned water/wastewater – this is a segment I'm particularly excited about and really, really happy to see the growth that it came out of this report in 2023. And that was presented at– at that conference. The interesting piece about water/wastewater is the growth in progressive design-build specifically. That was something that we were wondering if it would show up. This is something that is new to 2023 as well, assessing progressive design-build as a separate component, rather than just include it in design-build. So seeing that progressive design-build delivery really shine in water/wastewater was– was cool to see.

Erin Looney  12:21

There's also variance in how design-build is distributed across the U.S. So areas like the Pacific, the Mid-Atlantic, the West South Central area, they're expected to carry the largest share over the next three years. Now on the flip side, New England, Mountain and the East South Central regions – that last one includes Mississippi, Tennessee, Kentucky, Alabama – they show the lowest numbers. Is there any indication in the study or in your experience as to why that might be?

Emily Beardall  12:50

Yes, so I'll point out West South Central specifically. That one was a bit of a happy surprise to us here at FMI. To see growth in design-build in that division specifically. That is really driven by infrastructure projects and industrial projects in the West South Central. There's a lot of work activity, a lot of manufacturing and growth in general from the population, demographic changes in Texas. There's– there's more activity happening there. And that is what's driving a lot of that growth.

Now from the Pacific Northwest and the South Atlantic side, those organizations – or an organization – particularly in the Pacific, tend to lead the way with testing the waters with new delivery methods. And quote, "well, design-build delivery is not new." Those Owners tend to be more comfortable with it and are more familiar with the process. And the growth there will continue to be strong; it will continue to kind of push the nation in a more alternative delivery type approach.

Now the North– Northeast region again tends to be more open to trying– testing the waters with design-build, but unfortunately, FMI is projecting a bit of a overall decline in construction activity. And that's where you're seeing some of the impacts on the what looks to be the use of design-build. It's not necessarily that Owners who have historically used design-build are turning away from it in certain regions. There– we're projecting just an overall decline in construction activity, which unfortunately does impact design-build.

 Erin Looney  14:39

I found the East South Central numbers – Mississippi, Alabama, Tennessee, Kentucky – particularly interesting, having lived in Alabama, and it seemed like there was always construction money being poured into new projects as those areas grow. So it's a little surprising to see that there's this– well, it was until you pointed out that it's an overall decline in construction. That makes it make a little more sense.

Emily Beardall  15:05

And this is really due to a combination of things. It's no secret, the Fed is trying to tackle the inflation problem just at a broader economic scale. We do expect some of these fluctuations that have happened over the last 18 months really to have an impact on construction activity, broadly speaking, in '24 and '25. So that– that is going to hamper that a little bit.

Erin Looney  15:31

Which is also interesting to see that the design-build numbers, specifically within that decline are actually growing. So that's– that's a good– 

Emily Beardall  15:40

yes, yes, yes. So it's some good news wrapped in a little bit of bad news. But overall, still not very positive outlook for design-build. 

Erin Looney  15:52

Great. So we recently published a Deeper Dive on progressive design-build, and it gets into the nuances of this procurement approach. There's been extended interest in PDB across the nation, so we thought it was time. On the topic of that interest and that growth, talk to me a little bit about what the respondents had to say not just about PDB, but about other procurement methods.

Emily Beardall  16:17

So this one was very interesting to see. I think we were all pleasantly surprised to see that progressive design-build would account for about a quarter of design-build projects moving forward. According to our survey respondents, that was something that we were pleasantly surprised to see; we were not expecting it to be that high. It is still behind qualifications based and competitive best value, but that is in line with what we saw in 2021 and in 2018.

I will say the competitive best value as the kind of leader in procurement selection is starting to lose its grip, its hold. In our previous study, it was almost 50% of projects were expected to use that and now it's– it's dropped to 41%. So we are seeing folks explore other types of procurement. We saw the growth– primarily in qualification based selection. But things like progressive design-build and sole source and negotiated are still– still have their place in the market as well.

Erin Looney  17:28

So I noticed in the numbers as well, that PDB was considered by a lot of the respondents to be the best method for managing costs in an unpredictable market. Talk to me about that.

Emily Beardall  17:39

We were pleasantly surprised to see that primarily because it feels as though it's among the most the least understood type of approach. So the ones who have used it really can justify and speak to how effective it is at managing costs, especially in the market that we've seen over the last 18 months, where that is just such a priority for Owners and the contracting community. Additionally, I thought it was telling that competitive best value is something that historically has been quite high as far as utilization for design-build projects. That was not seen as something that is particularly beneficial or useful in managing cost certainty or getting to that cost certainty in this environment. It's really the progressive design-build and the qualifications based selection that were viewed as most effective and getting to that cost certainty.

Erin Looney  18:40

So we've been talking about challenges, but we've been doing it so far today in a broader sense. Why don't we take a look now at some of those challenges a little more specifically and how respondents perceived them. So more than three quarters of your respondents said the supply chain issues that have plagued projects since COVID – no pun intended – could be addressed by using design-build in projects. So tell us talk to us more about design-build and supply chain issues based on what you found in the study.

Emily Beardall  19:07

The data is clear. Using design-build definitely helps address the supply chain challenges that folks are facing. And the reason why that is primarily pointed to the ability to procure material early. Getting contractors and trade contractors and the engineering community kind of all aligned on a project early in the process gives the firms the ability to procure their– their supplies for the project much earlier. Now that was identified by respondents – by 52% of respondents actually – as kind of the main reason why design-build did assist in projects addressing the supply chain issues.

Additionally, other things that folks have used to address supply chain challenges are dynamic scheduling. That is something that is also viewed as a benefit of design-build delivery because you're able to take the project kind of in parallel terms as opposed to one step at a time in a very linear fashion, as is the case in design-bid-build. So early procurement and dynamic scheduling are really the two drivers behind over 80% of folks saying, yes, design-build definitely helps us address the supply chain. 

Erin Looney  19:41

That's a overwhelming number. Again, it's good for us. So along with the supply chain issues and project constraints, there's also talent retention challenges. They're top of mind in the AEC industry as in a lot of other industries. While the majority of practitioner respondents said design-build could have a positive impact on those talent retention issues, Owners didn't seem to have the same perception. So what can you tell us about that difference?

Emily Beardall  21:05

That's why it was particularly interesting to kind of dig into the data behind. We initially were surprised, looking at– looking at it by industry participants, like construction firms, like engineering and architect firms – it was a very significant difference in opinion. And we– we discovered a few reasons for that. Now, some of these reasons are– are related to the contracting community, factors such as project location – some design-build projects, unfortunately, are just not in the most desirable places to live. So that's– that's certainly a factor. Additionally, individuals at the Owner side pointed to the importance of company culture and leadership and belief in the strategic mission of organizations as a key driver of retention.

And the project delivery method didn't necessarily have the impact that others viewed that it had. This was particularly true on the Owner side because the tenure seems to be longer and firms tend to have– or Owners tend to have less high turnover rates than on the private side– on the– on the contractor and engineering community side. So folks tend to work for agencies for a little bit longer. And the importance of culture and leadership and kind of identity with the organization felt more important to respondents as opposed to the– the delivery method.

Now another piece that I'll point out because it's– it's important across all types of construction to call this out. The rates of burnout were identified or perceived to be higher with design-build projects, and folks trying to protect mental health or– or– may need occasionally to take a break from design-build projects because the front end of the project can be more intensive than in a traditional design-build project. And so looking at factors such as burnout and sustainability of projects, having multiple design-build projects at a time, Owners felt that impacted the staff in a more negative way. 

Erin Looney  23:31

Sure, that makes sense. And you have to figure out ways to protect your team and their mental health. And speaking of that, our guest next month Kabri Lehrman-Schmid from Hensel Phelps, she's going to talk about mental health and the ways different team members and Owners can create a culture where that burnout can hopefully become a thing of the past. 

Even in a market that wasn't filled with all these challenges and these uncertainties, the advantages of design-build presented in the study would still be advantageous for both practitioners and Owners. We don't need turmoil to make this work. So let's look at some of those advantages. Particularly let's talk about prefabrication. That's another tally in the win column for design-build, particularly in specific sectors. So is there anything in your research to indicate why prefabrication is so commonly used in, say, recreation and manufacturing design-build projects?

Emily Beardall  24:22

Going back to my earlier comment, this is one of those questions that is new to this study, as opposed to the previous studies, because we have just seen so much growth and interest in offsite construction and prefabrication. And it was really exciting to see the impact design-build has on prefabrication, how it really lends itself, lends the project for companies operating in that space to be able to take advantage of those capabilities. Projects that have a high repetition tend to lend themselves towards greater use of prefabrication.

So looking within the recreation segment, we have lodging in there. You think about a hospital room: pretty consistent. Floor to floor, room to room, same thing. On the institutional side, we have hospitals, dormitories on the education side, even classrooms – there can be a lot of repetition in those types of projects. And that style of project really lends itself to take advantage of all of the schedule savings and the safety implications and the labor implications of offsite, or prefabrication, construction. Now, benefits that we've already talked about, such as early procurement and early involvement of these firms is just another kind of benefit of design-build enabling prefabrication.

Erin Looney  25:51

So now we're gonna go broad, again. We're gonna go back to 30,000 feet. We're gonna hang out there for a bit. We know you don't commission a study like this without being able to situate it in reality, in practice, right? So, you know, what do we do now? Why does this matter? That sort of thing? So let's answer the "so what" factor in terms of what recommendations can this study support for Owners, practitioners, design-build teams, DBIA going forward.

Emily Beardall  26:16

We're really optimistic about a lot of things right now. But we were also optimistic three years ago. And it's important to understand how circumstances change. And so taking the study and understanding design-build absolutely has its place – we expect it to continue to grow – and we expect a lot of projects really to be successful. But there's a lot of factors that go into making a project successful. And using this report and having open and transparent conversations with all parties associated with a project from Owners to practitioners to between practitioners on the same team, getting really clear about what the priorities of the project are really can help make a project be successful.

So thinking about some of the benefits of design-build – schedule savings or more accelerated procurement. If the Owner is not necessarily in a rush, maybe– maybe other things become more important, and understanding where all the individuals on a project team are coming from and what priorities they have absolutely will determine if a project is successful, but particularly a design-build project as these projects grow in complexity, as design-build tends to get utilized on highly complex projects as well. Having that clear communication is– is just absolutely imperative.

I just want to really highlight the importance of ongoing education. Not everybody is comfortable with design-build or other types of delivery methods. And so working with everybody to understand where their pain points are and what their apprehension or concerns might be about a certain delivery method is– is a really good starting point as well. And I want to highlight the great work that you all do and other organizations to really promote the use of design-build in cases where it works best, because let's be honest, it's not every project is the best fit for design-build. But when it works, it works great.

Erin Looney  28:26

And of course, knowing the types of conditions and circumstances that make it work. That's part of that education piece that you're talking about. Absolutely. So given that any study relies on reality, once again, the reality in this case of what the particular subsection of people or firms had to say in that specific study at that specific time. What are some cautions?

Emily Beardall  28:51

This is truly an impression from the last six months – or really eight months when the study was being conducted – of what folks view the impact of design-build on a range of project type or range of project characteristics like prefabrication. We cannot predict the future and– and there's a lot of interesting technology being developed now in regards to prefabrication and offsite construction that may totally change that market.

From a cautionary standpoint, I would also advise that while this overall market looks positive, FMI is– is sort of projecting a recession in overall construction activity for '24 and '25 in certain markets and in certain types of construction. And I would caution anybody from saying, "you know, this report shows a lot of growth. Why isn't my market growing, or why am I not seeing that here?" We– we can't unfortunately get super granular detail like that, you know, in a study like this, and so there's a lot of nuance that a high level kind of report like this will not get to.

And that really highlights the importance of understanding your market and understanding your project partners and Owners understanding that the construction community for what the priorities are for projects, what is feasible and realistic from a supply chain standpoint and a scheduling standpoint, and in really understanding, looking at each project individually and saying, "This is a best fit for design-build," or, "these few factors may– may prohibit them."

Erin Looney  30:43

So what you're saying is it's important to look at what's in the study and what's in the real world, not what's not in the study. You know, don't put information that isn't there; don't put expectations that aren't presented in what you found.

Emily Beardall  30:57

That's correct. Yes.

Erin Looney  31:05

There is no secret formula for why design-build continues to grow even while construction overall is expected to decline. But as Emily demonstrated today, there are some characteristics of Design-Build Done Right that can help it withstand an uncertain market and continue its growth toward half of spending. Emily also highlighted the importance of some basic considerations – knowing your market, your projects, your partners, being realistic about logistics, choosing the best fit to ensure success in your design-build project. 

And to help you deliver that success, DBIA offers a host of resources including our updated Best Practices primer, the progressive design-build deeper dive, and many, many others available in the DBIA bookstore at store.dbia.org.

Thank you to USCAD for their support of the Design-Build Delivers podcast. Learn more at uscad.com/dbia