MARKET OUTLOOK SURVEY s t l u s e r

GRASSI & CO. AND ZETLIN & DE CHIARA LLP

Grassi & Co. and Zetlin & De Chiara LLP, are pleased to announce the release of our 2013 Architecture & Engineering Market Outlook Survey Results Report. The goal of the Survey, which was conducted in December 2012, was to collect information regarding current market dynamics and to examine certain benchmarks to help predict and anticipate the projected market outlook for the A&E Industry in the regional New Yok area. The responses collected from the Survey identified valuable metrics, new and emerging trends and industry insights that will help A&E firms navigate 2013. The results revealed the following as areas of focus for 2013 and beyond: Geographic and Service Line Expansion Mergers & Acquisitions Technology Human Resources

Read on to learn more about these trends and the results of the entire survey. If you have any questions, please feel free to contact us or your Relationship Partner(s) at Grassi & Co. and/or Zetlin & De Chiara LLP. Sincerely, GRASSI & CO.
Michael J. Vardaro, LEED AP Partner Zetlin & De Chiara LLP mvardaro@zdlaw.com (212) 682-6800

Robert J. Brewer, CPA, CCIFP Partner, Architecture & Engineering Practice Leader Grassi & Co. rbrewer@grassicpas.com (516) 336-2420

The 2013 A&E Market Outlook Survey was sponsored by

Disclaimer: The results of this survey are reported for informational purposes. The findings and conclusions may be generalized for your informational purposes only. Please consult an accountant or attorney when making business decisions that may affect the operations of your firm.

TABLE OF CONTENTS

2013 A&E Market Outlook Survey Overview......................................................l Results Snapshot ....................................................................................................2 I. General Firm Overview.......................................................................................3 II. Financial ...............................................................................................................6 III. Operations........................................................................................................10 IV. Technology........................................................................................................12 V. Human Resources .............................................................................................13 VI. Media ................................................................................................................16 VII. The Future .......................................................................................................17 VIII. Legal and Risk................................................................................................18 Trends We See.......................................................................................................20 Conclusion and Next Steps..................................................................................23 Leaders in Serving the A&E Industry .................................................................24 Advisory Board .....................................................................................................26

2013 A&E MARKET OUTLOOK SURVEY RESULTS

2013 A&E MARKET OUTLOOK SURVEY OVERVIEW

Architecture & Engineering firms are constantly looking for market intelligence tools and resources to assist in developing their business objectives and strategies. Grassi & Co. and Zetlin & De Chiara LLP joined forces to conduct an Architecture & Engineering (A&E) Industry survey of companies based in the New York Metropolitan region to identify and examine current practices and trends that affect the industry. The results of the A&E Industry Survey provide: Important benchmarks for the industry An identification of critical trends that are necessary to understand in order to make thoughtful and prudent business decisions Insights on current and future market conditions ABOUT THE SURVEY The 2013 A&E Market Outlook Survey reflects the responses of executives from a cross section of the A&E Industry within the New York regional area. The survey included 77 questions categorized into the following areas of study: 1. General Firm Overview 2. Financial 3. 4. 5. 6. 7. 8. Operations Technology Human Resources Media The Future Legal and Risk

2013 A&E MARKET OUTLOOK SURVEY RESULTS

RESULTS SNAPSHOT
Although there is still a significant amount of uncertainty with regards to the countrys economic recovery, industry executives are optimistic about 2013. With expected increases in revenue, gross margins and headcount for 2013, A&E firms are seeing signs of improvement. In fact, 50% of the executives surveyed predict that a full A&E market recovery will take place in 2014. Key Data Points 71% of the executives surveyed reported that their revenues are expected to be higher in 2013 than they were in 2012, while less than 10% reported they expect their revenues to decrease from 2012. More than 75% of respondents said they expect their headcount to increase in 2013, specifically at the professional and general administrative levels. Half of the executives believe an overall A&E market recovery will not occur until 2014. More than 50% of the respondents anticipated their 2012 internal revenue growth to be 10% or greater. Expansion of business offerings and expansion of geographical reach were recorded by a majority of executives to be primary business strategies that were a focus in 2012 and will continue to be a focus in 2013. A significant number of the respondents indicated that their top business goals for 2013 and 2014 include increasing profitability, containing costs, hiring key staff and improving A/R collections. More than 60% of executives reported that they are looking to invest in business and infrastructure as well as design (BIM and modeling integration) technology in 2013. For more insight on these key data points and the trends identified in the following report, please refer to the Trends We See section on page 20.

2013 A&E MARKET OUTLOOK SURVEY RESULTS

I. GENERAL FIRM OVERVIEW

Overview of Respondents. Of the executives surveyed, the majority of the respondents held the title of Partner/Owner.

100%

80

60

40

20

0
Partner/Owner CFO (Chief Financial Officer) COO (Chief Operating Officer) Controller Other

Of the firms that were represented in the survey results, 33% operate an Architecture business and 29% operate an Engineering business. 31% of the firms represented operate in more than one business category and 19% operate in three or more business categories.
Architecture, A&E and Construction and Other Other 2% 2% Architecture A&E, Construction and Other and Other 3% 5% Engineering and A&E and Construction Construction 10%

2%

Other 7% A&E 7%

Engineering 29%

Architecture 33%

Business categories included in other category are: Surveying and Mapping, Preservation, Interior Design, Planners, Environmental & GIS Specialists, Design-Build, Interiors, and Exterior Restoration operations.

2013 A&E MARKET OUTLOOK SURVEY RESULTS

Of the 33% that operate an Architecture business: 84% have 0-50 employees 5% have 50-100 employees 11% have >100 employees

Of the 29% that operate an Engineering business: 12% have 0-50 employees 35% have 50-100 employees 53% have >100 employees

Of the 7% that operate an Architecture & Engineering business: 50% have 0-50 employees in Architecture 50% have 0-50 employees in Engineering 25% have 50-100 employees in Architecture 25% have >100 employees in Architecture 50% have >100 employees in Engineering

Of the 10% that operate an Architecture, Engineering and Construction business, the majority have the largest headcount in Engineering (67% with more than 50 employees in business category) and the lowest headcount in Construction (100% with 0-5 employees in business category). With regards to size of the participating firms based on net revenue, 46% of the firms have revenue greater than $10 million.

Net Revenue

>$100 M $26-$100 M 15% 13%

$11-$25 M 18% <$10 M 54%

2013 A&E MARKET OUTLOOK SURVEY RESULTS

Strategy. Given the current economic conditions, one would expect that the business strategies within the industry would focus on capital infusion, but as the chart depicts below, companies have been focusing primarily on expanding their business offerings and geographical reach as well as on Merger and Acquisition (M&A) transactions. Surprisingly, a significant number of respondents indicated that they will not implement any new strategies and will stay the course over the next 12 months.

Business Strategies Considered

Past 12 months Next 12 months

39% 25% 5% 20% 4% 7% Outside capital infusion 2% Sale/ Divestiture

29%

34%

16% 5% 2% Sale to ESOP 36% 34% 14% Expansion of Expansion of Transfer business geographical of ownership offerings to reach management

32%

Merger and/or Acquisition

No new strategies/ Stay the course

Geographical Focus. 91% of the respondents reported that 76-100% of the work performed by their firms occurs in the United States, with the majority of the work (72%) being performed in the Northeast. One third of the respondents reported that 1-25% of the work their firm performs is based in international jurisdictions, including Canada, South America, Asia, the Middle East and Europe. This supports the fact that a significant number of the executives indicated that expansion of their geographical reach was a strategy implemented in the past 12 months. Although the decision to pursue this strategy for the next 12 months declines slightly, it is expected that both the national and international reach of the work performed by A&E firms will continue to increase in 2013. The slight decline in this strategy may be due to entry barriers associated with entering international and new geographical markets as the learning curve and lack of staff in these new locations may result in compliance and operational issues.

2013 A&E MARKET OUTLOOK SURVEY RESULTS

II. FINANCIAL
Net Revenues. Approximately half of the firms represented have reported net revenues less than $10 million.

Net Revenue
54% 51% 55%

<$10M $11-$25M $26-$100M >$100M 23% 15% 7% 11%

20%

19%

19% 15% 11%

2010

2011

2012 Anticipated

Based on numbers above, it appears that larger firms did not experience revenue growth during 2012. Firms with revenues greater than $26 million experienced no revenue growth in comparison to 2011, while mid-size firms with revenues between $11-25 million, actually experienced reductions in their revenues. This was partially due to reduced margins firms were accepting during the year to cover their overhead. Additionally, it appears that new ventures for many of these mid-size firms came with an additional infrastructure and learning curve related cost. On the contrary, smaller firms with revenues less than $10 million, with lower overhead were able to increase their revenues by expanding new business offerings in 2012 as compared to 2011. Profit Margin. When asked about profit margins and internal revenue growth, a majority of the executives (80%) indicated that their anticipated 2012 gross margins were between 0-15%. Similarly, 82% indicated that their anticipated 2012 internal revenue growth was between 0-15%.

2012 Anticipated Profit Margin

41% 39%

2012 Anticipated Internal Revenue Growth

45% 37%

12% 8%

10% 8%

0-9%

10-15%

16-20%

>20% 6

0-9%

10-15%

16-20%

>20%

2013 A&E MARKET OUTLOOK SURVEY RESULTS

Internal Revenue Growth. When broken down by customer sector, a little more than half of the respondents anticipated their public sector revenue to increase by 0-5%, while only 10% anticipated their growth in the public sector was to increase by more than 20%. Anticipated growth for 2012 in this sector appears to be on par with actual growth rates over the previous two years.

2012 Anticipated Internal Revenue Growth in Public Sector

53% 56% 58%

2010 2011 Anticipated 2012

25%

24% 18% 9% 11% 11% 2% >20% 13% 9% 11%

0% 0-5% 6-10% 11-15%

0% 16-20%

In comparison to the public sector data above, only 26% of the respondents anticipated their private sector revenue to increase by 0-5%, while 18% anticipated their growth in the private sector to increase by more than 20%. Overall, the private sector has proven to be more opportunistic in 2012 than in previous years, evidenced by the increase in growth rates of 11% or greater.

2012 Anticipated Internal Revenue Growth in Private Sector

52% 44%

2010 2011 Anticipated 2012

28% 28% 18% 6% 10% 4% 4% 10% 12% 14% 18%

26%

26%

0-5%

6-10%

11-15%

16-20%

>20%

2013 A&E MARKET OUTLOOK SURVEY RESULTS

Cash Flow. In a market where cash flow is essential to success, the majority of firms surveyed (59%) indicated that retaining of earnings is the primary cause for improved cash flow. Additional causes for improvement included bank loans as well as other internal initiatives, such as improved A/R and collection policies and procedures, reduction of expenses (including rightsizing) and upgrading of finance department personnel.

Cash Flow Improvement Initiatives

59%

32%

32%

7%

Capital Infusion

Bank Borrowing

Retained Earnings

Other

Financial Management Tools. As would be expected, a majority of the respondents indicated that they use financial management tools to manage their business. For instance, the survey revealed that: 82% utilize cash flow projections 77% use annual budgets 75% use internally prepared financial statements 71% utilize internal job/WIP schedules 67% utilize interim forecasts

The least utilized financial management tools amongst the respondents were tax projections and management dashboards. A management dashboard gives a company a graphical snapshot of real-time data and trends; however, only 49% of the executives reported using a dashboard and 34% considered a management dashboard to be one of the top 3 most important financial management tools. In addition, 54% of the executives indicated that they share financial information with their project management teams via written reports, versus 46% that share through management portals and dashboards. When asked which of the financial management tools was the most important in helping the executives manage their business, the majority indicated that cash flow projections, annual budgets and interim forecasts were the top 3 tools utilized.
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2013 A&E MARKET OUTLOOK SURVEY RESULTS

Accounting and Finance Software. With regards to accounting/financial software, the majority of the executives (53%) reported using Deltek. 43% reported using software other than Deltek and BST, with 25% using Quickbooks and 18% using other programs, including custom software.

Other 18%

Deltek 53%

Quickbooks 25%

ClearView 0%

BST 4%

With more advanced and powerful technology becoming available each year, especially on the financial side of the business, one would anticipate firms changing the accounting and financial software being used. However, 84% of the firms reported that they have not updated their software in the last two years. Financing and Credit. The majority of executives surveyed indicated that obtaining credit is not the same compared to previous years. In fact, 53% indicated it is more difficult today than it was last year.

Obtaining Credit from Bank

53%

43%

4%

Easier today

More difficult today

No change over previous years

2013 A&E MARKET OUTLOOK SURVEY RESULTS

Regarding total exposure (as a % of total credit available), 78% reported that their firms total exposure was between 0-25%. When asked about reporting or compliance requirements, 81% of the executives indicated that banks have not changed their requirements in the last 12 months, but 64% are required to give personal guarantees. As a result, 67% reported that they have not changed banks, 40% of which are also not considering changing banks in the near term.

III. OPERATIONS
Firm Management and Ownership Transition. 44% of the firms represented in this survey are managed by an individual and in 80% of these cases that individual owns 50% or more of the firm.

Firm Management
31% 25%

44%

Board of Directors

Management Committee

Individual

Regarding ownership transition, only 45% of the respondents indicated that they have a formal transition plan. Of these, 64% reported that the next generation of management has already been identified. However, the timing for when the next generation will take the reins is unknown, as 88% of the executives indicated that their firm does not have a mandatory retirement age. When asked what are the key ownership transition issues facing the industry, the following represented the greatest percentage of responses: 1. Funding Retirement Obligations 2. Affordability for New Shareholders 3. Identifying Future Leaders Given the fact that over 75% of the firms represented in the survey are managed by an individual or a management committee, a proper transition plan is essential to the future health of their firms. Knowing this, it is surprising to note that 55% of the executives indicated that their firms did not have a transition plan in place.
10

2013 A&E MARKET OUTLOOK SURVEY RESULTS

Projects. When asked what are the primary sources used to obtain new work, the majority of the executives cited the following as the top 3 that generate the largest percentage of new work: 1. Repeat clients 2. Recommendations by clients 3. Responding to RFP's In an industry and economic environment that is becoming more and more focused on establishing strong relationships, it is not uncommon to report that the source which generated the lowest percentage of new work was cold calling. 77% of the executives identified cold calling among the three least effective lead/work generating tactics. When asked what percentage of their projects are design-build, more than half (58%) indicated that 1-25% of their projects were. When asked what percentage of their projects incorporate BIM, 34% reported 1-15%, while 32% reported 0%.

Percentage of Design-Build Projects

Percentage of Projects that Incorporate BIM

34% 0% 58% 1-25%

32% 0%

34% 1-15%

0% 76-100%
2% 51-75%

8% 76-100% 12% 51-75%

12% 16-25%

6% 26-50%

2% 26-50%

Of the firms represented that have projects which incorporate BIM, approximately 75% of their executives indicated that they have not outsourced any of their BIM projects and 61% have incorporated BIM through in-house training. Regarding how incorporating BIM has impacted their firms, 97% of the executives reported that BIM has improved the quality of the services they provide; however, their responses on its effect on profitability and risk were not as positive. As the chart on the next page indicates, the impact BIM has had on profitability has been inconsistent among the participating firms. However, 97% agree that incorporating BIM has improved quality and a majority (58%) indicated that it has also decreased risk.

11

2013 A&E MARKET OUTLOOK SURVEY RESULTS

BIM Affect on Firm

Increased 42%
Risk

Decreased 58%

Quality of services provided

Increased 97% Decreased 3%

Increased 48%
Profitability

Decreased 52%

IV. TECHNOLOGY
As expected, technology is very important to the majority of the companies and executives surveyed.

Importance of Technology
66%

34%

0%
Very important Not important at all

Moderately important

However, 58% of the firms reported that they do not use a paperless document management system. Of the firms that do use a paperless system, 35% use Newforma and 35% use custom in-house systems. The remaining 30% use a variety of system options, including Sharepoint, AutoCad, ADEPT and ContractManager.

12

2013 A&E MARKET OUTLOOK SURVEY RESULTS

When asked what technology investments they will be making in 2013, 70% indicated that their investment focus will be on business technology and infrastructure systems; however, it is important to note that a significant number (62%) of the respondents also indicated their interest in investing in design technology, such as BIM and modeling integration software.

Technology Investments in 2013

70% 62%

30%

4%

Business technology and infrastructure

Design technology (BIM and modeling integration)

Project information management (PIM)

Other

V. HUMAN RESOURCES
The respondents have implemented a variety of HR programs, including those indicated in the chart below.

Human Resources Programs Implemented

76%

54%

50%

50% 44%

38%

36%

34%

6%

Technology training

Pension plan

Incentive Management/ compensation soft skills plan training

Safety training

Human resource information system

Partner/ Management retreats

Performance management system

No programs implemented

13

2013 A&E MARKET OUTLOOK SURVEY RESULTS

In addition, more than 66% of the executives reported that their firm has implemented the following to help emerging professionals develop their potential: 1. 2. 3. 4. Training seminars (i.e. lunch and learns) (84%) Paid membership in professional organizations (80%) Employee mentoring (78%) Paid professional exam preparation (61%)

When asked, what percentage of Principals and senior staff members participate in activities outside the firm that demonstrate leadership in their profession, 77% reported that at least 20% of their professionals participate in such activities.

% of Professionals that Participate in Industry Activities Outside the Firm

25% 23% 19% 21%

12%

0-20%

21-40%

41-60%

61-80%

81-100%

61% indicated that they set specific goals for all employees and 16% reported that goals are only set for management. However, the majority of respondents (61%) do not have detailed performance reports for partners and managers. Of the 39% that do use performance reports, the top 3 areas the reports address are profitability by Partner/Manager, business development and marketing activities, and new business by Partner/Manager. More than half (53%) reported having a 2012 employee turnover rate of greater than 5%, which was driven primarily by economic conditions, the lack of work/elimination of position and/or poor performance and quality of work. More than three quarters of the executives indicated that they plan on hiring in 2013, with most of that hiring to occur at the professional level (85%).

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2013 A&E MARKET OUTLOOK SURVEY RESULTS

2013 Expected Changes to Headcount

Decrease 22%

Increase 78%

Additional signs of the industrys recovery is the fact that 70% of the firms that participated in this survey increased salaries in 2012 and 73% gave employee bonuses in 2012. 27% of the firms increased salaries on average by more than 5% and the average bonus (based on % of salary) exceeded 5% for 53% of the participating firms (these bonuses were tied primarily to performance and company profits). When asked about healthcare and other employee benefits, the executives reported implementing a variety of programs. New and alternatie benefits programs are becoming more common across all industries as companies are looking to reduce their overall employee healthcare costs.

Healthcare and Benefits Programs Implemented

56%

30% 24% 28%

30%

2%

Higher Deductible Plans

HSAs

Wellness Programs

Self-Insurance

Higher Employee Contributions

None of the above

15

2013 A&E MARKET OUTLOOK SURVEY RESULTS

As the economy and industry continue to change, it is not uncommon for a number of new human resource initiatives to be implemented. However, approximately half (51%) of the executives reported that they have not updated their employment manual in the last 12 months (39%) or do not have an employment manual at all (12%).

VI. MEDIA
With the numerous media resources available to executives within the industry, the survey results show that industry-specific media and associations, as well as discussions with industry colleagues, are the primary platforms executives use to obtain market data and stay informed of developments in the industry.

Market Data Resources Used

96% 90% 82% 68% 52% 38%

Professional organizations and industry associations

Discussions with industry colleagues

Industry conferences and events

Industry specific publications

Digital media

Social media

When asked about social media, 38% reported that they use social media to obtain and/or share news and business related information. Of those that do not utilize social media, the primary reasons cited for this were that social media was more of a personal tool than a business tool and that it is unclear how social media could benefit executives or their firms. Of those who utilize social media, LinkedIn and Facebook were the primary networks used, and 50% have implemented governance policies to mitigate the risks associated with the use of these tools. However, 53% of the executives indicated that they are not satisfied with the return on investment (ROI) from social media. Although executives may still rely heavily upon industry publications and market research to uncover trends in the industry, the convenience as well as the real-time capabilities of digital and social media will likely result in a shift of perception and utilization of these channels within A&E firms.
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2013 A&E MARKET OUTLOOK SURVEY RESULTS

VII. THE FUTURE

Confirming the uncertainty that still exists within the A&E Market, 59% of respondents expect a better outlook for the 2013 A&E Market than in 2012, 31% expect it to remain the same and 10% expect it to be worse than 2012. A majority of the executives (71%) expect that their revenues will increase in comparison to 2012. Similarly, 63% expect that their gross margin percentages will increase in comparison to 2012.

2013 Revenue Expectations

71%

19% 10%

Increase vs. 2012

Decrease vs. 2012

Equal to 2012

Most of the firms expect this growth will be focused in the Northeast of the United States and in Asia internationally for 2013. Although a significant number of the respondents expect improvement in 2013, 50% of them do not expect an overall A&E market recovery until 2014 and 40% do not expect a full recovery until 2015 or later. The top 5 business goals for 2013 and 2014 are: 1. Profitability 2. Growth 3. Controlling costs/overhead 4. Productivity 5. Improve A/R collection

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2013 A&E MARKET OUTLOOK SURVEY RESULTS

VIII. LEGAL AND RISK

78% of the executives reported that their firms do not have in-house counsel. Of these firms, the majority use outside counsel to assess their contractual risk.

How Firms without In-house Counsel Assess Contractual Risk

51%

37%

7%

5%

Outside Counsel

Partner(s) Owner(s)

CFO

Other

When asked about Professional Liability Insurance Limits: 46% of the firms with annual revenue under $10 million reported a $2 million limit and 21% reported a $5 million limit 60% of the firms with annual revenue between $11 million and $25 million reported a limit of $5 million 50% of the firms with annual revenue between $26 million and $100 million reported a $5 million limit and 38% reported a limit of greater than $5 million 43% of the firms with annual revenue greater than $100 million reported a greater than $5 million limit while 57% reported a limit of $5 million or less

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2013 A&E MARKET OUTLOOK SURVEY RESULTS

Insurance deductibles vary greatly among the respondents; however, 84% of the executives indicated that they are not being pressured by underwriters to raise their deductibles.

Deductibles
36% 32% 28%

4%

0-$10,000

$10,001-$50,000

$50,001-$100,000

>$100,000

Regarding limitation of liability, 30% reported that 76-100% of their contracts have limitation of liability, while 28% reported that only 1-25% have limitation of liability. The majority (56%) base their limitation of liability on insurance, while 35% base it on fees. Respondents identified the following key areas that they believe present new risks: 1. Government and Legislation. Lack of long-term tax policies, legislative inaction, anti-business philosophy in the Federal Government and lack of flexibility in accessibility laws were all identified as potential concerns. 2. 3. Lack of Growth. Fee competition and price cutting, clients higher expectations and rejection of salary/fee increases. LEED. Client concerns that LEED does not yield the intended utility cost savings, does not meet building performance expectations and new building code requirements that require certification. 4. 5. 6. 7. BIM. The risks associated with the use of BIM are new and largely unknown. Liability and Risk. Sub-consultant risk and the difficulty in procuring general liability insurance. Litigation. Involvement in clients lawsuits, and legal matters involving third parties working on the same projects. International. Understanding of and compliance with country specific laws.

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2013 A&E MARKET OUTLOOK SURVEY RESULTS

TRENDS WE SEE
WE ARE STILL RECOVERING Although there have been some improvements in the A&E market, a full recovery is still years away as certain sectors within the industry are lagging behind the local economy as a whole. During 2012, the American Institute of Architects projected that construction spending would rise by 6.4% in 2012; however, the results of the survey tell us a different story. Most of the firms with revenue of more than $26 million saw no change in their revenue growth from 2011 based on anticipated 2012 results. Architects, Engineers and Consultants, have experienced a tough economic quake that has reshaped the industry. The surviving firms are retooling to meet the standards of a new reality. Hence, many firms are looking at opportunities to unite forces and are finding themselves bidding on projects of a size or type they previously would not have considered. DIVERSIFICATION AND ITS FINANCIAL IMPACT Firms have been and continue to be under intense pressure to diversify their service offerings, many times venturing into projects where they lack the level of experience needed. For instance, more than 30% of the A&E firms surveyed operate in more than one business category and 19% operate in three or more. Firms are showing increased interest in expanded business offerings to attract and enhance potential opportunities and increase their client base. This was evident for many small firms with revenues less than $10 million that showed increases in revenues of 6%. Experienced firms are accepting work with tighter margins and dealing with more individuals in the decision-making process. Additionally, the firms are experiencing tremendous oversight from clients, which is impacting their administrative costs. Due to this, more and more firms saw margins and revenue growth dipping below 10% based on historical data. On the other hand, firms are beginning to be more optimistic about private sector work in the coming years than public sector work and are gearing themselves up to present a strong front to the bank from a cash flow standpoint by retaining profits, requiring additional capitalization and improving receivable collection processes in anticipation of new work coming down the pipeline. Firms should keep in mind that increasing work does not automatically increase cash flow, thus partnering with banks to ensure the level of financing is appropriate to accommodate their expansion and the resulting new work may be needed as constant focus on cash flow is imperative.

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2013 A&E MARKET OUTLOOK SURVEY RESULTS

MARKET AND COMPETITION DRIVING EXPANSION AND ACQUISITION The volatile state of the economic climate combined with the rise in competition and overall fee pressure has resulted in an expansion of geographical reach. By expanding their reach on a national basis, companies are looking to identify more opportunities to win work and ultimately increase cash flow. Additionally, firms surveyed indicated an increased focus on exploring M&A as a business strategy over the next 12 months. M&A transactions are a common way for a firm to expand both its business offerings and geographical reach. As such, transactions that occur in 2013 will likely be tied to efforts to expand service offerings as well as geographical presence, as firms continue to focus on profitability and growth. HR AND EMPLOYEE BENEFITS CHANGING WITH THE ECONOMY 2012 resulted in relatively high turnover rates for the regional A&E market (more than half had a turnover rate greater than 5%). As with companies in other industries, A&E companies are supporting a number of HR related initiatives in order to counterbalance high turnover rates and to keep existing employees. As teams become leaner, it is essential to offer different types of incentives and Such initiatives also provide employees with a vested professional development opportunities. profitability. While certain initiatives have been launched to help strengthen employee morale, other HR initiatives, specifically benefits based initiatives that help reduce the employers overall expenses, have also been implemented. 56% of the executives surveyed reported that their firm has implemented a high deductible health benefits plan and 28% have implemented higher employee contributions to their healthcare costs. These initiatives support A&E companies efforts in achieving their goals to cut/control costs and keep overall expenses down in order to improve the bottom line. TECHNOLOGY A CHALLENGE THAT MUST BE ADDRESSED Some firms are using technology and accounting software as pure overheads or a necessary evil, while others are using it as a vital tool for high efficiency and improved client satisfaction. 66% of the executives surveyed acknowledged that technology is very important to their operations and 70% indicated that their short term technology investments will be focused on business and infrastructure systems, which supports the need for companies to shift to more advanced software in order to remain efficient and competitive.

interest in the growth and success of the firm, which often can lead to increased productivity and overall

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2013 A&E MARKET OUTLOOK SURVEY RESULTS

As many companies look to implement initiatives to help better meet their clients higher expectations, investments in technology that improve quality of service are likely to be priorities as we move through 2013 and 2014. It should be noted that technology, which results in revenue and workforce growth, may require a more robust reporting system that will give management the information they need to make decisions in a timely manner. New initiatives mean a different way of looking at profitability and as more firms focus on increasing technology in technical areas, a comparable investment in new and updated reporting systems should be considered as part of their overall technology strategy. OWNERSHIP TRANSITION AND SUCCESSION PLANNING One of the main sources of revenue generation for many of these firms has been identified as repeat clients and recommendations by existing clients. Given this, with more top individuals and key management members nearing retirement age, there is cause for concern across the industry regarding how to maintain long-standing client relationships. Identifying future leaders who would grow the firms existing relationships in order to sustain business in the future is a major issue that A&E firms face. Succession planning and ownership transition is a challenge for many firms due to concerns about funding the retirement obligations of soon-to-be retiring partners along with the affordability of the new partners to buyout old partners. With only 45% having a formal ownership transition and succession plan, it is clear that many firms have not made succession planning a priority, which could result in more complicated and costly issues down the road.

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2013 A&E MARKET OUTLOOK SURVEY RESULTS

CONCLUSION AND NEXT STEPS

Based on the survey results, one thing is clear; all the efforts firms are making today are focused on increasing profitability and overall firm growth. Whether it is implementing initiatives that reduce costs, increasing employee productivity, expanding geographical reach or service offerings, all efforts have a direct correlation to a firms growth and profits. As firms begin to see a more promising future, they are continuing to explore opportunities to help ensure that they appropriately realize this promise. Implementing various initiatives will require the firms to focus their initiatives on core values and critical strategies. Firms need to find new ways to differentiate themselves to remain competitive. Dont be drawn to seductive RFPs, instead form a strategic alliance, collaborate with an independent mind, and discuss the key issues and concerns surrounding the deal with the firms financial and legal teams. Board and management members should take charge and make tough, high level decisions to help navigate the complexities and obstacles of implementation. Firms should ensure that all policies and procedures are properly aligned with their overall strategic objectives. Doing so may require assistance from accounting, legal and business advisory providers. Firms looking to adjust HR or technology based infrastructure as well as those looking to expand their business, either through acquisition, new geographic market entry or service offering expansion would benefit from consulting with advisors to financial obstacles or requirements. It is essential for firms implementing a number of different initiatives to focus on integrating each of the next steps together and not just looking at each initiative individually. When a firm plans for the future, it needs to consider the impact these changes have on each of the functional areas of its business. For example, general focus on cost cutting may not be the correct approach when a firm chooses to expand into new service offerings or geographical regions as these initiatives may require an increase in appropriate spending (i.e. expanding the work force to meet additional needs will increase costs, but is a necessary investment to ensure success). Communication amongst management and functional leaders is essential as new strategies are developed and implemented to help ensure success and health of the entire firm. Firms that incorporate this into their planning and action steps will enhance the impact of the initiatives implemented, improve the economics of service delivery and appear more appealing to clients as well as to banks and underwriters. If you have questions or if our professionals may be of assistance to you, please feel free to contact Robert J. Brewer, CPA, CFE, Grassi & Co. Partner and A&E Industry Practice Leader, at 516-336-2420, or Michael J. Vardaro, Zetlin & De Chiara LLP Partner, at 212-682-6800.
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ensure compliance with and resolution of any legal and

2013 A&E MARKET OUTLOOK SURVEY RESULTS

LEADERS IN SERVING THE A&E INDUSTRY

About Grassi & Co. Grassi & Co. is one of the top 100 largest accounting firms in the U.S. and has considerable expertise, providing exceptional service and proactive advice to help Architecture & Engineering (A&E) firms run their businesses better. Our clients are served by a team of experts who work with architecture and engineering organizations across the region and have industry deep experience, which they leverage to ensure that the services we perform are being completed efficiently, accurately, and precisely. With a strong growth record over the past decade, Grassi & Co. offers its clients a multidisciplinary range of services, including: Audit and Attest Services Accounting & Business Services Business Advisory Services Forensic, Litigation Support and Valuation Services Tax Compliance & Consulting Services Tax Controversy Services Technology Consulting Services

The single most important factor of our firms success has been our dedication to knowing the industries which we serve. Now, more than ever, entities are closely scrutinized, held accountable, and under the proverbial microscope. Our team works closely with management to increase overall efficiency, while minimizing challenges and enhancing the organizations overall success. Serving the A&E Industry for over 30 years, Grassi & Co.s A&E Practice is built around a team of experts who study the industry, building an unmatched knowledge base. By providing counsel to a cross-section of the industry, we are well equipped to bring best practices to our clients. We regularly interview industry leaders, sureties, bankers, attorneys and advisors across the industry to expand our base of knowledge and to develop innovative new ideas and services. Grassi & Co. has served as a trusted advisor to many A&E companies since the firms beginning. Our knowledge of the industry combined with our extensive technical experience provides us with the tools necessary to convert information into insight, enabling us to deliver timely business advice to our clients.

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2013 A&E MARKET OUTLOOK SURVEY RESULTS

Our team also studies the dynamics of the A&E Industry, gathering the necessary information to make positive business improvements for our clients. As a result, our depth of knowledge and experience enable us to bring our clients market and economic updates and inform them on how they may influence and impact their decisions. About Zetlin & De Chiara LLP Zetlin & De Chiara LLP is a leading construction law firm committed to providing innovative legal and business advisory services to members of the design, construction and real estate industries. We are dedicated to producing superior results that lead to successful projects and satisfied clients. The firm provides counsel throughout the planning, design, and construction process from drafting and negotiating contracts to advising on risk management. The firm also advises on business formation, licensing and corporate issues. When litigation and alternative dispute resolution are required, Zetlin & De Chiara represents its clients worldwide. Founded in 1992, Zetlin & De Chiara serves as general counsel to numerous design, construction, and real estate industry and professional associations. Our attorneys include individuals with in-house counsel experience, able to bring pragmatic business understanding to the table. Several of our attorneys hold architecture and engineering degrees, and a number have earned LEED AP status. Partners teach classes at Columbia University, The Cooper Union, Cornell University and other local educational forums. Zetlin & De Chiara authored New York Construction Law, the definitive treatise on construction law in New York State.

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2013 A&E MARKET OUTLOOK SURVEY RESULTS

ADVISORY BOARD
In order to ensure that the 2013 A&E Market Outlook Survey addressed the most pertinent issues facing the A&E Industry and its executives, we enlisted the assistance of the following Advisory Board for their insights and recommendations.

Joseph Tortorella President Robert Silman Associates

Marc Weissbach Managing Partner Vidaris, Inc.

Paul Bello Owner AKF Group, LLC

Don Weinreich Partner and Managing Principal Ennead Architects

Paul Grosser President P.W. Grosser

Milo Riverso President & CEO STV Group, Inc.

Peter Catalano CFO Kohn Pedersen Fox Associates PC

Vincent Zerilli Vice President JPMorgan Chase

Grassi & Co. would like to express a special thanks to all the participants on the Advisory Board for the help and advice they provided during the development of the survey.

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